Competition, innovation and best practice

in offshore financial centers

Sidebar:  The Cayman Islands 

Financial centers operate in an increasingly competitive world. In order to compete successfully for the financial flows that are the lifeblood of a financial center they must differentiate themselves. Offshore centers are currently at a disadvantage due to reputational damage they have suffered over the last six or seven years.  

We examine below the things that an offshore center might do to stand out from over 80 other centers that are currently ranked on the basis of their competitiveness in the Global Financial Centres Index (GFCI). Z/Yen first published the six-monthly GFCI in March 2007 with the support of the City of London Corporation. 

The idea behind the index was to generate discussion about the competitiveness of financial centers around the world. Since then, the GFCI has become an important means of encouraging competition, encouraging innovation and determining best practice. It has been especially useful when examining the competitiveness of the offshore financial centers and how they might innovate and adopt best practice.

The GFCI now rates and ranks 83 financial centers, drawing on instrumental factors and responses to an online questionnaire survey. What distinguishes the GFCI methodology is that, rather than being based on the research team weighting instrumental factors or just taking respondents’ raw assessments, GFCI uses a statistical approach where over 83,000 financial center assessments from over 8,400 respondents have been used to produce the instrumental factor weightings.

Z/Yen published GFCI 15 in March 2014, with sponsorship from the Qatar Financial Centre Authority. With increased information over time, the GFCI profiles centers in terms of their links with other centers, as well as the extent and quality of the services that they offer. Instrumental factors are grouped into five ‘areas of competitiveness’ – business environment, financial sector development, infrastructure, human capital and reputational factors.

A center’s performance in these areas is assessed from external measures, for example, evidence about a fair and just business environment is drawn from a corruption perception index and an opacity index. Factors change over time due to predictive capacity and availability. 103 instrumental factors were used in GFCI 15. Assessments are provided from an ongoing online questionnaire completed by international financial services professionals. Respondents are asked to rate those centers with which they are familiar and to answer a number of questions relating to their perceptions of competitiveness. (See Table 1)

GFCI 15 Top 20

      GFCI 15 
 GFCI 14 CHANGE   
Center RankRatingRankRatingRankRating
New York 17862779▲ 1
London 27841794▼ -1▼ -10
Hong Kong 3761 3759 ▲ 2 
Singapore 47514751
Zurich 57306718▲ 1▲ 12
Tokyo 67225720▼ -1▲ 2
Seoul 771810701▲ 3▲ 17
Boston 87157714▼ -1▲ 1
Geneva 97138710▼ -1▲ 3
San Francisco 1071112697▲ 2▲ 14
Frankfurt 117099702▼ -2▲ 7
Luxembourg 1270713696▲ 1▲ 11
Washington DC 1370617689▲ 4▲ 17
Toronto 1470511699▼ -3▲ 6
Chicago 1570414695▼ -1▲ 9
Montreal 1669918688▲ 2▲ 11
Vancouver 1769819686▲ 2▲ 12
Shenzhen 1869727660▲ 9▲ 37
Vienna 1969620685▲ 1▲ 11
Shanghai 2069516690▼ -4▲ 5

The 83 global financial centers are each assigned a profile on the basis of a set of rules for three measures or ‘axes’ (See Table 2):

Global Financial Centres – Profiles and Ratings (TABLE 2)

GFCI-Chart-2 

  • ‘Connectivity’ – this represents how well known a center is around the world and how connected is it to other financial centers;
  • Diversity’– the breadth of industry sectors that flourish in a financial center;
  • ‘Speciality’– the quality and depth of certain industry sectors in a center.

The 11 ‘global leaders’ (in the top left of the table) have both broad and deep financial services activities and are connected with many other financial centers. Madrid and Seoul are ‘global diversified’ centers as they are equally well connected but do not exhibit sufficient depth in different activities to be considered ‘global leaders.’ Similarly, Dubai and Geneva are ‘global specialists’ but do not have sufficiently broad ranges of financial services activities to be ‘global leaders.’  See Diagram 1

Top four centers’GFCI  ratings over time (DIAGRAM 1) 

Top_4_Offshore_Centres.jpg
 

GFCI ratings of the Cayman islands over time (DIAGRAM 2) 

 GFCI-ratings-of-the-Cayman-islands-over-time 


Offshore?

What is ‘offshore’? Many of the world’s smaller states or territories have sought to become successful financial centers by using their constitutional independence to develop legislation, regulation and tax vehicles that attract non-resident business. Many have used their comparative advantage to create world-class expertise in international financial services. These states or territories include the geographically ‘offshore’ centers such as Jersey, Guernsey, the Isle of Man, the Cayman Islands, the British Virgin Islands, Gibraltar, Bermuda and the Bahamas.

There are also a number of states, cities or regions that although not geographically ‘offshore’, exhibit several of the key competitive advantages of the island states. Geneva, Zurich, Luxembourg, Delaware and even places such as Hong Kong are viewed as ‘offshore’ centers by many who deal with them. Whatever the definition, the most enduring offshore centers offer ways of transacting essential but complex wholesale finance transactions, e.g., reinsurance in Bermuda.

Most of the offshore centers in the GFCI are profiled as ‘Transnational Contenders’ or ‘Local Specialists’ in Table 1. These centers often specialize in wealth management, asset management, fund management and specialist insurance.

Perceptions of offshore financial centers during the financial crises were volatile and the past five years have produced considerable negative press coverage about offshore finance. Since then, the reputation of offshore centers has steadily improved: (See Diagram 2)

The recovery in perceived competiveness has increased as more financial professionals come to appreciate the utility of the offshore centers. Overall offshore centers have gone up in the ratings in GFCI 15 although over half have declined in the ranks as other centers have seen greater rises. Table 3 demonstrates these movements: (See Table 3) 

The Offshore Centers in GFCI 15 (TABLE 3) 

Center GFCI
15 Rank
 
GFCI
15 Rating
 
GFCI
14 Rank
 
GFCI
14 Rating
 
 Change
 in Rank
 
Change in
Rating
 
Jersey  4165728
 
657 ▼ -13
 
  –
 
Guernsey 4265636
 
649
 
 ▼ -6
 
 ▲  7
 
Cayman Islands 43655
 
39
 
642▼ -4 
 
 ▲  13
 
British Virgin Islands 44654
 
48626▲  4 
 
▲  28 
 
Isle of Man 51642
 
41638
 
 ▼ -10
 
▲  4 
 
Gibraltar 53
 
639
 
70572 ▲  17
 
 ▲  67
 
Hamilton 56631
 
40
 
641
 
▼ -16 
 
 ▼ -10
 
Mauritius 63621
 
68581▲  5 
 
 ▲  40
 
Bahamas 6561867581 ▲  2
 
▲  35 
 
Malta 6761453583
 
▼ -14 
 
 ▲  6
 
Cyprus 79541
 
74608  

Global popularity has risen but how do offshore centers see themselves? Jersey and Guernsey achieve higher than average assessments from other offshore centers (Diagram 3). The Cayman Islands achieves higher than average assessments but only by a small margin. However, inter-offshore trade is hardly a way to grow business: (See Diagram 3)

External Assessments of Jersey, Guernsey and Cayman (DIAGRAM 3)  

GFCI-Diagram-
 

Competition

Top offshore centers have tried to attract long-term finance and regulatory simplicity, rather than competing solely on tax mitigation and secrecy. Clever offshore centers that enable longer-term financial planning with ‘long finance’ structures (structures that can endure for a generation or two), benefit from avoiding the capriciousness of larger nations’ domestic agendas. A large nation can change tax rules at short notice. Well-regarded offshore centers have achieved a reputation for stability in their tax rules and remember that financial professionals hate surprises.

  • Z/Yen’s offshore work indicates that the leading centers have identified several sub-strategies to support ‘long finance’ strategies:
  • Stronger promotion and demonstrating that larger nations do have shortcomings with long-term planning and capricious regulatory change;
  • tackling long-term skills shortages with better training of indigenous populations rather than relying exclusively on imported skills; improving power, transportation and communications infrastructure;
  • subsidizing and hosting high profile conferences and events, simplifying visa and work permit processes;
  • increasing service levels both for those entering the center and long-term residents.

Innovation

Offshore centers need to innovate. This innovation is unlikely to be technological and more likely to be around regulation and taxation. Offshore centers need to extend both breadth and depth, which in turn will move them towards a GFCI profile of ‘established transnational.’

One of the offshore centers’ persistent problems is the inability to promote the positive messages of their work to the general population. Knowledgeable and sophisticated clients are happy to continue using the Cayman Islands or the Channel Islands, but few ordinary people understand their value.

Best practice

Paradoxically, the best way to be an offshore center may be to behave like a better onshore center, promoting long–term finance and regulatory simplicity. It is argued that financial flows through offshore centers increase the rate of GDP growth and employment in larger economies. However, the offshore world is linked to the state of the global markets, so transactional work will slow down as international markets slow. There are other challenges on the horizon too:

  • EU regulators are accused in some quarters of bullying the offshore centers and international regulators are still focused on the activities of these centers – can these centers be over-regulated?
  • What will be the impact of transaction taxes (if they are introduced) on the offshore centers?
  • The World Bank is showing increased scrutiny of the use of corporate vehicles to conceal misuse of funds – will this impact on offshore business?
  • The EU crisis – will investors start a flight to safety and use offshore funds more and, if so, which centers will they choose?

What the offshore centers need to do now is to increase transparency, continue to demonstrate commitment to meeting international standards and continue to demonstrate skill levels and specializations. Perhaps the most significant action that they can undertake is to promote the positive elements of offshore centers. Offshore centers perform many worthwhile functions for the global financial system. These centers provide significant benefits for their clients and their onshore counterparts.

Offshore centers have a good story to tell – now is the time to tell it in a much louder and more confident voice.

GFCI 15 – published on March 17, 2014. Please make your views known by participating in the GFCI and rating the financial centers you are familiar with at: www.globalfinancialcentres.net  

 

 

 

 

 

 

 

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Mark Yeandle

Mark Yeandle is the lead author and co-creator of the Global Financial Centres Index (GFCI). Prior to joining Z/Yen in 2002, Mark’s background was in consumer goods marketing and he has held senior marketing management positions at companies including Liberty, Mulberry, Sanderson and Carlton. Mark has also worked as an interim manager and helped project manage four successful company turnarounds. His experience includes launching new brands, company acquisitions & disposals and major change management programmes. Mark has a degree in business management and an MBA from Cass Business School where he specialised in Corporate Finance and International Marketing. He is a Fellow of the Chartered Institute of Marketing. Mark has also been involved in several not for profit organisations through his involvement with City Livery Companies.

Mark has also been involved in many of Z/Yen’s recent projects including an Anti-Money Laundering research project commissioned by the City of London Corporation and the ICAEW. He was project manager of a large research project into the use of PropheZy – Z/Yen’s support vector machine for Best Execution Compliance Automation – the output of which was published in The Journal of Risk Finance as Best Execution Compliance Automation, Towards An Equities Compliance Workstation and Best Execution Compliance, New Techniques for Managing Compliance Risk. Mark has also conducted a piece of research evaluating competitive stock exchange systems and carried out portfolio analysis for a leading charity. He recently helped evaluate the use of PropheZy in increasing the response rate to charity fundraising mailings. Mark also developed a role playing game which demonstrates the politics of climate change negotiations. This was written up as part of the London Accord.

Mark Yeandle FCIM MBA BA (Hons)
Senior Counsultant
90 Basinghall Street
London EC2V 5AY


T: +44 (0)20 7562 9562   +44  (0)7799 678 412     
E: mark_yeandle@zyen.com
W: zyen.com 

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ZYen Group

Z/Yen is the City of London's leading commercial think-tank. Z/Yen was founded in 1994 to promote societal advance through better finance and technology. Z/Yen has built its practice around a core of high-powered project managers, supported by experienced technical specialists so that clients get expertise they need, rather than just resources available. The firm is headquartered in London, but Z/Yen is committed to the ‘virtual office’ concept and is an intense user of technology in order to improve flexibility and benefit staff. Z/Yen has 25 full-time-equivalent staff and over 300 associate experts. Z/Yen people share significantly in the benefits of success and Z/Yen seeks to develop a supportive environment in which professionals from a variety of disciplines can flourish.

 

90 Basinghall Street
London EC2V 5AY


T: +44 (0)20 7562 9562   +44  (0)7799 678 412     
E: mark_yeandle@zyen.com
W: zyen.com 

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