A couple of years ago, it was not looking so rosy for the Isle of Man. Among other setbacks, it was hit by the UK Government’s renegotiation of a VAT sharing agreement. This dented the island’s coffers, with a net loss to the average householder of £5,000. Equally, the demise of Kaupthing Singer & Friedlander (Isle of Man) did the reputation of the island’s banking sector no favours.
But unlike the eurozone, the Isle of Man has managed to ensure that there has been no contagion. It has several things in its favour. First, its Government has worked hard to sell the island’s charms to a more international client base. As a result, it is less exposed to the problems of the UK economy, and is building up its client base in Asia and the Middle East. Many of these will be English-speaking expats, but the economic exposure is different.
The Government has worked with the industry to devise a long-term marketing plan to bring in business from emerging markets. This has included analysis of individual country requirements, recognising that markets such as China, India and the Middle East are not homogenous “emerging markets” but have differing needs. Partly this is necessity – the Government has to recoup the revenue lost in VAT by other means.
Natalie Hall, head of marketing at Royal London 360°, the Isle of Man-based international life products provider, says this initiative has been a success and has helped support the island as a financial centre: “A lot of advisers have moved into the Middle East and Far East, and this has been a market that is really expanding.”
Simon Willoughby, director at research group Acuity, says: “The [life products] business into the UK is still very important, but there is an international dimension to the life sector that is not matched by the competitor jurisdictions of Dublin or Luxembourg.”
He believes part of the attraction is – some 20 years into its life as a financial centre – the store of experience held on the island.
The island has also benefited from regulatory activity elsewhere. For example, restrictions on UK pensions have proved a catalyst for advisers putting money into offshore jurisdictions.
Richard Leeson, sales and marketing director at Axa Wealth International, says: “UK-based individuals with significant spare income find themselves capped out on their pensions, and their choices for regular savings are quite poor. They have increased their allocation to the offshore regular savings market as a result.”
The UK pension regime has also created a potential new revenue stream for the island in the form of offshore pensions and QROPS. The expertise in international pensions is already available, and this has been suggested as a strong growth area.
At the same time, changes to the capital gains tax rules implemented at the end of the last Labour Government in the UK proved disastrous for the onshore insurance bond market. The effect on the offshore market has not been as profound, and fund flows have generally held up.
Leeson says that average investment levels have increased significantly. This has partly been fuelled by private banks, which are seeing their business eroded by the top end of the IFA market. As such, they are increasingly allocating funds offshore as a defensive move.
Part of the Isle of Man’s strength has simply been that it is what other jurisdictions are not, and Hall believes that the island’s advantages came to the fore during the recent economic crisis.
“You only have to look at the number of companies established here,” she adds. “It is AAA-rated. It has one of the longest running parliaments. It has good political stability and the Government is happy to work with the financial services industry.”
Isle of Man bank deposits(£bn)
Pillars of industry
The Isle of Man has four pillars to its financial services industry. The trust and fiduciary sector has benefited from the island being one of the first jurisdictions to regulate this area. It is also serving businesses with income sources from all over the world, which has helped stability.
Equally, the captive and general insurance market is relatively robust, providing captive insurance for, among other blue chips, National Grid, Centrica and Cathay Pacific.
Although the life sector has been relatively strong, it is changing. Leeson says the key strength for the Isle of Man originally was that providers built systems that were suited to open architecture. They had structural advantages over UK-domiciled funds that had to make a reservation for tax.
He adds: “This tapped into the increasing move from in-house insurance company funds to open-architecture investment. Investors wanted to take ownership of the underlying assets.”
But a more recent development has been a trend among advisers to appoint a discretionary manager within these open-architecture platforms.
“Advisers have increasingly realised that they cannot provide an investment management service,” Leeson explains. “They are also looking to shelve the liabilities that go with it.”
Total premium income on the Isle of Man rose to £8.5bn ($13.6bn) in 2010, near to its 2006 peak of £9.4bn. All providers report an increasing emphasis on regular premium business.
According to Hall, this reflects a trend among investors to “keep themselves in cash, rather than go for single premium business. They do not want to get into the market at the wrong time. As a result, advisers have been really focusing on the benefits of regular saving.”
Hall notes that there have not been a lot of new product initiatives recently, since the economic climate has not supported them. Where there has been product development, it has tended to be led by technical changes.
Plenty of commentators had expected the banking sector to be hit hard by the European Savings Directive. This did not prove to be the case but the global banking crisis has done its fair share of damage. The highest profile casualty was Kaupthing Singer & Friedlander (Isle of Man), but several Irish banks also left the island. Deposits are lower than at their peak of £57bn in 2008, but have stabilised at £50bn.
The funds industry has had a trickier run. At $38bn, funds under management within the sector are well below their 2008 peak of $57bn.
Willoughby says: “The funds sector has had various false starts. At the moment it is aiming to promote experienced investor funds, and some have had more success than others. The Government believes it could be doing more of this type of business, and therefore there is a lot of promotional activity going into this area.”
The Department of Economic Development continues to target early-stage and mid-sized fund managers, alongside hedge fund administrator groups. The department’s marketing initiatives have included promoting the island’s strengths – such as its low cost and high skills base – to the City of London.
Pool of experience
Willoughby says the skills base of the island as a whole is improving, with fewer positions staffed by school-leavers, and more experienced personnel across the finance industry. One group whose numbers have remained stubbornly low is that of the seriously wealthy. The Government has put tax incentives in place but the island lacks the upmarket housing that UHNWIs require.
While it may, for now, lack the luxury housing of London or New York, the Isle of Man is clearly established as a financial centre and well-placed to broaden its investor base in new markets.
The Government’s move to expand into emerging markets could give the island the boost it needs to move to the next stage of development.
Its fund regime, meanwhile, is receiving strong support but it is finding its feet; and pensions represent a strong growth area. The island’s key selling points – capability, capacity and cost – remain in place.