Will crackdown on tax avoidance and increase in regulatory costs push UK financials abroad for good?
The UK government aims to shut down bank tax loopholes in light of Barclays' tax-avoidance scheme and Prudential considers relocating to Asia – are these signs of a new era?
The UK treasury official David Gauke announced on BBC Radio 4 on Tuesday that the government is looking to crack down on bank tax loopholes, after the UK's HM Revenue & Customs (HRMC) ended the tax-avoidance scheme Barclayshad been using for years:
This pivotal move by the UK government will, no doubt, call into question whether financialswill look to relocate overseas, to find a domicile with a more favourable tax environment.
But this is not a new theory.
For the past few years, experts have warned that a crackdown on tax loopholes, the continually changing regulatory environmentand increased costs from regulatory changes – especially after increased capital requirements under Basel III and Solvency II – has meant that some financials have already made the bid to move overseas.
On Sunday, the UK's largest insurer Prudential revealed it is debating whether to relocate to Hong Kong, to avoid an "adverse outcome" from Europe's proposed Solvency II capital regime.
Analysts say they are not surprised, considering the firm would have to raise "billions" to comply with Solvency II.
Michael Wainwright, partner at international law firm Eversheds, says:
The news from Prudential is a sign of the times. Eversheds also recently unveiled a Regulation in the City report, which revealed a notable degree of frustration about the UK regulatory regime.
Half of those surveyed were concerned that businesses will move to other financial centres to avoid regulatory pressures, with 44% thinking that businesses will relocate to Hong Kong and 37% to New York.
Previously, Scott Cameron, partner at Reed Smith, emphasized how US and European reforms could create regulatory arbitrage in Asia, due to the region being perceived as having less costs and a more favourable compliance environment:
In September, the Institute of International Finance said that global financial regulatory reformswill prevent economic recovery until at least 2016, as bank-lending rates rise and cost jobs, while long-term net debt funding for banks will increase to $1.5 trillion by 2020.
For more in-depth coverage on the changing landscape of the banking industry and impending regulation, check out the March edition of Euromoney magazine.