Rock solid

Gibraltar

Gibraltar has transformed its image to a well-regulated, international financial services centre but now finds itself under fire from the G20 to adhere to new compliance criteria. Sarah Hills reports.

Whatever you do, don't call Gibraltar an 'offshore tax haven'" this is an image it has been trying to shake off for 15 years. Gibraltar is a self-governing parliamentary democracy located at the southernmost tip of the Iberian peninsula. And although the territory has a land frontier with Spain, the connections with the UK are strong" the UK represents Gibraltar in the forum of the European Union and English is the spoken language resulting in a healthy supply of ex-pats located in the region. However, Gibraltar has its own parliament and is a separate and distinct jurisdiction from the UK" it joined the EU in 1973 to boost its prowess as a financial services district.

But Gibraltar's quest to promote its reputation as a well-regulated, specialist finance centre has not been helped by the recent decision by the G20 to impose a new definition of compliance" and developing a 'list' of countries they regard as amenable to this new criteria.

This has been done through the existing Organisation for Economic Co-operation and Development model, but now the expectation is for all international finance centres to sign 12 'exchange of information agreements' immediately. Gibraltar found itself on the 'grey' list, having only signed one agreement with the US.

 

Reputation at stake

Needless to say this irked the jurisdiction" mainly because of its attempt to develop its reputation as a finance centre, but also because it was not notified that such a list was being published. Gibraltar's chief minister, Peter Caruana, explains that in the mid-1990s it was, indeed, a tax haven of 'brass-plate companies' but, in 1996, made a conscious decision to become part of the EU.

"Companies based in Gibraltar had access to the entire EU single financial services market. We also re-positioned our finance centre away from a 'zero-tax haven' into a more mainstream finance services centre. Now, our finance centre has to comply with all EU laws, measures and requirements," he says.

"We have been concentrating on developing our insurance market, plus our wealth management, investment and funds markets. As a result, Gibraltar has successfully shifted itself from being a simple tax haven into an onshore European financial services centre dealing in the more value-added mainstream financial products," adds Mr Caruana.

With a population of 30 000, Gibraltar has an extensive and diversified service-based economy, with the principle contributors to its economic base being tourism, port operations, online gaming and financial services" the latter accounting for around 33% of gross domestic product and employing 3000 individuals. To boost its profile, Gibraltar has kept its philosophy of low tax, but, as of 1 July 2010, a corporation tax of 10% will be established for all companies based in Gibraltar.

James Tipping, director of Gibraltar's Finance Centre, explains that corporation tax paid in Gibraltar for domestic companies currently stands at 27%, compared to the 0% 'exempt company regime' paid by overseas companies that have set up in Gibraltar.

"We entered into an appropriate measures agreement with the EU in 2005 for the phasing out of the tax-exempt regime," he says. "Since then, no new companies have been permitted to operate under this tax status. In 2010, the introduction of the lower rate of tax will see all existing companies paying 10% and the 0% tax regime will be extinguished."

He explains that if Gibraltar wants to promote itself as a quality jurisdiction, people should be expected to make a contribution. "No companies are leaving because of the tax increases" this proves we have made ourselves attractive to blue chip international financial service providers for reasons other than tax."

As well as a strong regulatory environment, Gibraltar's government philosophy has focused on attracting a smaller amount of high-quality businesses into the jurisdiction. "We only want companies that are leaders in their field and are as concerned about their reputations as we are," says Mr Tipping. "Most importantly, we do not want any companies that will use Gibraltar to be a 'brass plate' business."

The attitude of the authorities appears to have worked" over the past 10 years, the country has seen an 8% to 9% year-on-year growth, while inflation throughout that period has been between 2% and 2.5%.

Marcus Killick, chief executive of the Financial Services Commission, agrees with Mr Tipping, saying Gibraltar's appeal is partly down to its strong and respected regulatory environment. The FSC is the regulatory authority responsible for all Gibraltar-regulated financial services, including insurance. With one independent chairman and seven board members, the FSC is arguably one of the most reviewed regulators in the world. Reviews undertaken include: first statutory review 1998; second statutory review 1999; IMF assessment 2001; assessment against FATF standards 2002; third statutory review 2004; and second IMF assessment 2006.

Mr Killick explains that Gibraltar was the first jurisdiction to volunteer for the 2006 IMF review, arguing that it is fully compliant" with 24 observed and three largely observed out of 28 applicable international standards for insurance supervision. "It irritates me when people call us a tax haven and then define a tax haven as a place with low regulation" we are well-regulated and results from the IMF review found that our level of compliance is higher than in the UK."

He adds that Gibraltar is committed to international co-operation, having signed a number of memorandums with regulators around the world. "We need to work in co-operation. One of the greatest failures of the past two years has been the lack of regulatory synergy," he says, explaining that the FSC is required by EU statute to establish and implement supervisory practices that match the standards in the UK.

In addition, Gibraltar as an EU jurisdiction, is required to apply all directives and regulations made under the Financial Services Action Plan. As a result, Gibraltar gets full passporting rights throughout the EU and, via the Gibraltar Order, the UK. This means Gibraltar hosts a lucrative and diverse insurance sector, including captive insurance companies, open market insurance business and protected cell companies.

The PCC Act was passed in the Gibraltar parliament on 3 July 2001 and came into force on 1 November 2001. The legislation, in essence, provides for a single company with individual parts, known as cells, which are kept separate from each other. Each cell is only liable for its own debts and not for the debts of any other cell within the company.

Paul Sykes, managing director of Aon Global Insurance Managers, says the global captive industry has an annual growth rate of 6%, but Aon chose Gibraltar as a base for its reputation, regulation and EU connections. "Aon Gibraltar writes into 30 EEA territories; we manage 12 companies, including five pure captives, one reinsurance captive, four open market insurers and two PCCs with 27 active cells," he says, adding that Aon's PPC, White Rock, saw a gross written premium of £35m in 2008.

 

Diverse opportunities

Meanwhile, Andy Baker, chief executive of domestic business Argus Insurance, highlights the diversity of the Gibraltar market. "More than £900m of premiums are written in Gibraltar in a year," he claims. "You do have the captives, the PCCs and foreign insurance businesses, but there are other operations here that write business purely for Gibraltar."

He explains that the market is more sophisticated than people might imagine. "With a population of 30 000 you would expect it to be parochial," he says, adding that Gibraltar exhibits an entrepreneurial nature, which has resulted in a strong financial centre that punches above its weight.

And that is not surprising" Gibraltar works hard at investing in its people. The government of Gibraltar will pay the tuition fees, grants and flights for any Gibraltar student who obtains a place in a UK university to study. Inevitably, most of the students return home, which means Gibraltar can take its pick from university-trained individuals.

However, Mr Baker says that businesses in Gibraltar were not taking that forward and investing in further training. This was one of the factors that prompted him to establish the Gibraltar Insurance Institute in September 2008. With a constitution modelled on the Chartered Insurance Institute, its main objective is to provide a central organisation for the co-ordination and provision of insurance education and knowledge.

"I realised there was nowhere in Gibraltar to send staff for training, nor was there any forum for people in insurance to come together to network," says Mr Baker. Now membership stands at 136 from a total of approximately 300 people who are employed in the Gibraltar insurance industry. "The level of response has been tremendous," adds Mr Baker. "We have put on social events, business briefings, claims courses" and the government has been very supportive and active in addition.

"The intention is to apply to the CII for 'associated status' early in 2010, once we have completed a full year of operations," he explains. "There are currently 70 overseas institutes within the CII family, but there hasn't been the formation of a new institute for more than 10 years, so we anticipate a favourable response to our application."

However, despite the healthy choice of students in Gibraltar, the region faces a similar problem to the UK" a lack of quality senior staff. "That is why the institute is so important for training staff as quickly as possible," says Mr Baker" not missing the opportunity to plug Gibraltar to those looking for a new job and change of scenery: "The UK environment is hard at the moment with potential redundancies and job losses. I know at least three companies here that are looking for people at the moment and it's important that the insurance institute plays its part in marketing Gibraltar as an attractive option."

 

Border dispute

Of course, Gibraltar also faces its own challenges" for example, political barriers resulting from its tense historic relationship with Spain have made it difficult to do much business just on the other side of the border; there is also not a strong claims presence in the country.

However, if you are looking to go back to basics, Mr Baker says Gibraltar embodies old-fashioned work ethics. "If someone has a mid-term-adjustment, they will come into the office, we have no call centre facilities here" everyone prefers the personal touch. I've had premiums and renewals handed to me when walking down Main Street. That can be challenging because you cannot take the black and white approach to underwriting but, at the same time, we are expected to maintain a high level of professionalism," he says.

It may be one of the smallest financial services districts, but Gibraltar has worked tirelessly to reinvent itself as a solid and respectable offshore finance centre. A proven tight and transparent regulatory regime should now remove any connotations of a dodgy tax haven, but proof of Gibraltar's success lies in its reputation. Chief minister Mr Caruana sums its up: "Our only economic resource is the way the rest of the world thinks of us, and their willingness to come and do business in and from Gibraltar."

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