01 July 2016

The UK EU Referendum and the potential implications for International Finance Centres

This note provides a brief summary on the potential implications for the International Finance Centres of the British Virgin Islands, the Cayman Islands, Guernsey and Jersey following the result of the UK referendum in favour of leaving the EU.

The Channel Islands’ constitutional relationships with the UK will not be affected by the withdrawal of the UK from the EU and the UK remains, and we expect will remain, the largest trading partner of the Islands. 

By virtue of the constitutional relationships that exist between the Islands and the UK, we expect that the UK government will be aware of its obligations to take the interests of the Islands into account as it negotiates with the EU. 

Working together, the Governments of the Islands have made it clear to all that they are not seeking to change their formal relationships with the EU. These points were recently reinforced in a joint letter (dated 28 June 2016) from the Governments of Guernsey, Jersey and the Isle of Man to David Cameron. 

The relationship of the Channel Islands with the EU is currently governed by Protocol 3 of the United Kingdom Treaty of Accession to the European Economic Community of 1973. Protocol 3 brings the Channel Islands within the Customs Union, and therefore essentially within the Single Market, for the purposes of trade in goods. Although the export of goods to the EU represents a modest part of the economies of the Channel Islands, the Governments of both Islands, as indicated in the joint letter to the Prime Minister, wish to negotiate a similar arrangement with the EU to replace Protocol 3. 

It is the sale of services and in particular financial services that has driven the growth of the Channel Islands’ economies, and Protocol 3 is silent on the trade in services. The Islands are therefore treated as “third countries” (i.e. non EU members) for the purpose of services, including financial services. This long-standing relationship will not change if or when the UK leaves the EU. 

While the Channel Islands are not members of the EU, some EU legislation applies to the Islands by virtue of the bilateral arrangements that exist between the Islands and member states of the EU. In addition, the Channel Islands are able to market their services into the EU because the services meet the stipulations imposed by the EU. It is not envisaged that this will change by virtue of the UK leaving the EU. In fact, in the funds arena, the Channel Islands expect to be amongst the first third country jurisdictions to be given the ability to passport funds into the EU/EEA under the Alternative Investment Fund Managers Directive. ESMA are due to provide more information on the timetable and process at the end of July. 

The British Virgin Islands (BVI) and the Cayman Islands are overseas territories of the UK, as such they are not part of the EU and EU law does not apply to them. 

We do not therefore expect a material impact on the BVI or Cayman Islands, including each territory’s relationship with the UK or their current judicial system and relationship with the UK’s Privy Council as a result of the outcome of the referendum.

In terms of access to European markets, it is not envisaged that the UK leaving the EU would impact on existing EU market access rights. Although not in the first round of third countries to be considered by ESMA for inclusion in the AIFMD passport regime, ESMA confirmed in December last year that the assessment of Cayman would shortly be commenced and therefore the Cayman Islands will follow closely behind the Channel Islands as an approved third country.

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such. © Carey Olsen 2016.