Opportunities for Substance Based Growth

  • Written by Ray Wearmouth

The Changing World. As many industries around the world find themselves being disrupted by technological advances, changing social attitudes and challenges to globalisation, it is no surprise that the global financial services industry is navigating less certain waters than ever before. Banks, stock exchanges, fund managers, accountancy firms, law firms and a whole plethora of businesses and professions that form part of that industry find themselves in a rapidly changing, often uncertain, environment.

The International Finance Centres of the UK’s Overseas Territories and Crown Dependencies sit in the middle of that environment although they are already well versed in continuous evolution and change, usually driven by externally-driven forces. As such, their adaptability, outlook and modus operandi suit change well.

Whilst the current winds of change in relation to political and national globalisation appear to suggest a “stop and think” attitude, the global harmonisation of standards and regulation in the financial services sector have continued to go in the opposite direction. The OECD’s Global Forum Review, the Common Reporting Standards and the FATF Recommendations all represent global standards which have already been accepted around the world. That international playing field should now be level, by its global nature, and this very much suits the British Virgin Islands (BVI).

All Part of the Plan. The global harmonisation of standards and regulation within the wider financial services world has long been anticipated and recognised by the BVI. It has typically been an early adopter of such standards, fully appreciating the important role it plays in international commerce. It continues to see those international standards as being part of its fabric and an important bedrock for the success of its own financial services industry. Exceeding those standards and being an international partner with the G20 nations and OECD countries is part of its kite mark for success.

When McKinsey & Co endorsed the BVI Government’s Strategic Plan for Financial Services in late 2014 a clear pathway was set for how the BVI would continue to thrive in a changing world where those standards would evolve quickly. The two part plan of remaining a world leader in company incorporations while at the same time expanding its value-added services offering was considered fit for purpose. It also mapped out the likely road that international standards would take and planned the BVI’s own journey along that road. The plan contained ten key deliverables which have been put into action and life through the BVI Forward platform which is the delivery mechanism for those ten items.

Adding value-added services, particularly those which build substance in the BVI, is, in essence, the most fundamental element of BVI Forward. In OECD terms, substance growth helps deliver permanent establishment under the OECD’s BEPS Action Plan. It also complements other existing financial services products and diversifies the BVI’s home economy.

BVI Forward’s ten deliverables are holistic and bring together a number of independent parts. Each part brings individual benefits but the cumulative effect is exponential for all of them. As such, the sum of the whole is certainly greater than the sum of the parts. A number of those parts represent important stepping stones for the optimum delivery of the value-added services and products element. A number of those are structural in nature, involving both physical infrastructure and organisational structure. The latter would include, for example, the way in which the jurisdiction’s marketing efforts are structured and organised. With those elements in place, the value-added component can be added in the most effective way.

Structural Enablers. Attracting businesses and investment into the BVI which will build substance requires a very carefully constructed plan. Inward investment programmes are popular throughout the world with governments across the globe regularly offering attractive incentive packages to potential candidates. Special economic zones regularly feature in many of those packages. In developing its own investment programme the BVI has carefully reviewed several other programmes, looking at the successful and less successful elements of the plans executed to-date by various countries around the world. It has carefully examined the impact that those programmes have had. The social impact, good and bad, almost always outweighs the direct economic benefit over time. A delicate balancing act is called for.

From an infrastructure perspective, the BVI’s location calls for convenient and quick air access to help attract inward investment, and investing in specific infrastructure more generally is one of the ten deliverables under the BVI Forward plan which includes an extension to the BVI’s airport to enable wider air access. The construction of the BVI’s new Arbitration Centre is well on its way to being completed. This new facility will help broaden the jurisdiction’s value-added offering more generally.

Immigration controls for any country present a challenge. Striking the balance between protecting national interest and welcoming external investors and personnel is never easy. The BVI has found a good balance over the last 30-plus years. However, it plans to enhance its current work permit and related processes to reflect a more efficient and structured process which will help it to be able to continue to attract and retain a first rate international work force which also helps secure the return of highly talented BVIlanders who leave to study and work at leading universities and firms around the world.

The marketing of BVI financial services has been re-thought and BVI Finance, the Governmental marketing function for the BVI, is being re-shaped as a private sector vehicle which will have a public-private partnership with the Government. This is a material step forward for the industry and a key development towards being able to build more substance.

Finding Synergies. As a small territory with a limited land mass and a small population, growth of any value-added business requires careful thought. The overall footprint of each new business is a key consideration.

Finding synergies to offer easy bridges towards investment and / or the re-location of businesses and products to the BVI is one of the first priorities of the substance-based growth plan. Sectorial synergies make obvious sense. Adding more strength and depth to existing tried and tested offerings carries less investment risk and is easier to manage. Bolting-on additional complementary and secondary services to those already in place is the next step.

Geographical synergies are also relevant to building out the existing offering and to adding new value-added products and services. The geographical position of the BVI points to certain target audiences as being more likely to be looking towards the BVI than other countries. The US Eastern Seaboard and the pan Caribbean region are obvious candidates. It is fortunate that those regions include some major international cities and offer a wide and diversified potential user base.

New Products and Services. A prioritised list of products and services which will be focused on to help build substance in the BVI has been settled. The short listed items are complementary to the territory’s existing offerings and also fit together well. A number of the areas of focus have already seen early successes for the territory and in those cases the focus is on improving the existing base and looking to build on those foundations.

Attracting corporate headquarters has been a focus of two or three leading International Finance Centres. The BVI also sees a number of benefits in focusing on this area. Action point 7 of the OECD’s BEPS Action Plan explores what is needed to establish “permanent establishment” and not run into harmful tax practices. In order to change tax residency and satisfy BEPS, careful planning and execution is needed. Applying the synergies noted above means that the BVI’s target list will include small head offices of high value companies with both sector and geographic connections to the jurisdiction. For example, this would include attracting head offices in the marine or tourism sector that already operate in the wider pan-Caribbean or Eastern Seaboard region and would be natural fits for the BVI, also offering their own synergies in return. Being able to offer a one-stop combined package to such HQ’s is a major attraction.

In a similar vein to corporate HQ’s, attracting family offices, or branches of those offices, is another area which potentially brings collective advantages to both parties. This is focused on the professionals leading those offices which tend to be compact in size and can manage very diversified and great wealth. This throws off demand for several related services that can be met on the door step.

Greentech companies are of particular interest to the BVI. The BVI has the perfect climate and geography for greentech research and development companies to operate in, especially those in the alternative energy space. Those companies typically have small bases and conduct high level, clean and lucrative research programmes of significant international importance. Wind, sea and solar are in abundance and the financial services component offers full service corporate expertise across the board, access to the latest intellectual property laws and a well-trodden global network to link into.

Ecommerce, internet based and support businesses tend to be portable and create a number of tertiary services around them. They are usually low impact and the personnel operating in those industries also tend to be mobile. Non-financial advisory services, such as recruitment providers, destination planners and technological support offices would suit the territory well. They would support and enhance existing industries and create others.

As new products and services continue to come on-line the territory will tailor its laws to help enhance their effectiveness.

The BVI’s Strategic Plan for Financial Services has already served it well during turbulent times for the wider financial services sector. Having a clear plan which includes diversification and adaptability, and which takes account of the ever-changing world, gives the BVI a very strong foundation for future growth.

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