Jersey's courageous decision on tax

THE European Union tax code of conduct on the table at yesterday's Ecofin meeting raised barely a flicker of attention in the City but was the main event in Jersey. The code gives it time to adjust its tax regime to meet EU objections but brings to the fore the big decision.

Does it comply with the requests of EU governments that it impose a withholding tax on the interest paid on customers' saving accounts or take the alternative course of disclosing to the tax authorities of the 15 EU countries which of their citizens received how much interest on any offshore accounts they hold?

Most expect Jersey to opt for the exchange of information, but it will still be a momentous decision. Secrecy and discretion have long been considered essential features of an offshore financial centre.

Some believe that by becoming open and transparent and imposing the highest standards of regulation while other jurisdictions such as Luxembourg and Belgium, to say nothing of Switzerland, cling to their secrecy, Jersey is throwing away its competitive edge.

Certainly it is nothing if not courageous. Confidentiality was a key part of the Jersey package. Soon confidentiality will be gone. But it also marks a stage in Jersey growing up, a recognition that if it is to survive in the long term it needs to play the game and be a good neighbour to the powerful nations on its doorstep.

In five years, therefore, the island's financial regulatory regime has been transformed to ensure full compliance with anti-money laundering, know-your-customer rules, and the anti-terrorist financing measures that came in after 9/11. It now operates to the best of international regulatory standards. It may still be lightly taxed but that no longer means lightly regulated.

Yet to some extent regulation was the easy bit. Accepting the EU code of conduct signed yesterday - though Jersey is not in the EU - will, in addition, require sweeping changes both politically and in the way the financial sector positions itself for the future. On the fiscal and political side it will blow a large hole in the island's tax base, a hole that can probably only be plugged by putting up taxes for the residents.

That won't be popular, and presents a major test for the selling skills of Jersey's senior politician, Frank Walker. But it also marks the transformation of the Jersey government's approach to the financial sector. Laissez-faire policies of the past have been abandoned with the recognition that maintaining its health, viability and acceptability are now a major part of the government's job. With the decline of agriculture and tourism, finance is what keeps the island's economy afloat.

The test for the financial sector is as great because it has to consider what it is offering for the future. Bankers believe there will still be a life after disclosure for that increasingly mobile international workforce which wants a multi-currency account that stays in Jersey while they flit from job to job around the globe. The island is selling convenience and security as much as tax avoidance.

But the second leg will be in offering a skilled and knowledgeable advisory service in a well-regulated jurisdiction providing a tax-neutral environment for corporate activity - be it employee benefits, securitisations, bond issues. If this grows as hoped, it may well become the norm in 10 years not to think of Jersey as an offshore tax haven but as an international financial centre.

DKW mess

A FEW YEARS ago the German insurance giant Allianz paid e27bn (£18.2bn) for Dresdner, Germany's third-biggest bank. Today the entire Allianz group is capitalised at only e7bn, having come down from e100bn in the past year, and the group's horrendous financial results published today suggest that even this might be too much.

In similar vein but over a longer timespan, the British bank Kleinwort Benson was virtually the same size as American investment bank Goldman Sachs 20 years ago. Their paths diverged, however, Goldman going on to dominate the global investment banking market, Kleinwort - which is now known as Dresdner Kleinwort Wasserstein - to sit unhappily within this ill-starred German financial conglomerate.

But for how long will it remain part of the group? Top-level management changes in Germany suggest that the Allianz board has lost patience with the status quo and wants the mess sorted out. One has to assume that any reasonable offer would secure DKW, but in these markets who would be a buyer?

It is a depressing outlook for what not long ago was London's largest merchant bank.

Mellor farewell

IT'S tough on Chris Mellor to have to step down after 24 years as chief executive of AWG, the Anglian water company, but it is the right decision. As long as he was in place the company had little defence against a bid, even from as unlikely a source as private equity house WestLB, such was investors' lack of confidence in him. But the job is still only half done. To get its defences properly organised AWG needs a credible replacement. It would be rash for it to delay too long.

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