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Gibraltar Basks in New Era of Goodwill

Stuart Fieldhouse

8 October 2007

Gibraltar has it all to play for. Once a sleepy offshore finance centre providing little more than tax-free bank accounts for a limited number of clients, Gibraltar seems to have embraced the Internet Age with a vengeance, and to have diversified its range of offerings for wealth managers and their clients. Traditionally, Gibraltar’s private banking and asset management sector was low key. The handful of law firms and trust companies transacting business on the Rock got on with their jobs quietly, or at least as quietly as they could with the ongoing efforts of successive Spanish governments to make Gibraltar’s life as difficult as possible. Much of this diplomatic diatribe focused on the financial services sector, accusing local banks of money laundering, particularly for the Moroccan gangs the Spanish alleged were shipping drugs into Spain via the Rock by the boatload. Ten years ago there was still a distinct impression that Gibraltar was engaged in a battle for its very identity against a powerful and determined opponent. Go-slow rules still applied at the frontier, causing irritating tail-backs at odd times of the day, and disputes ranged from mobile telephone communications to nuclear submarines at the local British naval base. Now, all that has changed. Gibraltar’s membership of the European Union has been a big factor in this, as has the concerted diplomatic offensive undertaken by Chief Minister, Peter Caruana. The landmark Cordoba Agreements, signed by the UK, Spain, and Gibraltar last year, have led to normalisation of relations with Spain and the resolution of a number of thorny issues. There is now a strong sense of an atmosphere of engagement and openness at the political level which seems to be filtering down into the financial services sector as well. Gibraltar has cleverly styled itself as an ideal EU member, with rapid implementation of a range of directives, including MiFID, Basel II, and the EU anti-money laundering directive. The Rock is now ahead of many major European jurisdictions in terms of legislative compliance, and its regulator, the Financial Services Commission, is now in a position that would make it difficult for any government or international agency to attack. “We’ve had an incredible period of growth over the last 10 years without Spanish involvement,” says James Tipping, director of the Gibraltar Finance Centre. “But we also see a lot of scope for synergy. The sovereignty issue has been pushed completely to one side.” The fund management sector in particular has been a major recent success story, with the introduction of Experienced Investor Funds in 2006. There are now 21 EIFs registered in Gibraltar, and five PCCs. In addition, the FSC now regulates 25 local investment management operations and six investment dealers. Marcus Killick, Chairman of the FSC, says he is seeing a record number of license applications at the moment, particularly for the EIF product. Free movement of labour across the frontier also means that the financial services sector can tap the nearby Spanish communities for extra staff should capacity issues arise, and these are personnel that do not require housing in Gibraltar itself, as they simply commute back across the frontier in the evening. “We have structural full employment according to the OECD definition, and any further growth will need to be served by Spanish labour,” says Peter Caruana, Gibraltar’s Chief Minister. Perhaps one of the biggest future challenges facing the Rock is a lack of housing and office space. There is a very limited amount of available land in this jurisdiction, and a large slice of that is still jealously hoarded by the UK Ministry of Defence. It is lucky that many staff can live quite easily within commuting distance on the other side of the border. If anything, it is finding suitable office space which presents the biggest challenge for private banks looking at acquiring a license in Gibraltar. The massive Europort business centre, which seemed lonely and deserted when this writer wandered its echoing halls in 2000, is now at capacity. Many of the new luxury housing developments at the planning stage or under construction have incorporated office space as part of their applications. Gibraltar’s private banking sector is also growing rapidly, and there are a number of big names in wealth management already there, amongst them ABN Amro, Barclays, Credit Suisse, Lloyds TSB, SG Hambros, and Royal Bank of Scotland. The UK bias is obvious, and has partly arisen due to the fact that neighbouring Spain plays host to an estimated 270,000 British residents, many of whom are wealthy enough to want to make use of private banking services. “The private banking sector is growing rapidly, and has done a good job of aligning itself with the offshore financial sector,” says Giles Clarke, managing director at ABN Amro Private Banking in Gibraltar. Gibraltar has traditionally been a busy centre for structuring offshore vehicles for wealthy families and individuals. At one stage in the early 1990s it was marketing its asset protection trusts fairly heavily, with the US medical professions particularly in mind. It still has a large community of lawyers, and a deep knowledge resource in terms of trust and estates planning which local banks can call on if required. Like many other financial professionals in Gibraltar, ABN Amro’s Mr Clarke sees the Cordoba process as being enormously important for the jurisdiction’s ongoing development. For private banks, more political stability could well see a realm of new opportunities opening up. For example, Gibraltar’s proximity to North Africa, and particularly an economically buoyant Morocco, could see the future development of Islamic finance products and the issuing of Islamic banking licences within the centre. If relations with Spain stay on course, there is also the prospect, once thought so remote, of Spanish financial institutions making use of Gibraltar for a variety of functions. It is critical, however, that Gibraltar continues to maintain warm relations with Spain, and Chief Minister Caruana is acutely aware of that. He is careful not to place too much emphasis on Gibraltar’s tax status, while emphasising its credentials as a legitimate part of the EU. “As Gibraltar’s finance centre increasingly does business in the EU single market, we won’t be able to plunder on a zero tax platform. We look to the future as a base for pan-European and trans-European business,” he says.