Isle of Man: Bank Deposits

There are currently 33 banks established on the Isle of Man, and although this figure has fallen slightly in recent years, the calibre and scale of banking operations has been showing marked improvement. The Royal Bank of Scotland International, the Royal Bank of Canada, Coutts (Northern European HQ) and Merrill Lynch have all moved to the Isle in the last few years and NatWest has ring-fenced its offshore business by moving to the Island. Recently several banks have begun to offer e-banking services from the island.

Deposits (net of local inter-bank placings) with Isle of Man deposit taking licenceholders (banks), including those held with overseas branches of Isle of Man incorporated banks totalled GBP57.23bn as at 31 December 2011, consisting of GBP36.38bn sterling deposits and GBP20.85bn non-sterling deposits.

Of the 18 locally incorporated banks six had actual risk asset ratios between 10% and 15%, eight had risk asset ratios between 15% and 20% and four had risk asset ratios of over 20%. (The capital adequacy of Isle of Man incorporated banks is measured on a risk-weighted basis in accordance with the Basel Capital Accord.)

The Island's banking industry is dominated by subsidiaries or branches of the main UK clearing banks and some foreign banks. The majority of banks in the Isle of Man are engaged in providing private banking services to UK expatriates and to foreign nationals. The services offered often extend beyond deposit taking to establishing and administering trusts and managing the underlying companies and assets held by those trusts, including investment management.

Banks are regulated by the Financial Services Commission under the Financial Services Act 2008. This new legislation, which came into force on August 1, 2008, consolidated several pieces of financial services legislation, including the Financial Supervision Act 1988 and the Banking Act 1998, into one Act and simplified the licensing regime. The underlying regulations remain largely unchanged however, although the term 'banking' has been reclassified as 'deposit taking.'

A Managed Bank employs the services of another licensed bank in the Isle of Man, the "Approved Manager", to provide the day to day management and administrative functions to it. The Managed Bank may not employ any staff in the Island without the consent of the Commission and it must operate from the premises of the "Approved Manager". Unless otherwise agreed with the Commission, all banks that were approved under the old legislation to manage another bank or building society are expected to hold licences to conduct Class 7 Management or Administration Services.

Prior to the tax and regulatory reforms, for taxation purposes a "managed bank", in accordance with the Banking Act 1975, signified that the bank had no local premises or staff but is operated on the island by an approved local bank. From July 12, 1989 the Treasury exempted, for a specified period, all or part of the profits or income of a "managed bank" from income tax. Where such exemption existed, the Assessor did not require deduction of income tax from payments to non-residents and did not pursue income tax liability of non-residents on such payments.

The Banking Act (as amended) recognises the contractual duty of a banker to keep the affairs of his customer confidential and the customers' entitlement to confidentiality. There are very few limited exceptions to these principles, set out in the Financial Supervision Act 1988 (since superceded by the Financial Services Act 2008), and these include circumstances where disclosure is required to assist criminal proceedings or to enable the FSC to discharge its statutory functions.

All banking licence holders are required to participate in the Depositors Compensation Scheme. The FSC is the Scheme Manager. The Banking Business (Compensation of Depositors) Regulations 1991 extends to all licensed banking institutions, except those listed by name in the Schedule. Under the Compensation of Depositors Regulations 2008 as amended by Tynwald on October 23, 2008, and further amended in October, 2010, the DCS compensates people who have money in current and deposit accounts in the Isle of Man with up to GBP50,000 of net deposits per individual depositor or GBP20,000 for most other categories of depositor. Cover is calculated per depositor, per deposit taker, if this bank fails.

The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man. To date a total of GBP54.1 million has been received from the liquidators. Of this, GBP24.4 million has been paid to claimants. The remaining GBP29.68 million formed part of the general pool of funds held by the FSC and enabled repayments of GBP23.47 million to banks — equivalent to 100 per cent of the total levies imposed on them to date.

Isle of Man banks evidently offer many opportunities to non-resident investors. However, some care is needed when approaching a 'private banker' or a bank offering customised relationship management (there are lots of expressions all amounting to the same thing). What matters is the structure of the bank. This is not to say that one kind of bank is necessarily more reliable than another, just to understand why the bank is offering personal attention, and what it hopes to gain from it.

Some banks are little more than front ends for investment funds. They may be safe enough, but are they objective? Perhaps it is best to look for a bank that is trying to make money out of private banking as an activity in itself, rather than just using it as a scoop for customers for its financial products. If you just want a bank that will give you a good rate of interest without deduction of withholding tax, then the choice is simpler.

However, it is necessary to remember that since July 1, 2005, the Isle of Man, in common with other European offshore dependencies, has been applying the EU Savings Tax Directive, meaning that interest paid to citizens of EU Member States was subject to a 20% withholding tax. But from July 1, 2011, the rate rose to 35% and the Isle of Man switched to the automatic exchange of information with regards to interest gained on the accounts held by depositors resident in countries within the European Union in accordance with the European Savings Tax Directive.

Private banking doesn't just mean investment: banks like to lend money, and especially to richer people. This raises the question of how a private banker is going to get rewarded. Depositing money with a bank is reward enough, of course, whether into the bank or into one of its financial products, but private banking when it has an advisory nature and is not accompanied by lending or borrowing may be fee-based. Provided the sum involved is large enough to justify the fee costs, an advisory private banking relationship is probably a good way to go. The bank will get the benefit from time to time of being able to offer bridging finance, or of holding large amounts in transit etc. It can hope for more substantial involvement with you in future. But the immediate relationship is between financial adviser and client.