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Expat Briefing Editorial Team
01 August, 2016
In terms of outright numbers, the British Crown Dependencies – Guernsey, Jersey and the Isle of Man – and Gibraltar – a UK Overseas Territory – are home to small populations of British expats. However, as important centers for banking, wealth management and pension vehicles, these diminutive territories play a large part in the financial lives of many expat retirees, as well as peripatetic workers, executives and entrepreneurs, who may rarely see home shores. So how will Brexit affect these important financial jurisdictions? In this feature, we try to find out.
Before we go any further, some might be wondering why these far-flung islands and territories with no physical connection to Great Britain should be concerned at all about June's referendum on membership of the European Union, which has resulted in the UK taking the decision to leave the EU. The answer is that, while these territories are largely self-governing, they still have strong constitutional attachments to the UK, and by extension have legal relationships with the EU to varying degrees: Guernsey and Jersey form part of the single market, but are outside of the European fiscal area; the Isle of Man is in the single market and VAT area, but not otherwise a part of the fiscal area; Gibraltar entered EU with UK and has representation in EU Parliament, although it does not belong to the EU's VAT, Common Agricultural Policy, or common external tariff regimes. A change in these relationships could therefore affect these territories' access to the all-important EU marketplace for financial services.
First and foremost, the Crown Dependencies are anxious that their voices are heard during the UK's withdrawal negotiations with the EU. So following the referendum, the Chief Ministers of Guernsey, Jersey, and the Isle of Man jointly wrote to the United Kingdom's Prime Minister seeking assurances that the islands will be consulted during this process, and that their existing relationships with the EU will remain substantially unchanged. The letter seeks the UK's confirmation that if the UK withdraws from the EU this will not prevent continued free trade in goods and services, the free movement of capital, and the free movement of people between the UK and the Crown Dependencies.
However, some of these jurisdictions are more worried than others about the fall-out from a Brexit. Guernsey for instance sees itself as a "safe haven" in an increasingly volatile and uncertain world. Its Chief Minister, Gavin St Pier, said: "I am confident will continue to be, seen for what we are: an oasis of stability - a safe haven. We are a safe haven for financial services - in or out of the European Union - and we are a safe haven physically for those who want to relocate here - or even just holiday here in peace and quiet."
Nevertheless, Jonathan Le Tocq, Member of the Policy & Resources Committee, told Guernsey's legislature recently that a UK exit from the EU will nonetheless "impact the Bailiwick of Guernsey."
"Our relationship with the European Union is currently governed by Protocol 3 to the United Kingdom Treaty of Accession. This allows for the islands to be part of the customs territory of the EU, and effectively underpins the free movement of goods between Guernsey and the UK and the rest of the EU," Le Tocq observed.
However, he explained that Guernsey's Protocol 3 relationship could be "replicated." And, importantly, the island's main trading relationships with the EU, including financial services, are as a third country, and "these relationships will remain intact as they are not part of Protocol 3."
"Guernsey is a third country now and will be a third country no matter what the UK decides to do in respect of its own EU relationship," Le Tocq said.
Over in Jersey, the Government reacted to the UK Brexit vote by commissioning the island's Fiscal Policy Panel to study the effects of the UK's withdrawal from the EU on its finances. And the conclusion it came to was, unsurprisingly, that the Government should delay any major fiscal policy decisions until the impact of Brexit becomes clearer.
Jersey's Treasury and Resources Minister, Alan Maclean said: "I warmly welcome this advice from our independent economic experts. This is an important juncture in UK politics, which is why I felt it necessary to commission an update report without delay. The Panel highlight that while there is significant economic uncertainty about the impact of the referendum result on the UK economy, the Jersey economy is not likely to be immune to any impacts. However, the Panel are clear that at this stage their advice has not changed and that we should still be looking to support the economy in the near term and balance our books in 2018/19."
Jersey has played down the possible consequences of Brexit for its finance industry, arguing that it is pointless speculating on outcomes that remain unknown. However, the Isle of Man has been considering the issue in more depth, with Chief Minister Allan Bell warning prior to the referendum that a vote for Brexit would "take the United Kingdom and the Isle of Man on a journey into uncharted territory."
"Much would depend on what the UK could negotiate in place of EU membership, and how the island as a Crown Dependency would fit into that new relationship. If the vote is to leave the EU, there will be a need for us to stay very close to the UK negotiators to ensure that the best interests of the Isle of Man are known and protected," Bell said.
The Manx Government also commissioned a report to assess the potential consequences for the Isle of Man in the event of a Brexit. This noted that the island's limited relationship with the EU allows for free trade in manufacturing, agriculture, and fisheries products with the EU. Because of this, these sectors could be likely to experience the most significant effects of a Brexit, although a lot will depend on what new relationship with the EU the UK and the Isle of Man can negotiate.
Bell added: "We have already been active in promoting awareness of the Isle of Man's position and in gathering information and intelligence both on and off island. In publishing this first interim report, the Council of Ministers is sharing what it knows with the public, so that local views on this major issue can be as well informed as possible."
"The report will hopefully give some food for thought for those people who live in the Isle of Man – or perhaps for Manx people currently living in the UK – who may be eligible to vote in the referendum, and for all who want to understand what Brexit could mean for the island."
However, it is probably Gibraltar that potentially stands to lose the most as a result of Brexit. This is because the "Rock" has implemented much EU financial legislation and can apply Common European Passport regulations in the insurance, banking, and fund management spheres, and its withdrawal from the EU could be damaging for its important finance industry – the financial sector and e-commerce and e-gaming now account for 45 percent of the jurisdiction's GDP.
Gibraltar's Government has, however, received a written undertaking from former UK Prime Minister David Cameron that Gibraltar should be fully involved in the process established by the UK to exit from the EU. Cameron said that the idea of a "UK-Gibraltar common market" is being looked at across the UK Government as a matter of urgency. Importantly, he confirmed that there are currently no plans to introduce any changes to the treatment of gambling marketing services, in particular in relation to VAT.
"It will take some time for our future relationship with the EU to become clear but I can assure you that there will be no immediate changes in Gibraltar's circumstances. There will be no initial changes in the way people can travel or in the way services can be sold", Cameron explained.
The Gibraltar Stock Exchange (GSX) said that it sees little change to its regulatory regime in the short term following the UK's Brexit referendum. It acknowledges, however, that if Gibraltar wishes to continue to enjoy access to the EU single market, it will likely need to demonstrate equivalence to the EU regulatory environment. Currently EU legislation forms much of the legal basis upon which Gibraltar operates and is unlikely to be repealed wholesale, the exchange said. Gibraltar's compliance with EU directives will remain unchanged, the GSX said, and it can still provide EU gateway services until clarity is reached on the UK's ability to "passport" financial services.
Nevertheless, Gibraltar is, understandably, worried about the future. In a similar vein to the Crown Dependencies, it has started a holistic review of how the territory will be impacted by the UK leaving the EU. According to the Government, this assessment will enable the Gibraltar to seek certain outcomes in the UK's exit negotiations and help identify potential new business opportunities.
Deputy Chief Minister Joseph Garcia said: "This is part of the work we need to do to keep all our options open and to ensure that we emerge from the aftermath of the effect of the EU Referendum stronger than ever. Our future participation in the EU must be carefully and properly calibrated and is one that we expect we will be able to agree with the UK and the EU Institutions."
However, unlike its cousins in the English Channel and Irish Sea, Gibraltar has another worry to contend with. And it comes in the shape of Spain.
Spain has long resented the UK's sovereignty over Gibraltar, and has pursued its own sovereignty claim aggressively at every opportunity, often making life difficult for Gibraltarians in the process. Shorn of EU protection, and perhaps with a more distant relationship with the UK, Gibraltar fears that a Brexit will embolden Spanish claims. Indeed, the Government issued a strong response to reports that Spanish Foreign Minister José Manuel García-Margallo had recently raised the sovereignty issue.
"We will never consider Margallo's 'joint sovereignty' price for access to the Single Market," retorted Chief Minister Fabian Picardo. "There is no hope ever for Spain to achieve any advances on our sovereignty."
"In fact, as I said four years ago at the United Nations, the Spanish Government needs to wake up and smell the coffee - Gibraltar will NEVER be Spanish."
Gibraltar was encouraged by comments from then UK Foreign Secretary Phillip Hammond (now Chancellor of the UK Exchequer) that would the UK "never enter into arrangements under which the people of Gibraltar would pass under the sovereignty of another state against their freely and democratically expressed wishes, nor would it enter into a process of sovereignty negotiations with which Gibraltar is not content."
Nevertheless, despite all the soothing words, Gibraltar and the Crown Dependencies are facing one of the most uncertain periods in their collective histories following years of growth and rising prosperity. From the point of view of the Crown Dependencies at least, it seems that Brexit will not affect the "third country" basis on which they trade their vital financial services with the EU. However, it looks like there could be more work for Gibraltar's and the UK's negotiators to do to ensure Gibraltar retains access to the EU financial markets on its current terms. Doubtless, they will all be fighting to make their voices heard over the next two years or more.
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