Aftermath – the offshore world post the Brexit vote

‘The morning after the night before, there was stunned silence,’ says David Cadin, managing partner at Bedell Cristin. For offshore law firms, the long-term implications of Brexit are no clearer than for their onshore counterparts and they are equally loath to make predictions when uncertainty continues to surround terms for the UK’s departure from the EU.

As Antonia Hardy, Cayman Islands managing partner of Walkers, puts it: ‘In terms of offshore access for financial services, no-one knows yet – like everything to do with Brexit the answer is possibly and hopefully.’ She offers a very positive take: ‘Offshore centres have always been required to apply for European access independently of the UK and so we do not foresee any negative impact from the Brexit decision.’

‘Offshore centres have always been required to apply for European access independently of the UK so we do not foresee any negative impact from Brexit.’
Antonia Hardy, Walkers

However, the response from the markets in the days following 23 June was as keenly felt by offshore firms as anywhere else. ‘In the immediate aftermath of the result, certain deals fell over, particularly property transactions, citing Brexit as a reason but which turned out to be simply an attempt to renegotiate on price,’ says Russell Clark, partner at Carey Olsen in Guernsey.

The onshore slowdown in deals and capital flows was inevitably mirrored offshore. This slowdown affected offshore transactions reliant on institutional lending/structures and caused a short-term pause (potentially market-altering) in the UK commercial real estate market in particular, says Jonathan Rigby, managing partner of Mourant Ozannes.

More recently, the UK has had an unexpectedly swift economic rebound, reinforced by political stability following an equally swift, bloodless change of leadership to Theresa May. Optimism prevails about how offshore firms will fare as a result, particularly in the short term.

Although certain types of transactions have been put on hold until there is more certainty on the impact of Brexit, Michael O’Connell, managing partner of Appleby, says: ‘The negative impact has not materialised to the levels that many predicted and activity levels remain strong.’ (See box, ‘High tide’).

Rigby observes: ‘We are seeing a flow of private equity transactions coming through our pipeline as investors are leveraging the opportunities created by a weaker pound and falling real estate values in the London market.’ His sentiment is echoed by Cadin: ‘The stunned silence has disappeared and we have almost come back to a normal level of activity.’

‘Brexit will not have any negative effect on Bermuda’s commercial insurers when writing EU business as Bermuda gained equivalence under Solvency II.’
Narinder Hargun, Conyers Dill & Pearman

Stay out of it

Thankfully, Brexit is not a problem that offshore centres need to solve. O’Connell notes: ‘As Crown dependencies and Overseas Territories, we do not have the same issue as the UK over disentangling 43 years of EU legislation.’ Clark confirms the view from the Channel Islands: ‘Guernsey and Jersey were third countries to the EU before the vote. They remain third countries to the EU now, and they will remain third countries if and when the UK presses the article 50 button.’

This is a point of view echoed by Jersey Finance, a non-profit marketing organisation funded by the island’s finance community, in a recent document entitled ‘Brexit: The implications’.

‘Jersey’s constitutional relationship with the UK will not be affected by the result of the referendum, nor is it envisaged that Brexit will impact on Jersey’s existing market access rights,’ says the report.

The answer to the more difficult question – what the longer-term impact will be on offshore centres – very much depends on which geography you are looking at. Rigby comments: ‘Brexit largely impacts the UK and Europe, and correspondingly has had a bigger impact on European offshore locations, more than those in the Caribbean and elsewhere, where we are continuing to see substantial growth.’ Nevertheless, he expects there to be ‘a continuing impact on transactional activity until the UK government sets out its plan and timetable for Brexit’.

However, there has been much speculation as to whether the effects will be felt as far as the Caribbean, particularly for Cayman and the British Virgin Islands (BVI), where alternative investment funds and managers’ main link with the EU is through London.

Clark notes: ‘Cayman and the BVI are not part of the EU and EU law does not apply to them. We do not expect a material impact on either of them.’

But although Cayman and BVI are outside the EU, one area where the UK’s membership of the EU has an impact on them is foreign policy, particularly as regards economic sanctions and restrictive measures. As Cayman and BVI fall under UK sovereignty, on Brexit foreign policy could start to differ from the EU’s policy over time, including in the way it deals with countries currently subject to sanctions.

The referendum result ‘has caused concern among some international investors regarding funds that invest into the UK who have decided to sit on their hands until there is greater certainty’, says Clark. ‘But equally, other investors are looking to take advantage of the relatively low price of sterling.’

The Bermudian perspective from Narinder Hargun, co-chair of Conyers Dill & Pearman, is equally sanguine: ‘Brexit will not have any negative effect on Bermuda’s commercial (re)insurers when writing EU business as Bermuda gained equivalence under the requirements of Solvency II.’ This is an important point, considering Bermuda reinsurers comprise 36% of the global market.

‘No matter how the exit unfolds, we remind our business partners in the UK that Bermuda continues to offer the same stable, attractive, effective and proven blue-chip international business domicile as it has for the past 70-plus years,’ notes Ross Webber, chief executive of the Bermuda Business Development Agency (BDA).

More intertwined with the UK, the Jersey managing partner of Walkers, Jonathan Heaney, is decidedly upbeat about the M&A advisory prospects for his firm, whichever way investments flow.

‘It will be interesting to see whether Brexit will see a large inflow of capital into the UK as investors look to snap up assets after the slide of sterling, or if capital will flow out of the UK into the EU. UK real estate remains an attractive prospect, especially for those using non-sterling currencies. From our vantage point, pricing looks like good value and there’s still a lot of money/dry powder in the markets for acquisitions, so we could see some increase in activity before the end of 2016.’

Appleby is also notably bullish on the overall outlook for transactional work. O’Connell says: ‘Many of the fundamentals that drove transactions to record levels in 2015 remain in place. Companies and funds still have plenty of cash available and ready access to affordable finance in a low-interest rate environment. The sterling fall means opportunities for investors, which may lead to specific transactions and private equity/fund activity.’

Amid the relative optimism, some local uncertainty prevails. Cadin points out that: ‘The Jersey authorities had positioned themselves with the EU prior to Brexit and they hope that those arrangements are going to stand. But there are questions of course. Will those agreements need modifying? Are we going to be able to have our own independent access? We will only have the full answers as Brexit develops in the UK.’

Other important questions are posed by Jason Romer, managing partner at Collas Crill: ‘London may position itself as a more nimble and entrepreneurial finance centre. How will it compete with the current offshore financial centres? Will it be as flexible as the Channel Islands or will it be at a disadvantage? These are the kind of questions that we are asking, but it will be a while before we know the answers.’

He also points to the introduction of the Alternative Investment Fund Managers Directive. In July 2015, Jersey and Guernsey were among six jurisdictions selected by the European Securities and Markets Authority (ESMA) for third-country passport access: together they have over £500bn of assets under management.

‘We have been dealing extensively with issues of marketing into the EU,’ says Romer. ‘However, it will be interesting to see how things will look having previously had the UK “onside” to help with the EU market. In some ways, our jurisdictions have already been facing many of the issues the UK will now have to face.’

‘The ESMA passport verdicts open up a simpler and more streamlined process for marketing funds into the EU, alongside the existing national private placement regimes,’ says Steve Meiklejohn, global senior partner at Ogier. ‘That’s a welcome development, given that ESMA sees no significant obstacles in so far as the granting of a passport to Guernsey and Jersey, and are waiting to see the implementation of legislative developments that are well in train before making a similar declaration in respect of Cayman.’

How different offshore centres will ultimately be affected and in what ways they might choose to reposition themselves in response to Brexit remain in the balance. The next few years may see significant and possibly unexpected change, not least a post-Brexit EU possibly seeking to diminish the attractiveness of offshore jurisdictions linked to the UK.

However, Meiklejohn warns against hysteria. ‘The immediate conclusion is that the apocalyptic outcome prophesied by some has not come to pass. The offshore world is not a single amorphous thing – the impacts on, say, banking, are likely to be different to the impacts on dispute resolution and restructuring. Ultimately, we expect an outcome that is not wildly dissimilar to the status quo.’ LB

For further reading see Standing apart – the offshore fallout from the Panama Papers.