Isle of Man Banking

There are currently some 54 banks established on the Isle of Man, and although this figure has fallen slightly over the last 5 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.

Several international banks with branches on the island offer global payment-processing solutions, and Manx Telecom offers an Island-based secure e-payment platform which can take multi-currency and Sterling-based transactions, enabling Island businesses to market their products globally.

Manx Internet banking operations tended initially to share the rather limited success that attended Internet banking operations generally. One of the more high-profile Isle of Man Internet banks was F Sharp, a subsidiary of the Bank of Ireland, and in October 2001 it was merged back into the offshore operations of its parent, Bank of Ireland, to be known in future as Bank of Ireland F Sharp. In recent years, however, most of the better known Manx banks have begun to offer Internet facilities.

Deposits in the year to 31st March 2007 increased by GBP6.56 billion (16.65%) to GBP45.95 billion, according to the Financial Supervision Commission. Over 20 banks had capital ratios exceeding 20% at the end of March, 2005. (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. The growth in other areas of the Island’s finance sector, including captive insurance, life assurance, collective investment schemes, investment management and ship management, means that these organisations have sums of money to invest and therefore require investment management services. Some banks also act as trustees to collective investment schemes.

Banks operate under either a full or restricted banking licence. The Financial Supervision Commission regulates the banking and investment industry under the powers created by the Financial Supervision Act 1988 and the Investment Business Act 1991. To obtain a domestic licence a bank must have a real presence on the island, while an Offshore Banking Licence allows banking business to be conducted from outside the island through a locally-incorporated bank on a managed basis.

The FSC has a system of supervision based on quarterly or half-yearly financial returns. This is reinforced by annual audited accounts which must be audited by qualified accountants who have effected professional indemnity insurance currently at £10 million.

For taxation purposes a “managed bank”, in accordance with the Banking Act 1975, signifies that the bank has no local premises or staff but is operated on the island by an approved local bank. Since 12th July 1989 the Treasury may exempt, for a specified period, all or part of the profits or income of a “managed bank” from income tax. Where such exemption exists, the Assessor cannot require deduction of income tax from payments to non-residents and cannot pursue income tax liability of non-residents on such payments.

An application for exemption is submitted to the Financial Supervision Commission. Exemption must not be granted unless the Treasury is satisfied that the bank:

  • does not transact, directly or indirectly, any banking business with any Isle of Man resident other than a bank,
  • has been granted a licence under the Banking Act 1975, and
  • is managed by the holder of such a licence.

Fees for exemption applications can be prescribed by order by the Financial Supervision Commission. A bank which has been granted exemption must produce accounts, etc if required.

Unlicensed banking operations remain a problem and have become known as ‘brass plate’ companies. These ‘rogue’ operations are, when reported, investigated by the Enforcement Division of the FSC.

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, 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. Deposits are protected up to 75% of the first £20,000 per depositor and the Scheme extends to the sterling equivalent of foreign currency deposits. Compensation is not available with regard to secured deposits or deposits which had an original term to maturity of more than five years.

The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man.

The government announced in July 2001 that it would become the first Crown Dependency with a financial ombudsman which means that customers worldwide will have access to an independent dispute-resolution scheme covering Isle of Man-based financial institutions. The ‘Financial Services Ombudsman Scheme’ covers complaints about financial advice and products across the range of personal finance such as banking, credit, insurance and investments. The scheme is open to individuals with a financial complaint against an Isle of Man firm that the firm has been unable to resolve.

In June, 2005, the Isle of Man’s Financial Supervision Commission announced that a project is underway to update the Banking (General Practice) Regulatory Code 1999. The key drivers for this project were to update the Banking Code in line with current requirements whilst taking into account the recommendations made by the International Monetary Fund (“IMF”) inspection team following its visit in 2002.

As a result, the Banking (General Practice) Regulatory Code 1999 was replaced by the Banking (General Practice) Regulatory Code 2005 on 1st July 2006.

The Commission published its approach to Basel II adoption in February 2006.

Says the Commission: ‘The EU has issued the Capital Requirements Directive (“CRD”) which all regulators of member states must implement. Although this encouraged adoption from 1st January 2007, the CRD contains a qualification that, where a bank has committed to the standardised approach by 1st January 2008 it can continue to report under Basel I during 2007.

‘The Isle of Man is not part of the EU and is not under any legal obligation to require locally incorporated banks to report under Basel II from 1st January 2007 or 1st January 2008.’

However, the Commission says it understands that locally incorporated banks which are subsidiaries of banks in countries requiring Basel II reporting in 2007 may wish to begin similar reporting to the Commission, whether under standardised or more advanced approaches (re parallel runs). With this in mind the Commission intends to have available the necessary reporting forms and guidance during 2007 but may require these banks to also continue reporting under Basel I.

The Commission says it will require locally incorporated banks to report under Basel II with effect from 1st January 2008 for the standardised approaches, with some degree of flexibility on a case by case basis for later adoption.

Basel II will require the Commission to make some changes to the Banking (General Practice) Regulatory Code 2005, as amended (“the Code”). It is expected that these changes will be minor and will focus on capital, risk management, and reporting forms (which are specified in the schedule to the Code). In addition, the Commission anticipates that guidance notes will be utilised to supplement the Code to ensure compliance with Basel II principles contained within Pillar 1 and Pillar 2.