Fund Domiciles

Economy

The Isle of Man has long been regarded as one the most economically stable of the offshore fund domiciles, with a per capita income higher than in the UK. In July 2008, for example, Standard & Poor's renewed its 'AAA' international credit rating for the Isle of Man. "Over the medium term, we expect that the Isle of Man's very strong credit standing will remain secure against almost all foreseeable downside economic, political, and financial risks," said Standard & Poor's.

An important element of the Island’s fiscal strength is the long established and self imposed legislative requirement that Government must budget for a surplus in respect of its annual revenue spending.

However the Isle of Man has been affected by the global economic crisis - and, in particular, the slowdown in funds activity. On top of which it has had to deal an increasingly antagonistic attitude from the UK government over the last year. In particular two decisions to have come from the Treasury in London have had a negative impact upon its economic situation.

The first of these was the decision by the UK government to compensate depositers in the failed Kaupthing Bank from Britain but not those in the Isle of Man’s Kaupthing Singer & Friedlander. As a result the Isle of Man government has been forced to come up with its own compensation scheme for the 10,000 people who had money deposited with the bank.

The second and, more significant announcement from the Treasury, was UK Chancellor Alistair Darling decision in October of this year to cut £140m off the Isle of Man’s £572m annual budget by reducing a 400 year old customs revenue-sharing agreement. As a result the Isle of Man is facing a 24% cut in its budget. Little notice was given by the UK government of this hostile move – which will undoubtedly have an impact upon this domicile’s economy over the short to medium term. (Mr Darling announced a review of the crown dependencies and overseas territories in his pre-Budget report 2008 - three weeks after he made his comments to a Treasury select committee when he called the Isle of Man a "tax haven sitting in the Irish Sea".)

Growth in the Isle of Man was projected to be 2.5% in its 2009 Budget, compared to 7.5% in the 2007-8 period. But with significant job losses in the banking industry this figure may be optimistic. (HSBC, for example, closed its operation in the Isle of Man this spring.)

Governmental and political system

The Isle of Man is an internally self-governing dependent territory of the British Crown. Whilst Queen Elizabeth II is acknowledged by the Island as its Head of State, the Island is politically and constitutionally separate from the United Kingdom. It is technically a Crown Dependency and is therefore independent in all matters except foreign affairs and defence, both of which are the responsibility of the United Kingdom government and for which the Isle of Man pays an annual contribution.

The Manx exercise their political and legislative independence through their ancient parliament, Tynwald, which is the oldest legislature in the world in continuous existence. The next general election is in September 2011. The Island is noteworthy for its relative absence of party politics; this has contributed to the stability of the Manx system.

Population (approx)

80,000

Stability and infrastructure

The Isle of Man is as stable as any fund domicile in the world – onshore or offshore. It has good infrastructure built on the back of a well developed financial services industry.

Threats to this domicile

The Isle of Man faces two threats: an increasingly antagonistic attitude from the (at least the current) UK government and possible changes in patterns of domiciliation activity from the alternative fund industry.

The current UK government is unlikely to be in power after May 2010. But the changing face of the alternative fund industry could be a concern in the future. The AIFM Directive is likely to affect fund domiciliation patterns. However until the redrafted Directive is published it is too say how extensively.

Leaving AIFM aside, the downturn in the hedge fund industry has impacted the Isle of Man. At the peak of the hedge fund boom the Isle of Man was forecasting that assets from its funds would exceed $100 billion by the end of the decade. It is unlikely to be anywhere close to that total given the downturn.