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Banking in the Isle of Man
The Isle of Man has come a long way since the Isle of Man Bank Limited became the first incorporated body to be registered here in 1865 with Isle of Man Company Number 1. Since that date “banking business” (which is defined in Isle of Man law as comprising the receipt of deposits and the payment and collection of cheques) has flourished here so that today there are now approximately 54 banks established on the Island with the ability for global banking business to be facilitated to and from the Island via the world-wide-web and e-payment secure technology.
As at 30th June 2004, the Island’s banking deposit base stood at GBP £29.09 billion, and the Island is proud to count amongst its high net worth residents the likes of Barclays, Merrill Lynch, Bank of Scotland, The Royal Bank of Scotland International, Coutts, and the Royal Bank of Canada.
The Banking Act 1998 as amended ("the Act") governs those who in or from the Isle of Man carry out banking business. The Act requires those carrying on banking businesses to hold a licence from the Isle of Man banking regulatory body, the Financial Supervision Commission (“FSC”). Given the broad scope of the definition of banking business contained in the Act certain specific exemptions are also provided, and in addition to these, the FSC have powers to determine whether a business is in fact a banking business for the purposes of requiring it to have a licence to operate.
As the Island's finance sector has developed, and in particular collective investment schemes, captive insurance, life assurance, pensions, investment and ship management, additional services have been sought by institutions and persons with money to invest. The extension of traditional banking services beyond deposit taking has naturally followed so that banking institutions now often act as trustees to collective investment schemes, third party fund administrators of collective investment schemes, as investment managers, custodians, or act in establishing and administering trusts and managing the underlying companies and assets held by those trusts.
The FSC is accommodating in the granting of banking licences to the right kind of licence applicants (largely those with proven track records in other reputed jurisdictions), but it is ultimately there to protect investors and maintain the integrity and reputation of the Island’s finance sector through its careful screening of applicants and ongoing monitoring of business based on, amongst other things, quarterly or half-yearly financial returns and professionally audited annual accounts.
There are various categories of banking licence that can be applied for. Banks operate under either a full or a restricted banking licence depending on the activities undertaken and the locale of the bank’s custom.
Broadly speaking, an unrestricted (Domestic) banking licence can be obtained for a bank which has a real presence on the Island with local management and staff, discrete and secure premises, and adequate systems and resources. Such an unrestricted licence permits the institution to carry out a full range of banking business with customers in the Isle of Man and elsewhere.
A restricted (Offshore) banking licence allows banking business to be conducted from outside the Island through a locally licenced bank providing the day to day management and administrative functions. This latter, “managed bank” approach, can be used to facilitate an introduction to banking in or from the Isle of Man, where the expense or inconvenience of establishing a full operation from the Island can be avoided prior to “testing the water” – which in the geographical context of the Isle of Man is inevitably the Irish Sea.
From a taxation perspective, since 12th July 1989, the Isle of Man Treasury may exempt from income tax, for a specified period, all or part of the profits or income of a "managed bank". If so exempt, the Assessor of Income Tax in the Isle of Man cannot require the deduction of income tax from payments to non-residents and cannot pursue income tax liability of non-residents on such payments. An application and fee for exemption is submitted to the FSC, and the Treasury must be satisfied the bank is a managed bank. Although this reflects the position at the date of this article, it will be impacted upon by the European Savings Directive to which we refer later on.
Investors in banks in the Isle of Man enjoy the protection of a Depositors Compensation Scheme, and the Isle of Man led the way as the first of the UK offshore jurisdictions to implement such a scheme. All banking licence holders must participate in this Scheme with the exception that if they are not retail deposit takers they may apply to be exempt. The FSC is the Scheme Manager, and the Scheme extends to the sterling equivalent of foreign currency deposits. Deposits are protected up to 75% of the first £20,000 per depositor.
In January 2002 the Isle of Man became the first offshore jurisdiction to initiate a Financial Ombudsman Scheme for persons, based anywhere in the world, with a complaint against an Isle of Man financial institution, including a bank. The Scheme operates as an independent dispute resolution service, and an Isle of Man financial institution can be directed to remedy a given situation, which may include a direction for the payment of up to £100,000 in compensation.
An Island-based secure e-payment platform which can take multi-currency and Sterling-based transactions is offered by the local telecoms provider, Manx Telecom. This enables global marketing for Island businesses, and several international banks with branches on the Island offer global payment-processing solutions.
By way of comparison, building societies in the Isle of Man are governed by separate Isle of Man legislation in the form of the Industrial and Building Societies Acts 1892 to 1986 (as amended). A building society is a society whose purpose is the raising of a stock or fund, by the subscription if its members, for either making advances to members out of the funds of the society to repay security by way of mortgage on land, or making loans to or depositing money with a building society established under the Act or established in the United Kingdom under the relevant legislation.
In like manner to a bank, a building society in the Isle of Man, be it incorporated here or a foreign building society wishing to establish a branch office here, must be authorized by the FSC to accept or borrow monies, and further authorization is required before a building society may advance any monies in the performance of its aims. There is a slight overlap with banking in terms of the legislation, in that if an overseas building society wishes to establish a presence in the Isle of Man it may do so either by way of a fully staffed branch (which requires authorization as stated above) or a subsidiary (which requires a licence under the Banking Act 1998). Again on a par with banking, authorizations can be and often are granted subject to conditions.
Although as of the date of this article there is no Isle of Man compensation scheme for investors in building societies which are not licenced banks, shares and deposits made with branches of UK building societies in the Isle of Man are eligible for compensation under relevant UK legislation.
As far as future developments are concerned, the banking and building society sectors in the Isle of Man will be effected by the European Union (“EU”) Savings Directive (“the Directive”) as it has been agreed to apply to the Isle of Man. By way of maintaining its international clean business image, the Isle of Man has agreed to the Directive to ensure “individuals resident in the EU Member States do not escape from a liability to tax where such a liability properly arises in the Member States by moving their funds to the Islands.”
Pursuant to the Directive, some EU member states have chosen either to apply a withholding tax or to the exchange of information with other member states. The aim of the Directive is essentially exchange of information. It is anticipated that from 1st January 2005, and for a transitional period, European investors in the Isle of Man will have the choice of either electing for their paying agent to exchange information with their home tax authorities, or for withholding tax to be applied by the bank or building society in the Isle of Man.
The withholding tax option will operate as a revenue sharing exercise with a 25%/ 75% split between the Island and the investor’s home country when the transfer of income takes place, thus avoiding the problem of double taxation between the two jurisdictions. The exchange of information option is for obvious reasons the subject of many safeguards in respect of confidentiality, data protection, and rights of use, and these are enshrined in bilateral agreements between the Island and other member states.
