A diverse economy experiencing its 33rd year of growth, the Isle of Man (IoM) continues its move from traditional offshore market to an inpatriate and expatriate market for the mass affluent and HNW segments. Valentina Romeo speaks to key players about how the IoM is thriving as a niche market for local and international clients
Visiting and doing business on the Isle of Man (IoM), one of the well-known British crown dependencies, could represent a rather surprising experience for many people.
With a population of around 85,000 people, the island is driven by growing job creation and business opportunities with a low unemployment rate at 2.6%, compared to an average of 5.5% across the developed world.
David Batey, director RM, Coutts & Co, Isle of Man, says: "When I came to the island I had a view of what I though it will be, which is different to what it is.
"I thought it would not be as cutting-edge as London, perhaps more traditional, while the reality is quite different because there are a lot of professionals here and, in a way, it is more innovative than London," he says.
Arguably, Batey says, the entrepreneurial size on the IoM is "much stronger" than London as well as more interconnected than the UK capital, given the smaller dimension of the island.
The IoM has 34% of its economy steeped in financial services activities, and that is the primary source of wealth for its HNWIs.
"Before targeting the UK, I spent the first months on the IoM making the industry aware that the IoM is keen to relocate people here in the HNW space. I think previously that happened more by chance than by management," says Nick Preskey, the newly appointed business development manager for HNWIs at the Department of Economic Development (DED) on the IoM.
A former banker, Preskey tells PBI, that alongside his team, they are currently exploring Chinese and Russian tier-one entrepreneurial investors, as the interest in investing or relocating to the IoM is growing quickly.
"We welcome them on the island and help them do the ‘jurisdictional shopping’," says Preskey. He admits, however, that many banks on the island are under pressure, with several "going back to their roots" and rationalising because of rising costs.
"Private banking is still a good business and firms will upgrade in quite a niche space. They’re preparing to look at things in a different way," he says.
South Africa-owned NedBank Private Wealth, which has over 22 staff members split between client services and private banking teams on the island, has played on the "novelty factor" to differentiate itself from the competition on the IoM.
"Because of reputation issues of other banks, client behaviour changed a lot and they were suddenly much less interested in returns and just interested in security.
"We’ve continued to grow through the financial crisis. Our clients’ balance sheets are increasing," says Beckie Williams, senior private banker, NedBank Private Wealth.
Duncan Lawrie, the UK private banking boutique, has a 30-year-old established presence on the island, and is focusing its strengths on the investment management side as well as on its private banking services.
"Initially, we started as a fiduciary company. After the banking licence, the banking side of the business grew fast in the 90s. Now our mix is 40% fiduciary, 45% banking and the rest is investment management," says Nigel Gautry, MD, Duncan Lawrie Private Bank.
"Going forward we are looking more at the investment management space, and in many ways it is the area we undersold – compared to the other services – to existing clients over the years."
Gautry can predict that revenues for the investment side of the business will increase up to 40% in the next 12-20 months.
Similarly to Duncan Lawrie, local wealth management firm IOMA has been expanding into the fund and investment management area, explains Philip Scales, MD and CEO at IOMA.
Starting in the insurance area, IOMA then expanded into the fund and investment management space, a model shift that Scales calls "pretty unusual" on the IoM. He says: "I don’t think anyone on the island has that business combination.
"The ethos of the group is great flexibility and working jointly with people. We are not stuck with the big company mentality and difficulties. The IoM itself is a fairly niche jurisdiction and within that I think we can provide a fairly flexible operation."
IOMA’s investment director Russel Collister also tells PBI: "Everything we have done on the private client side of the business has been to create bespoke portfolios for them." The group is now approaching $500m under discretionary management with approximately 500 individual client portfolios.
With 400 clients and £900m in AuM, Coutts plans to expand its proposition with a full banking suite in April 2016, informs Batey.
He adds: "The new proposition will naturally attract different type of clients, more deposit-led clients will give us some fresh opportunity.
"I see the banking side offering real opportunities to the locals in the local market and we are keen to grow there. We have been relatively successful in it in the last two years, but we are always going to be bespoke because of the nature of the clients we have."
The E-commerce boom
As for investment trends and new opportunities on the IoM, John Garland, head of corporate financial services at the DED says angel investing and crowdfunding have a lot of growth potential in the region.
"Crowdfunding is a global phenomenon and it is forecasted to become a $93bn industry by 2025.
"Though the UK, US, Brazil, France, Germany and the UAE are ahead in the sector, the IoM fits into that interestingly," the ex-private banker says.
NedBank Private Wealth’s Williams adds: "We had new revenue streams from promoting openness to the e-commerce industry and we are one of the more willing to look into banking e-commerce businesses and related businesses. That has been a real source of growth for us locally."
She adds, "There are great opportunities for banks in that sector. If you got a bank looking at each of those companies, it is not just corporation per se, it is the directors, owners, and individuals who have got the potential to become private clients. So we are seeing growth on both sides."
Garland also adds: "The reason we’ve been able to weather the storm for seven years is asset diversification. We diversify our portfolio as an island. We’ve not just based our investments on big industries. "We need to continue to diversify and look at these different areas, and the IoM is superb at that."
Williams says as interest rates have been low in recent years just holding money in cash has not been possible for many people.
Instead, she says there is a "real search for yield" with investors increasingly accepting the longer term planning and taking on "a little degree of risk".
"We are in a good position for that because one of our strengths is in our investment management business where we have got a long history of discretionary investment management for our clients," she adds.
Williams explains that clients are getting a lot more interested in making investments. "The search for yield is also driving people into other asset classes like property, which has been ‘a big one’ over the last few years," she says.
Linda Muirhead, MD, IOMA Life and Insurance says: "What we see from HNWIs and UHNWIs is really a desire of certainty and security."
Collister further adds: We like companies that we know are going to be in existence in about 10 years’ time. We don’t like companies where it is difficult to attach any certainty."
Currently, "a good example" is an oil or commodity company, simply because the success of that company is tied to a product where they have no absolute control of it.
"Not that we will ignore the sector of course, but we underweight it intentionally and we overweight other companies, such as healthcare," he adds.
Shaking off the tax-haven status
When it comes to the subject of compliance and transparency, none of the private banking islanders expressed any concern or doubt.
"The IoM leads the way in terms of transparency," Williams says firmly.
Compared to the other crown dependencies, such as Jersey and Guernsey, the IoM government is "more innovative" having, in fact, implemented FATCA before anyone else did.
The IoM has voluntarily signed automatic exchange of information agreements with the US and the UK under which lists of account balances and interest payments will be sent annually to tax authorities in an investor’s home country.
Muirhead says FATCA hasn’t come as a surprise for businesses. "We are on the Isle of Man because we like living here, because we like the regulatory approach.
"The more elements that are reassuring our clients that we are compliant with every step of the law, the better," she adds.
Gautry says: "None of us can escape from the ever-increasing costs. When it comes to regulation on the IoM, we take all these changes very seriously and we action them very quickly.
"We can’t afford not to, and that’s because the international community would love to focus on the IoM as a tax haven. However, when you are offshore you act first and apply new rules and standards, definitely well before the UK and the US and other countries do, which I think is a huge benefit of being here."
Williams says all the bank’s clients have "legitimate reasons" for banking with them, whether offshore or in London.
In response to a trend of many offshore jurisdictions experiencing client assets’ moving away, mainly to Asia, Williams says: "We haven’t seen a transfer of assets abroad. Not any more assets undeclared compared to 40-50 years ago."
Coutts’ Batey says the days of moving money around different jurisdictions are long gone. "Clients look for transparency now, they look for a very safe environment to place their money with people they can trust," he explains.
Williams expects more regulation coming, but she considers that as an opportunity. "After FATCA many banks just decided that they were closing doors to many US citizens while we have decided to open our doors to them.
"We don’t target people who live in the US at all, but there are huge communities of US expats around the world who really struggle to get bank accounts anywhere."
The IoM is "working really hard on trying to get away from the reputation that it has been a tax haven", Gautry also says. It is a perception that people hold rather than the reality".
He adds: "My time at Duncan Lawrie has taught me that it is very different in reality. We see clients coming to us who have tax liabilities in their own jurisdictions and there is little we can do about that. It is not the objective of our services."
The profile of a client attracted to the IoM has changed dramatically, and their concerns and thoughts about the jurisdiction have also changed, adds Katherine Ellis, director at Boston, an independent fiduciary services firm also offering single and multi-family office services.
"Very few clients we talk to are considering the IoM purely based on tax. The IoM is tax-neutral which is useful but that is not the main driver," she says.
Scales can’t remember the last time a client or potential client has talked to him about tax advantages.
Collister backs this sentiment, saying: "The IoM is a sort of hidden gem; it is not tax-driven. It is driven by the client service, and by professionals wanting to do well."
Preparing for the future
Williams believes that a challenge for any small bank to keep growing is to keep up with technology and develop new ways to keep in touch with clients.
"There is a big commitment in training our staff, which are all Level Six-qualified," she says.
Muirhead adds: "This industry has changed. What you see today in 2015 is a world apart from what you’ve seen in 1985.
"Even 10 years from now it is going to be more difficult to get a licence to do what we do than it was 10 years ago, because the cost of compliance has grown a lot.
"The technology we have now is helping, but increasingly businesses will suffer."
Gautry says: "What I would do is drive more automation, even in the private banking industry. It will drive up the take on level meaning the benchmark above which you prepare to accept clients."
Gautry concludes: "Our concerns are not about the quality of the business or the loss of the business. It is simply that it is going to cost more to deliver the same level of service and that is happening consistently, throughout the financial services industry."