The inconvenient truth is that, in the British Prime Minister's words, the banks are acting as masters of the economy rather than as its servants and none of the measures taken thus far seem to have done much to address the fundamental issues. The banks' continued refusal to lend, allied to the impossibility of forecasting how bad it’s going to get before things change, has given rise to the unprecedented volatility being experienced in markets everywhere.
Cash rich investors now shudder at the thought of investing in even blue chip stocks, and the powerhouse investment banks now come under the meticulous scrutiny borne out of zero confidence. Confidence in larger hedge funds has also taken a knock, mostly as a result of the general economic malaise but also because of the massive impact of the widely reported Madoff scandal. The upside is that this represents new opportunities to new managers and individuals who now compete on a playing field where the brand, name or even rating on a product arguably means less than proven performance, track record, and even personal relationships.
In any event, the effects of these problems are being felt in all areas of the finance industry, all over the world. Law firms in offshore jurisdictions failing to acknowledge and/or respond to the new dynamics of their market will, in some cases, lead to failure. Those who seize the opportunity to develop the right products and solutions, addressing the clients changing needs, will be far better placed to succeed when the clouds lift to reveal an unrecognisable business landscape.
Investors are now looking for far more controlled investment vehicles such as niche funds set up to pump cash into diverse and emerging opportunities, each investment insulated from the other with the use of vehicles such as protected cell companies. One such product attracting significant interest in Gibraltar is the experienced investor fund (‘EIF’), similar to the SICAV in its creation and operation, allied to all the advantages Gibraltar can offer as a sophisticated Finance Centre.
The regulatory landscape is set to change, and it’s probably about time. It’s clear that the regulatory movement over the past fifteen years resulted in controls and supervision which were either deficient in design or application or both. An example of the institutional desire to address these shortcomings is the UK’s Chancellor's initiation of an enquiry into offshore jurisdictions and their regulatory arrangements in a move designed to insulate the British tax payer from contingent liabilities. These moves, designed to tighten controls and revisit the principles of financial regulation, from the US in particular (e.g., the legal action currently being taken by the US Government against UBS for disclosure of information), though welcome, are not devoid of risk in themselves. Knee-jerk overreaction to the crisis by over-regulation brings a new risk to the free market with a real threat of stifling growth and development. Measures need to address any largely ineffective (in practice) ‘form-filling’ requirements and focus on licensee practices which may have gone ignored or unnoticed in favour of measures designed to enhance the combating of the financing of terrorism (‘CFT’), the darling of regulation since 2001. Where the line should be drawn in the new era of ‘proper’ and ‘balanced’ regulation, however, will occupy the minds of Government and industry alike for a long time yet.
Gibraltar’s membership of the EU, compliance with all its measures and its focus in recent years on regulation and compliance effectively means that all Gibraltar licensed banks are, by Gibraltar law, regulated to UK standards. Gibraltar’s position is distinguishable from that of Crown Dependencies and other Overseas Territories not in the EU. Gibraltar is responding to the current crisis in a way that’s been proved time and again to yield results. The local funds industry, for example, is working together with the regulator and Government to create added solutions relevant in today’s market conditions. The EIF, a funds product which is quick to create and is as flexible as the economic climate is volatile, is expected to be joined by further funds solutions. Innovation tempered by effective yet reasonable regulation is the one fundamental truth offshore jurisdictions must wake up to if they are to survive the challenges of today and strive during the next and hopefully imminent growth period.