Bank failure and deposit protection in the Isle of Man. A case study on investor protection in a British Isles offshore jurisdiction
| Published date | 20 July 2012 |
| Date | 20 July 2012 |
| DOI | https://doi.org/10.1108/13581981211238007 |
| Pages | 322-351 |
| Author | Philip Morris |
| Subject Matter | Accounting & finance |
Bank failure and deposit
protection in the Isle of Man
A case study on investor protection in a British
Isles offshore jurisdiction
Philip Morris
Independent Researcher, UK
Abstract
Purpose – The Isle of Man, a British Isles offshore jurisdiction located in the middle of the Irish Sea,
has experienced three separate bank collapses during a relatively brief 26 year period. These collapses
have affected in excess of 20,000 depositors and inflicted significant damage on investor confidence in
the Isle of Man as an offshore finance centre. The purpose of this paper is to trace the evolution of
deposit protection during this time frame, teasing out the delicate balance required in small offshore
jurisdictions between rigorous standards of investor protection on the one hand and the vital
importance of remaining competitive with rival offshore finance centres on the other. It critically
evaluates the recently enacted Isle of Man deposit compensation scheme (DCS) by reference to this
organising principle.
Design/methodology/approach – The paper outlines the nature of the Manx jurisdiction and its
offshore development. Focussing on the period 1982-2010, it discusses the three separate bank
collapses and insular regulatory and legislative responses. The focal point of the paper is a critical
evaluation of the new Isle of Man DCS including comparisons where appropriate with deposit
protection schemes in the Channel Islands offshore jurisdictions of Jersey and Guernsey and
discussion of the extent to which the new Isle of Man DCS complies with specific features of recently
formulated international best practice standards.
Findings – The paper reports that insular regulatory and government responses to bank collapses
have tended to be distinctly short-term and reactive. Despite being the first small offshore jurisdiction
in the world to embrace the principle of deposit protection in 1991, there has been a conspicuous failure
in the Isle of Man to develop related financial safety net policies, and the overriding motive for the
introduction and indeed continuation of deposit protection has been to repair enduring reputational
damage inflicted on its offshore finance centre by successive bank failures. The new Isle of Man DCS
conforms to this model, reflecting insular anxieties regarding risks of lost banking business to rival
offshore jurisdictions as opposed to rigorous standards of investor protection.
Originality/value – Analysis contained in this paper sheds light on the problem of effective deposit
protection in small offshore jurisdictions, including tensions in policy terms between principled
investor protection and finance centre reputational and competitiveness concerns. It also highlights,
more broadly, the endemic problem of delivering optimum investor protection at (small) jurisdictional
level in the context of international banking groups operating on a multi-jurisdictional basis and
deploying entrenched business models which operationalise offshore banking arms as essentially
vehicles for the onward transmission of liquid funds to treasury functions located in parent groups’
home jurisdictions.
Keywords Isleof Man, Banks, Deposit protection,Off shore investments,Legislation,Investor protection
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author expresses his gratitude to staff at the Tynwald Library, Legislative Buildings,
Douglas, the Isle of Man for their assistance and patience in accessing insular materials during a
field trip to the island from 11-14 September 2010.
JFRC
20,3
322
Journal of Financial Regulation and
Compliance
Vol. 20 No. 3, 2012
pp. 322-351
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981211238007
Background: the Manx jurisdiction and its offshore development: a modern
view
In order to properly appreciate problems caused by bank collapses and the role
of deposit protection, it is necessary, in the first instance, to sketch in background
information on the key characteristics of the Manx juris diction, its offshore
development and the impact of international standards in the spheres of taxation,
financial regulation, pursuit of financial crime and mutual co-operation.
Located in the middle of the Irish Sea and roughly equidistant from the coasts of
North-West England, South-West Scotland, Northern Ireland and Eire, the Isle of Man,
with a population of approximately 80,000, is a British Crown Dependency enjoying
sweeping powers of self-government constrained only by the UK Government’s residual
power of intervention on grounds of good government, which seems to require a serious
breakdown in civil order or the administration of justice, and a paramount power to
override the Island’s self-government, underwritten via historic constitutional
convention, by imposing legislation on or taking effective executive action in relation
to the Isle of Man (see generally: the Kilbrandon Report, 1973, paras 1347-1348,1361-1363
and 1473). In practice these specific powers of intervention are hardly ever exercised
with the result that the insular authorities possess, at first glance, substantial
constitutional and legislative autonomy to develop fiscal structures and special purp ose
vehicles which serve as key drivers of an increasingly offshore finance dominated
economy.
They have since the mid-late 1970s exploited this capacity with real zeal so that the
Manx insular economy is now heavily dependent on offshore finance and its associated
professional services functions (Edwards Report, 1998; Morris and Campbell, 2000).
Dependent indeed to such an extent that financial services accounts for 40 percen t of
national GDP and employs 8,000 individuals, which represents 14 percent of the entire
workforce (Foot Progress Report, 2009, Annexe B). Despite continuing attempts at
diversification within the broad offshore category, in particular the establishment and
growth of a shipping registry, a Freeport, an aircraft registry, an e-gaming platform
and satellite space exploration services (Bounds, 2008; Fletcher, 2009), underscoring
the point that the offshore domain is, contrary to popular perception, not confined to
traditional finance (Palan, 2003; Palan et al., 2010; Shaxon, 2011), the Manx economy is
now permanently shackled to the fortunes of its offshore finance centre (OFC); a
dependency likely if anything to intensify in the medium term. Banking represents a
cornerstone of the OFC with 33 Isle of Man Financial Supervision Commission-licensed
banks holding in excess of £59.53 billion in liquid funds (Isle of Man Financial
Supervision Commission, 2011a, p. 9). The critical importance of retaining this
business, developing it and shoring up external investor confidence in the essential
soundness of the Manx offshore banking sector is axiomatic.
(i) Regulatory constraints on development of the Manx OFC
It would be misleading though to leave the discussion at that. There are in practice
significant constraints on Manx constitutional and legislative freedoms which may
inhibit continued implementation of pro-OFC development policies. The first is
that much insular policy and legislation is subject to UK oversight via the Ministry
of Justice, the lead UK Government department with continuing constitutional
responsibility for the Crown Dependencies, which frequently objects to insular policies
Bank failure
and deposit
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