The Proper Channels
As published in the STEP Journal June 2018
Focus on Crown Dependencies
Anton Seatter explains how international transparency initiatives are changing the face of Jersey’s Private Client industry.
Jersey has for many years, engaged in careful cooperation with the UK, the EU and other leading international bodies to comply with international standards of transparency and information exchange. Since 2008, Jersey has entered into over 30 tax information exchange agreements with other countries, adopted the US Foreign Account Tax Compliance Act, entered into the UK intergovernmental agreement and, most recently, become an early adopter of the Common Reporting Standard (CRS).
However, this move towards greater transparency – and the costs associated with it – has changed the client landscape for Jersey, especially how the island is viewed among high-net-worth individuals (HNWIs) and their families.
As a result of rising compliance costs, the island has become more focused on servicing higher-value and more sophisticated client structures compared with ten or 20 years ago. In addition, the evolution of tax legislation has made some structures less attractive from a tax perspective, resulting in the main driver for new structures reverting to traditional estate and succession planning, rather than tax optimisation.
Can transparency go too far?
Clients value Jersey as a well-regulated and transparent jurisdiction, especially when it comes to mitigating potential reputational risk. However, the implementation of the UK trust register – part of the UK’s response to the EU Fourth Anti-Money Laundering Directive – has caused concern among many HNWIs and their advisors, as there is a conflict between the need to be transparent and an individual’s right to privacy.
There are many legitimate reasons why HNWIs choose to structure their wealth through offshore vehicles, such as trusts. In some parts of the world, security and kidnapping risks are very real concerns for families, and being able to disassociate assets from the family helps them maintain privacy. Trust structures are also used to shield HNWIs’ children from the full extent of the family’s wealth, in part to prevent children from becoming spendthrifts.
Many HNWIs work hard to ensure their electronic presence is kept to a minimum, with their biggest concern being data leakages to journalists and their names featuring in the tabloid press.
‘Regtech is an area of keen interest, especially as the cost reduces’
How are service providers responding?
To remain competitive in a global market, service providers have been focusing on managing rising internal compliance costs while also ensuring they stay ahead of continual change and new obligations placed on them.
As a consequence, a number of service providers have consolidated in recent years. Although consolidation among service providers is not isolated to Jersey, it has been particularly noticeable due to the size of the market on the island.
Larger service providers can absorb some of the costs associated with additional compliance while also ensuring there are sufficient internal resources and expertise to operate appropriate systems and controls.
In addition to consolidation between service providers, a number of new advisory firms focused on regulation and compliance have been established. These specialist firms help service providers stay ahead of ongoing change by lending their expertise when needed.
Service providers are also starting to look at the regulatory technology (regtech) sector. By automating previously manual processes, service providers hope to manage some internal compliance costs and redeploy skilled labour to areas where it can add
For example, regtech could be a powerful tool for work associated with the CRS. The CRS can involve manual validation of information provided by clients, the gathering of fnancial data, and preparation and subsequent fling of reports with various tax authorities globally. Regtech is looking to automate much of this process by combining well-tested technologies, such as optical character recognition and information validation based on decision-tree logic, with automatic information gathering and rules-based data manipulation.
Even though regtech is in its infancy – and a fully automated approach is unlikely – it is an area of keen interest, especially as the cost of implementing such solutions reduces.
Looking to the future
Transparency and the various requirements that go with it will continue to evolve, and the private wealth sector will continue to respond as appropriate.
To bring about a sustainable future, Jersey is committed to international tax transparency. However, it is a balancing act and, for Jersey structures to remain attractive and relevant to HNWIs, Jersey will also have to ensure their privacy needs are respected as much as possible.