What impact will the UK vote to leave the EU have on the UK’s Overseas Territories?
Bermuda, the BVI and the Cayman Islands are each Overseas Country and Territories of the EU (OCTs) under the Treaty of Rome and successive EC/EU treaties, by virtue of being Overseas Territories of the United Kingdom. They are not, however, direct members of the EU, and EU law does not apply directly to them.
Following the UK’s vote to leave the EU on 23 June 2016, nothing has changed for these jurisdictions as they each have their own separate legal systems and it is very much business as usual for them as leading international finance centres. Although the UK government has now announced that it will formally give notice to leave the EU under Article 50 of the Lisbon Treaty by the end of March 2017 (and once it does give notice that process will take 2 years to formalise the UK’s exit from the EU), we do not expect there will be any direct impact on these jurisdictions’ existing legislation or stability as a result of the referendum.
As it is not possible to predict the ultimate terms of the exit agreement between the UK and the EU at this stage, the actual impact of a Brexit on OCTs is inevitably uncertain. We expect, however, that the relationship between these jurisdictions and the UK will not change and their relationship with other UK Crown Dependencies and Overseas Territories with strong financial services sectors, such as Jersey and Guernsey, will remain strong following an exit of the UK from the EU.
The OCTs have diverse economies and the impact of Brexit will not be the same across each OCT. OCT status provides for preferential trading rights for, in practice, less developed OCTs. Bermuda, the BVI and the Cayman Islands, ranking amongst the highest GDP per capita in the world, have not historically looked to benefit extensively from these rights, although any loss of these rights may have more of an impact on other OCTs. We do not expect that the ending of OCT status will materially impact on the scope or viability of the financial services industries in any of Bermuda, the BVI and the Cayman Islands. Their relationship with the EU will technically change in future, howver, following a Brexit, as they will cease to be OCTs.
Brexit (once it happens) may also impact foreign policy, including economic and financial sanctions and restrictive measures. Although EU regulation is not usually implemented in the Overseas Territories (including the Cayman Islands, the BVI and Bermuda) as they are outside the EU, currently the UK directly applies EU-origin sanctions to its Overseas Territories. Following a Brexit, UK foreign policy can be expected over time to start to differ from the EU’s policy, including in the way it deals with countries currently subject to sanctions. How it will differ and any impact it may have on these jurisdictions is speculation at this stage.
What are the key concerns for OCTs in the light of the EU referendum result?
Given the importance of the financial services industries to Bermuda, the BVI and the Cayman Islands economies, one potential area of concern for these OCTs is the likely decline in the UK’s influence over EU financial services legislation and policy following the referendum vote and subsequent Brexit. Although these jurisdictions are not members of the EU and EU law does not apply directly to them, there could be indirect effects on them following the referendum result. This could include in relation to the likely process of the EU in creating its ‘common EU list of problematic tax jurisdictions’ by the end of 2017. The political element of this is extremely high and the probable absence of the UK as an influential voice increases the likelihood that this may become an attack on low tax rates. This obviously raises concerns for Bermuda, the BVI and the Cayman Islands, notwithstanding their full compliance with the OECD’s transparency requirements.
The European Commission recently issued its initial scoreboard of indicators setting out its pre-assessment of non-EU countries against the Commission’s risk indicators of transparency and exchange of information, the existence of preferential tax regimes and no corporate income tax or a zero corporate tax rate. Bermuda, the BVI and the Cayman Islands were each only included in the no corporate income tax category, confirming their strong co-operation on transparency and exchange of information and non-preferential tax regimes. It is now, however, for EU member states to decide which countries should receive further screening over the next few months for the common EU list. The lack of an influential UK voice supporting OCTs such as Bermuda, the BVI and the Cayman Islands could affect the results of this screening process.
Another area of potential concern is whether the AIFMD passport for marketing alternative investment funds will be extended to include OCTs such as Bermuda and the Cayman Islands. Although ESMA’s recent advice noted that there are no significant obstacles regarding competition and market disruption impeding the application of the AIFMD passport to Bermuda and the Cayman Islands, ESMA delayed its definitive advice on the basis that both countries are in the process of implementing new AIFMD-like regulatory regimes and other legislative changes. It is hoped that once those regimes and changes are in place, the third country passport regime will then be extended to Bermuda and the Cayman Islands once it is introduced, along with other jurisdictions like Jersey and Guernsey which have already been approved by ESMA, regardless of the referendum result and Brexit.
To what extent, if any, has the relationship of Cayman with the EU differed from that of the UK as a whole?
As Cayman Islands is not a member of the EU, its relationship with the EU is via the Cayman Islands’ status as an OCT. The UK is currently a full member of the EU, with the direct rights and obligations that involves.
What role would the Cayman Islands seek to play in any negotiations concerning the UK's future relationship with the EU?
The UK government has confirmed that when preparing for its negotiations with the EU on Brexit it will consult the Overseas Territories to ensure that the interests of all parts of the UK are protected and advanced. Some of the Overseas Territories may take the opportunity to try to become directly involved in negotiations on specific matters of concern to them, which could include financial services where relevant, even though this is not the UK’s preferred approach and the UK government has reiterated recently that it will be the UK that is negotiating with the EU on the terms of Brexit. Cayman is expected to participate in the UK government’s consultation process.
Has the Government of the Cayman Islands taken any position on the form of relationship it would like to see the UK adopt with the EU?
The Government of the Cayman Islands has not taken any position on the form of relationship it would like to see between the UK and the EU.
Are there any issues you think lawyers who deal with Cayman should consider at this stage?
Cayman Islands law remains unchanged as a result of the EU referendum result. We do not expect there will be any significant impact on Cayman’s existing legislation or stability following a UK exit from the EU, as EU law does not apply directly in the Cayman Islands.
To the extent that Cayman entities have entered into contractual arrangements which include references to EU regulations, there may be implications for their lawyers to consider with relevant onshore counsel.