Bank deposit protection in offshore Britain: the Jersey model

Bank failure and deposit protection in the Isle of Man

“…The principal reaction to the collapse has been a new DCS which in essence involves a system of bank‐financed ad hoc levies imposed post default combined with potentially massive Isle of Man Government financial support, subject to an overall cap on compensation payments of £100 million over any ten year period. Operational experiences in distributing compensation following the KSF (IoM) collapse have been drawn upon and its key features bear a striking resemblance to the Jersey DCS enacted in 2009 amidst lingering fears of contagion in the offshore banking domain (Morris, 2010b, 2012a).…”

“…A policy change along these lines appears to broadly replicate the Guernsey experience where initially the Guernsey DCS was based on a hybrid model of ex ante risk assessed premiums held in a captive insurance vehicle combined with ex post ad hoc levies imposed following a bank default (Morris, 2010c). In the event the structure, involving use of a special purpose vehicle designed primarily for commercial insurance, was not fully operationalised and within two years insular government effectively abandoned the whole concept of ex ante risk assessed premiums in favour of a pure ex post ad hoc funding model broadly similar to that in Jersey and the Isle of Man (Morris, 2010b, 2012a).…”

“…The motivation for this amended model appears to be, as in Jersey and the Isle of Man, realisation that at a time when international banking groups are taking strategic decisions regarding business distribution offshore, imposition of potentially expensive up front premiums could easily trigger re‐locations/consolidations and consequential tax and employment losses in a small Island economy heavily dependent on financial services (Morris, 2010b, 2012a). It may well be that these fears are exaggerated given that collective and individual locks on banks ex ante contributions can be constructed in such a way as to curtail excessive business costs in the future and do so over a long‐time frame.…”

“…Given the structural dynamics and irreversible trajectory of offshore financial regulation, insular government and the Isle of Man Financial Supervision Commission have no alternative but to be strongly focussed on full compliance with international Bank failure and deposit protection standards, and it may well be that in the longer-term this strategy will reap rich dividends in terms of an OFC attractive to reputable business. This "magnet effect" perspective on OFC development is one which underpins the UK Government recommended reform agenda (Edwards Report, 1998;Foot Review, 2009) and is apparently endorsed by insular governments in all the British Isles offshore jurisdictions (Morris and Campbell, 2000;Morris, 2010a). This web of constraints on OFC development is both well established (the UK Government/insular administrations constitutional interface) and still in its early stages of development (EU/OECD/Global Forum harmful taxation/transparency/mutual co-operation in tax initiatives).…”

“…On paper these characteristics appear to be major catalysts in development of the Manx OFC and its continuing expansion. Historically there may well have been a measure of truth in this analysis, particularly from the early and late 1970s when rescheduling of the Sterling Area in 1972 and abolition of UK exchange controls in 1979 removed significant impediments to the development of British Isles offshore platforms ( Johns and Le Marchant, 1993;Le Marchant, 1999) enabling them to eventually assume a key role in acting as gateways for massive inflows of highly mobile finance capital into the City of London's international banking sector (Foot Review, 2009;Morris, 2010a). Constitutional formalism along these lines is though, in the context of the Manx OFC, a distortion of modern political and international regulatory reality which subjects insular policy and legislation to covert UK Government oversight and involves effective imposition of supranational norms embodied in EU/OECD/IMF/FSB/Global Forum supervision, restraining cavalier development of finance-magnet fiscal structures, special purpose vehicles and new, fertile lines of offshore business regarded as problematic in terms of risk, onshore jurisdictions possible hostile reactions, including legislation designed to remove comparative advantages in use of offshore facilities [1], and effective pursuit of transnational financial crime.…”