There has been talk of Jersey relaxing its rule that automatically excludes banks outside the top 500 from setting up shop in the island. But is a rule change essential, will it actually happen, and what will take its place? David Burrows investigates
The rule that only the top 500 banks in the world are allowed to set up in Jersey has been a divisive issue for years - and one that we covered in detail in businesslife.co back in August 2010. In April this year, the States of Jersey, in its policy framework document on the future of finance, indicated that the rule would be changed. To what extent and how quickly, however, remains to be determined.
Joe Moynihan, Director of Financial Services, States of Jersey, confirms that discussions are currently in progress with the regulator and a number of options are being considered. He is confident something will be ready for consultation this summer.
The top 500 rule was introduced in the 1970s as one part of a broader set of conditions designed to protect Jersey against a financial crisis, and to maintain the island"s standing as a reputable, international financial centre. So why, after so many years, are regulatory changes being contemplated now?
Robin Smith, Partner at Carey Olsen, believes the rules have stood the island in good stead, reinforcing Jersey"s position as a well-run financial centre and a respectable base for banking. But he believes the financial crisis of 2008/09 had a big impact and that now the top 500 rule has little relevance.
“After the financial crisis, the "too big to fail" theory did not stand up to scrutiny,” he explains. “It showed that banks can rise up to the top 500 without necessarily having the standards to satisfy a jurisdiction such as Jersey.” RBS and Lloyds, for example, were comfortably in the top 500, yet only managed to survive because of government bailouts.
The counter argument from supporters of Jersey"s top 500 rule is that the financial crisis did prove that when systemically important banks such as RBS and Lloyds hit the buffers, governments would not let them fail.
However Lehman Brothers disproves this theory - "big" didn"t mean "safe" there. And the prospect of repeated bailouts in the future either side of the Atlantic is far less assured, with public opinion towards banks remaining resentful and government appetite for intervention greatly reduced.
Change requires change
Smith believes rule changes are inevitable and necessary. “There needs to be a revaluation of the criteria, but it has to be stressed that it"s not "relaxing the rules", it"s a case of making them more relevant,” he explains. “A bank"s liabilities, its operating model and its type of customer will all still feature as part of the criteria for banks to set up in Jersey, but there should be a challenge to the top 500 policy. I think it"s also likely that the island may go in the direction of Basel III [a set of reforms on bank supervision to improve the international banking sector"s ability to deal with financial and economic stress, risk management and bank transparency].”
Moynihan takes a similar line. “The top 500 as a measurement is pretty crude. The world of banking is changing - there"s a lot more consolidation and there are international banks with totally different banking models,” he says. “We are currently in consultation with the regulator as to whether we can consider banks outside the top 500 that are not considered to represent a threat to Jersey"s reputation. We don"t want to turn good business opportunities for the island away. One possible consideration is to extend the rule to the top 1,000 banks.”
This option would certainly provide more flexibility. One of the main criticisms of the top 500 rule is that it is too rigid, with Jersey unnecessarily losing good business as a result. As a case in point, Kleinwort Benson, which had operated in Jersey for 47 years, was bought in 2009 from Commerzbank by RHJ Investments. Though awarded a high investment rating by Moodys, RHJ was not in the world"s top 500 banks, so was effectively blackballed by the Jersey regulator. The upshot was that Kleinwort Benson"s offshore banking relocated to Guernsey.
Which begs the question, will Guernsey lose out if the rule is changed and fewer banks are excluded from Jersey? “I don"t think it will affect Guernsey too much,” Smith argues. “There"s an element of competition but banks often favour a presence on both islands and I think that will continue.”
What next?
What sort of regulatory model is Jersey likely to adapt? Will it look at what Guernsey does - judging each bank on its own merits rather than applying an inflexible top 500 rule?
Moynihan says there"s been no specific intention to look at the Guernsey model, and instead a number of proposals explicitly tailored to Jersey have been looked at - notably the top 1,000 banks criterion. “The top 500 rule was never a "green card" that guaranteed you"d get a licence. The quality of management and the financial health of banks were and will continue to be central to any approval to set up in Jersey.” He adds: “International banking is changing and the challenge for us is to ensure we attract good quality banks with good quality regulation in their home country.”
Richard Ingle, President of the Jersey Bankers Association, suggests there are a few options. “One option could be to apply a deeper understanding and assessment logic to would-be entrants, which would relate to more than simple size. A second option might be to offer another class of banking license with a restricted ability to take deposits, which might fall within any depositor compensation arrangements. Whatever choice is made, there will be no "free for all", with any relaxation seeking to maintain the best possible standards.”
If the rules are changed and the blanket exclusion of banks outside the top 500 is dropped, are we likely to see an influx of new entrant banks from emerging markets such as China? Ingle would certainly welcome it. “We"d all like to see a broader cross section of banks in Jersey, including better representation from our target markets in developing and emerging countries such as China,” he says.
Smith agrees, but thinks new arrivals will be few at first. “I don"t anticipate a huge wave of new banks. I certainly expect there to be interest from China but I think overall the number of banks coming to Jersey initially will not be great,” he says.
Moynihan echoes this view, suggesting that new banks are likely to increase their presence on the island gradually. “Part of our job is to promote opportunities in Jersey to emerging market banks,” he explains. “I think new banks coming in are likely to be modest-sized operations while they test the market.”
Quite whether the reality matches the theory is yet to be seen - but Jersey"s banking sector is going to look different in the future.
The population quandary
Even if, initially, the interest in setting up in Jersey is relatively restrained, will banks find it difficult to negotiate Jersey"s strict immigration policy and bring in foreign workers? Earlier this year, the States voted 25 to 20 to place a net migration cap of 325 licenses per year - a decision some felt would inhibit inward investment.
Joe Moynihan, Director of Financial Services, States of Jersey does not see this as a major stumbling block. Because the banks coming in are likely to run modest-sized offices, they will tend to recruit locally. “The last banking licence issued was for Abu Dhabi Commercial Bank (back in 2011) and they largely used locally qualified individuals,” he explains.
Richard Ingle, President of the Jersey Bankers Association, believes the Jersey Government will be pragmatic. “The States have generally been very supportive in helping the industry to secure the best people. We all recognise the population rules but would not anticipate any particular problems arising in connection with the outcome to the Banking Licensing Policy review.”
Robin Smith, Partner at Carey Olsen, takes a similar line: “I have little doubt there will be the flexibility for banks to employ highly skilled people from outside of the island in the event that those skills are not available in Jersey.”