The June referendum result has galvanised thinking about the City of London’s future in a UK that will soon cease to be part of the European Union. While much of the recent discussion has centred on the potential negative consequences of Brexit, greater legislative independence will also mean that there may be new opportunities.

One such possibility is the creation of a UK Global Financial Investing Zone. This would be a cross between a free trade zone and a tax jurisdiction. It would have the power to write local laws, be a tax authority unique in the UK tax system, and a governance authority making judicious use of data.

The investing zone would have an entrepreneurial mission: to create an environment that was an attractive base for investment company vehicles – managing money for global investors and being deployed around the world.

This simple sounding mission conceals an extraordinary level of opportunity. Financial services is the world’s largest industry and the UK has a particular strength in it. Britain’s ascent in the past 50 years has been supported by its international links, including a far-flung network of ex-imperial outposts, mainly in the West Indies. Entrepreneurs in the Cayman Islands, the British Virgin Islands, Bermuda and the Bahamas have created tax and governance regimes that have attracted trillions of dollars’ worth of funds.

Of course, some of these appear to have the taint of tax avoidance or worse. But most investors use these regimes because they provide a stable and well-established legal framework, and avoid adverse tax consequences in the investor’s home jurisdiction.

I have spent my life in the business of running global investment funds. These funds are established and run in the Caribbean, as well as Luxembourg, Ireland and Malta in the EU, Jersey, Guernsey and the Isle of Man in the UK, and Curacao and the Netherlands Antilles under Dutch oversight. All the legal, administration and accounting work tends to gravitate there. There seems to be no logical reason for this activity to take place offshore.

Our investors are not trying to avoid tax, and the funds are not trying to avoid sensible regulation. Usually, investors are actually trying to avoid paying tax twice as a result of the tax regimes in different countries not dovetailing properly. Funds may be trying to avoid the restrictive effect of some anachronistic law or rule that no one in authority has had the competence to update. This is why successful governance regimes with a little motivation and entrepreneurial spirit have sprung up in multiple locations.

The UK now has the opportunity to attract some of this business back “onshore”; an “offshore” regime in the heart of the City of London would benefit from the huge concentration of intellectual capital with expertise in the financial industry, IT and law.

David Fuller's view

The essence of this idea has appealed to me for many decades and David Harding has the knowledge and experience to flesh it out.  Post actual Brexit, we have only had the vote so far, a global financial investment zone in London should be a priority. 

After all, the City will lose a portion of its business, at least temporarily, as some financial firms hedge their perceived risks with further diversification within the EU.  I do not think that will prove popular, due to languages, inefficiencies, potentially bizarre regulations, taxes, etc., at least while the EU survives in its current form.  Meanwhile, the UK government should encourage the City to become even more internationally diversified.  Ireland should do the same, because both countries can only benefit from and even closer financial and commercial alliance.  

Here is a PDF of David Harding’s article.