Memorandum from the Financial Services
1. This Memorandum is submitted to the Committee's
inquiry into Offshore Financial Centres. We address those matters
within the inquiry's terms of reference that are relevant to the
FSA, fall within our remit, or where we feel we can make a useful
contribution. Additionally, we detail the international work,
in which we are involved, which is relevant to the Committee's
2. The key points we make in this submission
There is no internationally agreed
definition of what constitutes an offshore financial centre (OFC),
but there are common perceptions.
There has been considerable focus
on OFCs within the international regulatory community in recent
years, and they have been subject to extensive review.
These reviews have tended to conclude
that OFCs per se do not pose a threat to global financial stability,
and that standards of regulation are generally comparable to those
that apply in other jurisdictions.
The FSA, in its regulatory procedures,
does not draw any distinction between OFC and other foreign jurisdictions.
The level of cooperation received
from OFC regulators has generally been good, and has not typically
been determined by factors that are unique to OFCs.
3. There is no internationally agreed definition
of what constitutes an offshore financial centre (OFC). Generally,
there is a tendency to adopt the approach of "you know one
when you see one". Over the years, there have been many attempts
to define the concept by academics, international organisations,
regulators and others, and while there are common themes in the
various proposals, there has been no real consensus. Definitions
tend to be centred on the concept that an OFC provides financial
services (usually in currencies other than that used domestically)
primarily to non-residents, for whom it offers a favourable tax
regime. While many jurisdictions are attractive to non-residents
for the provision of financial services, it is typically the case
(but not universally so) that OFCs are seen to be those where
there is a significant imbalance of scale between the external
business and the domestic financing needs of the local economy.
4. As a consequence, there has been a tendency
to perceive a classic OFC as being a small island state that has
legislated to create a highly favourable environment for the development
of a financial services sector, which far exceeds what would have
evolved naturally to meet domestic needs. However, at the other
extreme, several commentators consider that OFCs include those
financial markets that have developed naturally on the back, for
example, of the provision of goods and services for foreign trade
and related activities. Within this category these commentators
might typically include the City of London, due to the highly
international character of its financial services industry. In
recent years, there has been a trend towards the creation of OFC
enclaves within developing economies, for example the Labuan Offshore
Financial Centre in Malaysia, or the Dubai International Financial
Centre in the United Arab Emirates.
5. The majority of OFCs exist because they
are able to offer an environment which isolates the financial
service providers from the constraints that might arise in "onshore"
financial centres. These include the results of measures designed,
among other things, to address domestic economic, monetary and
financial policy considerations. Onshore centres may have rules
that are considered by service providers and their customers as
too demanding, tax policies that are too restrictive, disclosure
requirements that are too extensive, or overall costs that are
simply too high. Successful OFCs will generally have legal, regulatory
and tax structures that avoid these "problems", although
it should be stressed that the standards to which they operate
are not necessarily out of line with international expectations
of a jurisdiction which wishes to offer appropriate incentives.
Increasingly, financial institutions in primary onshore centres
demand high operational and regulatory standards in OFCs with
which they are associated.
6. The majority of OFCs tend to provide
relatively traditional financial services. They do not seem to
play an especially important role in the development of complex
financial instruments, except to the extent that such instruments
may be heavily used by entities based in such centres. Onshore
financial centres, such as London and New York, remain the major
development locations for new financial instruments, but the "engineers"
of these instruments will naturally seek to identify the best
legal, regulatory and tax environment in which to market the product.
7. While, in principle, the FSA, draws no
distinction between OFCs and other financial markets in its regulatory
and supervisory policies and procedures (see below), it participates
actively in various international fora in which OFCs have been
a focus of attention, either as a discrete issue or as part of
a wider review of jurisdictions' adherence to international standards.
The most comprehensive work looking solely at OFCs has been undertaken
by the Financial Stability Forum (FSF). Shortly after its creation
it established a working group to consider whether OFCs posed
a threat to global financial stability. The working group's report
was published in April 2000,
and concluded that,
"OFCs, to date, do not appear to have been
a major causal factor in the creation of systemic financial problems.
But OFCs have featured in some crises, and as national financial
systems grow more interdependent, future problems in OFCs could
have consequences for other financial centres".
8. The report recognised the extent to which
international standards relating to the regulation of financial
services and the prevention of money laundering varied significantly
from one OFC to another, and it also recognised that the failure
to implement appropriate standards adequately could pose a future
threat to financial stability. It identified 42 jurisdictions
that it considered to be OFCs, and grouped them into three categories,
based on the perceived level of compliance with international
standards, drawing on a survey of the views of onshore and offshore
financial services supervisors undertaken by the working group.
9. In the light of these findings, the FSF
asked the International Monetary Fund (IMF) to assume responsibility
for instituting an assessment process to determine the true level
of compliance by these 42 jurisdictions. While priority was to
be given to those OFCs that had been considered weakest, the IMF's
OFC Program, which came into being in 2001, captured all 42 jurisdictions
referred to in the FSF report, together with another four identified
by the IMF. The initial phase of the programme was completed in
2005, and concluded that the OFCs' compliance levels with the
four main international standards against which they were assessed
were broadly comparable to those of other jurisdictions, and,
in some cases, better. However, the IMF noted that compliance
levels were generally weaker in the securities and insurance sectors
than in banking.
10. To date, only a limited number of assessments
have been undertaken in the second phase of the OFC Program since
2005. The IMF has reported that it continues to see improvements
in the levels of compliance with the banking and insurance standards,
but that the sample of OFCs with material securities sectors is
currently too small to be statistically relevant. However, it
notes that concerns remain about the implementation of some of
the FATF Recommendations on anti-money laundering and the combating
of terrorist financing (AML/CFT), for which revised standards
were published in 2003. The IMF concludes that, while compliance
by OFCs is broadly comparable with other jurisdictions, there
are common weaknesses in the areas of customer identification,
the monitoring of transactions, and international cooperation.
However, such weaknesses are not restricted to OFCs; the levels
of compliance globally with the FATF's customer identification
requirements are currently poor (eg both the UK and US have been
evaluated as only "partially compliant" with the standard).
11. The OFC Program has, by design, included
all 46 jurisdictions referred to above, but the IMF Board agreed
in May 2008 to merge this programme with its standard Financial
Sector Assessment Program (FSAP). This will allow a more risk-based
approach to the assessment process, in that it will focus resources
on both the key jurisdictions and the significant activities within
each jurisdiction. It will also allow the use of more developed
assessment techniques, and extend the potential scope of the assessments
to cover a broader range of international standards (eg corporate
governance) than the four included within the OFC Program.
12. The FSA has strongly supported this
move in the course of its participation in the IMF's annual OFC
Roundtable discussion, and through its membership of the FSF's
OFC Review Group. This group was established in 2005 to monitor
the results of the IMF work and any other relevant initiatives
by the standard-setters, and to advise the FSF on any follow-up
action that it might consider appropriate. In September 2007,
the FSF reported
that it considered that significant progress had been made in
improving levels of compliance in OFCs (although acknowledging
that some deficiencies remained), but that the Review Group stands
ready to examine any material problems that might emerge.
13. Within the European Union, in September
2004, the Financial Stability Table of the Economic and Financial
Committee invited the 3L3 Committees (CEBS, CESR and CEIOPS) to
examine, in liaison with the Commission, "non-cooperative
jurisdictions that are unable and/or unwilling to provide foreign
regulators cooperation according to international standards".
The 3L3 Committees decided to term such jurisdictions as OFCs,
whilst recognising that the scope may extend to onshore jurisdictions.
As part of this project the Committees have been asked to establish
"common databases on the existing problems in relation to
OFCs", and to develop a common approach for the supervision
of business operations in such jurisdictions. In the latest report
on this initiative, published in August 2007,
the Committees summarised the findings from a survey of European
supervisors, seeking information on their experience in dealings
with OFCs. These indicated that, on the banking side, "the
vast majority of [the 30] respondents reported that they have
no issues to be raised about OFCs and also stated that they had
satisfactory dealings". A similar picture emerged from the
securities side, while the insurance supervisors mostly indicated
that their dealings with OFCs were very limited, but that they
also had identified no particular problems. In most cases, the
supervisors generally felt that any difficulties could be, and
were best dealt with bilaterally with the relevant OFC.
14. The FSA participates in several other
international bodies which have looked more generally at the issue
of "non-cooperative jurisdictions". Although these initiatives
have not focussed exclusively on OFCs, several of the jurisdictions
that have fallen within their scope have been involved predominantly
in offshore activities. The most high profile of these initiatives
has been the FATF's Non-Cooperative Countries and Territories
(NCCT) exercise, which resulted in the publication, in June 2000,
of a first list of jurisdictions deemed to have significant deficiencies
primarily in terms of their ability or willingness to cooperate
internationally. This initiative has been highly successful in
bringing about reform in the AML defences of several jurisdictions,
with the result that there are currently no names on the list.
A total of 47 jurisdictions were reviewed under the initiative
(including 30 OFCs), leading to the nomination of 23 to the NCCT
list (of which 11 were OFCs). After extensive engagement with
the FATF, the last of the OFCs was removed from the list in October
2005. The FATF continues to monitor international cooperation
issues very closely, and in February 2008 issued a statement
reflecting its concerns about the AML/CFT regimes in five jurisdictions
and one geographical area, one of which is considered to host
15. In 2005, the International Organisation
of Securities Commissions (IOSCO) launched an initiative to raise
the standards of cross-border cooperation among securities regulators.
This involves identifying jurisdictions that appear to be unable
or unwilling to co-operate; prioritising follow-up work with those
presenting the greatest risks to IOSCO's objectives of investor
protection, maintenance of fair and efficient markets and financial
stability; and entering into a dialogue with priority jurisdictions
to develop a mutual understanding of their ability and willingness
to cooperate, and to assist them in resolving problems. This initiative,
which is not targeted specifically at OFCs, is undertaken on a
confidential basis, and the identity of jurisdictions is not disclosed.
16. One benchmark for the exercise is a
jurisdiction's ability to comply with the terms of IOSCO's Multilateral
Memorandum of Understanding (MMOU), which establishes the framework
in which securities regulators are expected to cooperate. To be
a signatory to the MMOU jurisdictions have to be subject to a
rigorous vetting process. Currently, approximately eight of the
signatories are recognised OFCs, and several others either have
applications pending or have formally notified IOSCO of their
intentions to effect legal changes to permit signature.
FSA SUPERVISORY RELATIONSHIP
17. In its bilateral relations with its
foreign regulatory counterparts, the FSA draws no distinction
between OFCs and other jurisdictions. This also applies to those
OFCs that have close constitutional links with the UK (ie the
Crown Dependencies and Overseas Territories). The basis of the
relationships is typically determined by the presence of firms
for which the FSA and the foreign counterpart have some form of
common supervisory interest, and the need to obtain or exchange
information for supervisory or investigatory purposes. For the
most part, the cooperation sought from foreign counterparts relates
to exchanges of supervisory information about individual firms,
or the provision of very specific intelligence to assist an investigation
or enforcement matter.
18. In general, there has been no material
difference in the overall experience of dealing with OFC regulators
compared with other counterparts. Relationships with several OFCs
(including the Crown Dependencies) are particularly strong in
terms of policy development, supervision and enforcement, and
the FSA has routinely received valuable assistance from the regulatory
authorities in many cases, and the criminal law enforcement authorities
from time to time. Where the FSA encounters problems when seeking
cooperation from specific OFCs, it will normally talk to the jurisdiction
in an attempt to resolve the difficulties. This will typically
be the case when we believe that there may be a need for further
cooperation in the future.
19. Where there is a clear business case,
the FSA may seek to enter into a Memorandum of Understanding (MOU)
or similar arrangement with a foreign counterpart in order to
lay down the framework for continuing cooperation. Currently,
the FSA has MOUs with agencies in ten jurisdictions that may be
The text of these documents is published on the FSA's website.
In addition, the FSA, as a signatory to the IOSCO MMOU, is entitled
to expect cooperation from fellow signatories without the need
for a bilateral arrangement.
20. The FSA will continue to promote, through
whatever fora it considers appropriate, the implementation of
international standards of regulation, transparency and cross-border
cooperation. However, it does not see these issues as being specific
to OFCs, however defined, and it will continue to advocate that
the performance of individual jurisdictions should be judged on
their own merits, rather than under some generic label.
16 June 2008
1 http://www.fsforum.org/publications/OFC_Report_-_5_April_2000a.pdf Back
The supervisory principles promulgated by the Basel Committee
on Banking Supervision, the International Organisation of Securities
Commissions and the International Association of Insurance Supervisors;
and the anti-money laundering standards published by the Financial
Action Task Force. Back
The staff reports on the progress of the OFC Program, together
with copies of the jurisdictional reports can be found on the
IMF website at www.imf.org. A summary of the finding for the UK's
Crown Dependencies and Overseas Territories may be found in the
NAO report "Managing the Risk in Overseas Territories"
Bermuda, Cayman Islands, Dubai, Gibraltar, Guernsey, Hong Kong,
Isle of Man, Jersey, Singapore, Switzerland. Back