Mon, 09/07/2007 - 10:27
After a 30-year career in the City, Peter Long could have been forgiven if he had moved to a relaxing and beautiful tax haven with one eye on a golden retirement. But Long actually went to the Isle of Man for far more dynamic reasons. He viewed the island as a potent force in the making and decided to launch a firm of stockbrokers there with sons Anthony and David, themselves financial industry professionals.
Although they knew little about the Isle of Man before they conducted their research in 1996, the Longs soon identified the jurisdiction as the ideal environment in which to set up Capital International, a broking, administration and fund management firm. 'We realised that the environment on the Isle of Man was conducive to entrepreneurial business,' says Anthony Long. 'The regulator here is incredibly realistic in its commercial outlook and willing to work closely with industry. This contrasts with London, which has thousands of regulated entities that cannot possibly all have a relationship with their regulator.' The Longs' story could be seen as a proxy for many firms in the Manx financial services sector which, after a tentative start, has blossomed in a way that few could have expected when the Experienced Investor Funds legislation was enacted in 1999.
EIFs were designed to involve a minimum of red tape, could be launched without preapproval and were not subject to product regulation provided they used an authorised administrator in the Isle of Man. To this day, EIFs are the fastest-growing category of funds on the island, making up 135 of the 422 funds and representing assets of USD9.8bn.
But laws and regulations, although significant in the island's recent growth, do not tell the whole story. Some of its greatest strengths are rooted in its distant past. For example, Tynwald, the Manx Parliament, is more than a thousand years old and is the longest continuous parliamentary assembly in the world.
The island makes its own laws and oversees all its internal administration, fiscal and social policies, with the British government responsible only for external issues such as defence and foreign policy. A self-governing UK crown dependency, the island is part of the Commonwealth and of the Organisation for Economic Co-operation and Development. In short, it is independent enough to act in its own interest, but has the patronage of a relatively powerful and wellconnected country.
The island has also earned a reputation for high regulatory standards and financial stability, enjoying an AAA risk rating from Standard and Poor's. An International Monetary Fund report in 2003 said the Isle of Man had a high level of compliance with international standards in areas such as banking, insurance, securities, prevention of money laundering and combating the financing of terrorism.
With many of the essential building blocks in place, the stage was set for a further step forward in 2003, the year that Brian Donegan began working with Isle of Man Finance, the government agency dedicated to promoting the growth of the sector.
The offering for funds at that time, in his words 'could have been more competitive'. There was no obvious way to challenge the supremacy of Dublin, which had a seemingly impregnable position as the administration centre of choice for Cayman funds. 'Back in 2003 we could see there would be no funds growth unless a new strategy was put in place,' says Donegan, who is Isle of Man Finance's business development manager for the funds sector. The main planks of this strategy were the removal of VAT on all companies except banks, and the ending of the dual regulation of funds not domiciled in the Isle of Man.
In addition, the island created a zero rate of corporate tax for fund managers and administrators, a regime that was extended to every business last year. 'We decided to position ourselves clearly as a place where alternative funds could incorporate, administer and manage all in the same location,' he says.
The main targets were hedge funds, private equity and closed-ended funds, and growth soon followed. Between 2003 and 2006, the level of funds under administration in the island more than tripled, with a significant proportion of that growth coming in the past year.
Funds under administration reached USD50bn by the end of 2006 and, buoyed by this success, the island is now targeting USD100bn by 2010, while funds under management have reached USD15bn. The assets of closed-ended schemes have grown to USD5.9bn, not counting those administered by corporate service providers. Says Long: 'The Isle of Man punches above its weight because of its offshore credentials. It has a really strong regulatory framework.'
Today financial services are one of the main drivers of the island's economic growth. In the past decade, annual GDP growth has averaged 6 per cent, compared with a European Union average of 2.4 per cent. Gross domestic product of GBP1.1bn translates to GBP17,309 per capita. Not only does this outstrip the UK figure in relative terms, but because the standard rate of Isle of Man income tax is only 10 per cent (the higher band is 18 per cent) and there is a GBP20,000 personal allowance, people are asking home more than their counterparts on the mainland.
Other factors contributing to growth include notably the longstanding relationship between government and industry. There is a pervasive feeling of togetherness on the island, in the classic 'united we stand' tradition. This resonates with the Isle of Man's famous three-legged symbol, accompanied by a Latin inscription that translates as: 'Whichever way you throw me I shall stand'. All parties realise that it is in their own interest to work in partnership. Long says: 'Having a healthy dialogue with the regulator allowed us to explore at an early stage areas of new business opportunities. We collectively coined the phrase Isle of Man PLC to show the close and dynamic relationship between government and business.'
The result has been regulation that is fairly robust without being so burdensome that financial services companies head straight for competing jurisdictions. Says Donegan: 'We believe the Isle of Man has the balance right between a high calibre regulatory framework and one that is business-centric. It offers speed, ease and value for money.'
The profile of the island has also been helped by a reduction in the cost of travelling to and from it. It is now far easier to get to Dublin, London and Edinburgh thanks to the launch of new air services and growing competition that has brought prices down. The profile of the Isle of Man is one of the issues taxing its best minds at the moment. Marketing and business development was one of the main topics addressed in a report, published in February, by the Isle of Man Funds Review Group, which was established in 2006 under the sponsorship of Isle of Man Finance and is made up of public and
private sector representatives.
Despite the heady growth of recent years, local industry leaders felt a review of the sector was necessary to make the Isle of Man a more attractive offshore jurisdiction for fund activity. The report was broken down into four parts: strategy, marketing, regulation and legislation, and training and education. The group was chaired by Paul Smith, the former global head of HSBC's alternative fund services division and a leading light of the international fund industry.
Gordon Wilson, managing director of Caledonian Fund Services (Europe), the Isle of Man arm of a Cayman-based hedge fund administration business, says: 'We were very lucky to get Paul Smith to chair it. He is very senior in the industry and has a lot of insight and understanding.'
The report, unveiled by Treasury minister Allan Bell in his 2007 budget speech, recommended several ways for the island to try to establish itself as a force in the global fund services industry. Its recommendations included the introduction of a new specialist fund with a USD100,000 minimum initial subscription, the flexibility to base management and administration of funds in other jurisdictions, the abolition of restrictions on investment strategies, and a light-touch regulatory approach.
Says Wilson: 'It is important these reviews get done or else you are relying on the government and regulators to come up with the way forward. They are not thinking about the opportunities; their job is to deal with the issues and problems as they come up. Industry must always take the opportunity to analyse its own markets.'
The main recommendation was the need to increase marketing activity in order to raise the profile and awareness of the Isle of Man as a funds centre. The island has many of the structures and advantages necessary to attract business, but has a substantially lower profile than Ireland and even than its
Channel Island rivals.
'External exposure is very important in the next 12 months as the island promotes its new fund status,' Long says. 'The opportunity is huge. This is the first time there has been a fully joined-up approach to position the island for new markets and opportunities.'
Donegan is confident that, with the hedge fund sector still growing very strongly, this is the right time for a big marketing push. 'We want to scale up resources,' he says. 'We will soon have a full-time research officer in the City and a dedicated senior hedge fund person. We can put together a whole package for hedge funds in Mayfair that can both provide quality and potentially mitigate the tax burden.'
Communication with the lawyers that create the structures for new funds is crucial. 'The business is within their gift,' Donegan says. 'Twenty per cent of the lawyers have 80 per cent of the business. It is down to us to talk to them and engage them and persuade them that regulation and key infrastructure has changed. In short, they should be thinking of incorporating funds in the Isle of Man as an alternative to the Caymans and Dublin.'
The vision is of a cluster of very successful hedge fund managers creating huge wealth. This makes sense because the island could not support a large commoditised industry. 'We don't want the infrastructure creaking at the seams,' says Donegan. 'Intellectual property is the way to go - look at the new IT centres in India and Hong Kong. We think hedge fund management is the way forward and we would want to see more hedge fund incorporations rather than rely too heavily on administration.'
Donegan and his team travel far and wide to spread the word. An Isle of Man delegation recently exhibited at Gaim in Monaco, and the island was represented at Fund Forum, Europe's largest funds event in the same location, in July. 'Companies often come along with us on a 'Team Isle of Man' basis,' says Donegan.
The marketing budget at GBP580,000 is not insignificant, but it may rise considerably. Donegan says: 'That is just a starter. The Treasury has given us a mandate, so the clear implication is that when performance comes through, at the end of next year therewill be another review. If we want to scale up business we need to extend funding. We believe there is no shortage of potential resources.'
The Treasury may well be happy to stump up. Even though it has lost revenue from the reduction of corporation tax to zero, this has been more than offset by the VAT take, which accounts for 75 per cent of the Treasury's income.
The VAT revenues primarily come from the services used by the - often well-paid - employees and executives based on the island. In fund management alone there are more than 500 professionals, including auditors, accountants, lawyers, brokers, transfer agents, investment managers and administrators.
And yet funds are not the only game in financial services. For example, the island is also developing a strong proposition for companies listing on London's Alternative Investment Market.
'Of all the companies listed on AIM, more than 5 per cent are Isle of Man-incorporated,' says Donegan, citing zero corporation tax, an English-speaking domicile and one close enough to get to and from for board meetings in the same day as the key benefits. 'We think this makes us more attractive than, say, Bermuda,' he says.
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