S T A N D I N G C O M M I T T E E O F T Y N W A L D C O U R T O F F I C I A L R E P O R T
R E C O R T Y S O I K O I L B I N G V E A Y N T I N V A A L
P R O C E E D I N G S D A A L T Y N
ECONOMIC POLICY REVIEW COMMITTEE OF TYNWALD
TREASURY
HANSARD
Douglas, Friday, 27th June 2014
PP2014/0106 EPRC-T, No. 1/13-14
All published Official Reports can be found on the Tynwald website www.tynwald.org.im/Official Papers/Hansards/Please select a year:
Published by the Office of the Clerk of Tynwald, Legislative Buildings, Finch Road, Douglas, Isle of Man, IM1 3PW. © High Court of Tynwald, 2014 STANDING COMMITTEE, FRIDAY, 27th JUNE 2014
Members Present:
Chairman: Mr M R Coleman MLC Mr D M W Butt MLC Mr D M Anderson MHK
Clerk: Mr R I S Phillips
Contents Procedural ...... 3 EVIDENCE OF Mr S Christian, Pinewood and Hon. W E Teare, Minister for the Treasury ...... 3 Mr Christian left the Chamber at 3.02 p.m ...... 11 EVIDENCE OF Hon. W E Teare, Minister and Dr M Couch, Chief Financial Officer, Treasury ...... 11 The Committee adjourned at 4.00 p.m...... 27
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Standing Committee of Tynwald on Economic Policy Review
Treasury
The Committee sat in public at 2.30 p.m. in the Legislative Council Chamber, Legislative Buildings, Douglas
[MR COLEMAN in the Chair]
Procedural
The Chairman (Mr Coleman): Good afternoon.
The Minister for the Treasury (Mr Teare): Good afternoon, Mr Chairman.
5 The Chairman: Welcome to this public meeting of the Economic Policy Review Committee, a Standing Committee of Tynwald. I am Mike Coleman MLC, the Chairman of this Committee. The other Committee Members are Dudley Butt, Mr David Anderson MHK and we have our Clerk, Mr Roger Phillips. If we could first of all ensure that mobile phones are switched off as it interferes with the 10 recording equipment. Also, for the purposes of Hansard and the Tynwald Listen Live facility, I would kindly ask that we do not have two people speaking at the same time. I feel like a ‘trolley dolly’. Anyway, okay. The Standing Committee today is taking evidence from Mr Steve Christian, relevant to the film industry, the Treasury Minister, Mr Eddie Teare MHK, and he is accompanied by Mr 15 Malcolm Couch. As far as the Treasury is concerned this is an annual oral evidence session, the last one being held on 28th June 2013.
EVIDENCE OF Mr S Christian, Pinewood and Hon. W E Teare, Minister for the Treasury
The Chairman: We are very conscious of Mr Christian’s availability and time so we would like to go to the film industry first if everyone is agreeable? And on that I will ask Member of Council, Mr Butt, to start that ball rolling. 20 Q1. Mr Butt: Thank you, Chairman. Good afternoon, Mr Christian, and Mr Teare – of course you were involved in the Pinewood investments deal as well. I wonder could we ask, Mr Christian: could you give us a basic rundown of how the new 25 system works when you moved from the original CinemaNX, to the new system of Pinewood;
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what the basic deal is and what actually happens with the Isle of Man’s money and its investments?
Mr Christian: Yes, I will try and summarise it as best I can. 30 The structure is not so very different compared to the NX days, insofar as the company looking after the film investment marketing – now Pinewood, latterly NX – will look at a project and bring that project, would always have brought that project, back to the Treasury. The basic remit has not changed. What has changed quite significantly is, back in the NX days, NX actually had the control of 35 the Media Development Fund by way of it sitting on its own balance sheet. So, whilst the funds were in the name of NX they were in a charged account at one of the banks. So that basically means that, prior to the Pinewood deal, NX had title to the Media Development Fund in terms of its cash deposit but could not unlock that deposit until such time as, basically, it had two signatures from the Treasury. 40 Q2. Mr Butt: It was drawn down from… ?
Mr Christian: Yes, exactly.
45 Q3. Mr Butt: So where is the Media Development Fund now?
Mr Christian: Now the Media Development Fund is held directly by the Treasury, so no title to the fund had ever passed under the Pinewood arrangement. So, effectively, Pinewood sits as an adviser to the Media Development Fund, rather than the whole of the Media Development 50 Fund, and that is the big difference. The process for drawing down is pretty similar, insofar as we will come – ‘we’ being Pinewood – to the Treasury with a report and will make a recommendation. However, as I say, the big difference is, back in the day prior to Pinewood, the funds would be drawn directly from the Media Development Fund sitting in the name of NX, now sitting in the name of Treasury. So 55 that is the big fundamental change. The other change is not so much of a structural change but it is a change of emphasis, and it is a change of standing in the marketplace, really. The Committee will probably be aware that the Island was facing a very competitive environment, and that competitive environment was really driven by the availability in the UK and Ireland of free money – and when I say ‘free 60 money’ I really mean subsidy. That proliferation of free money, that subsidy, was the thing that really led to the Pinewood deal because there was a realisation that the Island had to change if we were to remain as a player in the industry. We had to change on the understanding that subsidy money was not available, so the Island was not in the position, or did not want, to offer subsidy directly to film – unlike Northern Ireland, unlike the United Kingdom, and then also 65 regions of the United Kingdom. So the change in emphasis has come about whereby by marketing as Pinewood rather than marketing as CinemaNX – just as, I think, was suggested at the time of the transition – the Island would get better visibility and therefore better access to bigger, probably more commercial, films and certainly to a bigger throughput of films. And that has certainly happened. 70 Q4. Mr Butt: Okay, just go back to basics again then. The Media Development Fund is held by Treasury. How much is in that fund?
Mr Christian: That fund is a £25 million fund – 75 Q5. Mr Butt: That is still with Treasury?
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Mr Christian: Yes, and it is –
80 Q6. Mr Butt: And to do the Pinewood deal – let’s call it ‘the Pinewood deal’ – there was actually investment in Pinewood shares?
Mr Christian: Correct.
85 Q7. Mr Butt: That is separate money?
Mr Christian: Correct.
Q8. Mr Butt: How much was that? 90 Mr Christian: That was a total investment – I am going to say it in round figures, the Minister might be able to give a precise figure – but in round figures it was around about £12 million.
Q9. Mr Butt: And that was buying shares at about £2.50 each, I think. Is that right? 95 Mr Christian: That is correct, that was to purchase 9.9% of Pinewood’s issued share capital at a purchase price of £2.50 a share.
Q10. Mr Butt: And having those shares, what benefit does that give you with your dealings 100 with Pinewood, and trying to develop the film industry here?
Mr Christian: It gives a number of benefits insofar as the major benefit that was outlined at the time of the investment would be… There was always some fallback or some sort of hedging device as to our investment in film. And if we were not going to offer subsidy, then we had to 105 offer investment against something else; we had to create a hedge, we had to create a benefit. The argument ran something along the lines of: Pinewood appeared to be a growing business, it appeared to be an undervalued business, it appeared to be operating in a sector in which we had some knowledge, and therefore there was the opportunity for knowledge transfer. So, there was an opportunity for us to do something for Pinewood, but for us to do that as a 110 standalone organisation, CinemaNX was probably never going to happen – in fact, it would never have happened. But now we have that ability where I sit on the board of Pinewood, I have that intimate knowledge of film financing, but I also have that intimate knowledge of the Isle of Man and what can work for the Isle of Man – and what will not work for the Isle of Man. So we have been able to contribute to that business that we have invested in, but the biggest 115 virtue really is the fact that now the Isle of Man is going out into the film world with the Pinewood name, with the Pinewood brand. That was for me, at the time when we originally discussed the deal, a huge win because I felt that the Pinewood brand was a brand that was growing; very much an enormous potential to become an international brand. That appears over the last two years to have come to pass insofar as you now see the brand 120 in many more places around the world than you did previously.
Q11. Mr Butt: We will come back to that in a moment. Just to paraphrase then: are you saying instead of our previous system of having a subsidy to achieve what we wanted, we are now investing in shares to get the same sort of benefits? 125 Rather than having subsidy we are using our shareholding to do the same?
Mr Christian: Yes, we never did actually offer subsidy, so we were always investing previously on an investment basis. Now we are still doing that but our hedge, or our offset, is the ability to buy into that growing company. And that is an opportunity that – whether it is in the media
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130 sector or any other sector – you do not often get the chance or the opportunity to buy into something, to buy into those listed growing businesses in quite the way that we did.
Q12. Mr Butt: Okay. So in terms of now, what has actually happened since you have been part of that? What have 135 we had in terms of financial benefits to the Isle of Man and bed nights, the usual things that used to be judged upon? Have we had any figures on that you could give us?
Mr Christian: Well, I think we are shooting something like our sixth film at the moment. The 140 deal is about 18 to 19 months old, we signed it in October two years ago – so 20 to 21 months old. In that time we are now working on our sixth film. I think everyone will notice that the quality of the films have improved quite dramatically. The last film that was here was Spooks: The Greater Good, and that is a film based on a very well-known worldwide franchise, so it was bringing a big brand here. 145 The cumulative spend benefit on all of the films that have been produced here to date will total something probably in the order of around about £5 million. We try to spread that spend as best we can across the calendar years; we try to focus as much as we can in the winter months so that the impact of the spend is greater. Basically, the quality of films has improved, the throughput of films has improved to six projects in around about 18 months, that is probably 150 equivalent to something like… prior to the Pinewood deal I think we had done six in probably three and a half years. So the throughput is much greater, the spend profile is much better, the quality is much better – and the opportunities are just so much greater because we have a greater visibility to more projects. 155 Q13. Mr Butt: We were told at the time of the deal being made that it might bring extra work for us in terms of later processing – like in the audio and the sound etc, and the more technical stuff – for the Isle of Man. Has that come to fruition at all? 160 Mr Christian: Not yet, it is still to my mind very early days in the deal. We have absolutely concentrated on getting production back to the levels that we said we would get them back to, but it is still very much in its early days. The prospects for doing more on the Island are significant. 165 I do not want to go into specifics as to what we might be looking at because that is – in terms of being a listed company – it is very difficult to talk about specifics. But certainly as far as the long term is concerned we see a number of benefits for Pinewood and the Island. The benefits have to be mutual benefits, there is no point in bringing things here for the sake of bringing things here, but there are potential opportunities. 170 Q14. Mr Butt: Okay, just going back to the shares, our investment of £12 million. There was a recent report that shares had gone down quite a lot. What is the current position with the shares?
175 Mr Christian: I will be very honest and say that I do not look at the share price every day –
Mr Butt: Mr Teare might know, I am sure –
Mr Christian: I can tell you what the share price roughly is today, I think we are sitting at 180 around about a mid-price of £4.80 a share. But in the very nature of things shares go up and
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shares go down; there was a slight fall in the share price during May, but it is not something that anybody really took any notice of within Pinewood, it is just one of those things.
Q15. Mr Butt: Well we have gone from £2.50 to £4.80 at the moment… 185 Can we actually, if we needed to, cash those shares in, or are we restricted in our use of them?
Mr Christian: You are restricted insofar as, at the time of the deal it was agreed that the Treasury would not buy or sell in a two-year period, and that two-year period will expire… I think 190 it is round about 15th October, so you will be free to buy more if you so wish – or indeed to sell, if you so wish.
Q16. Mr Butt: And in the meantime, has there been any dividend declared on the shares that has come back to the Isle of Man Government? 195 Mr Christian: Yes, the dividend was paid last year, I think the dividend was 1.9p per share. The full year dividend this year is 2½p a share, so the dividend profile is growing, earnings per share are growing – and the policy of the company is to increase the dividend so long as we are increasing profits and so long as we are producing the results that allow us to. 200 Q17. Mr Butt: Okay, just help me with the maths here please, Mr Teare, maybe: 1.9p per share, what is that worth in actual dividend per year? It must be –
The Minister: It is about £160,000 off the top of my head. 205 Q18. Mr Butt: Yes, that has come back to the Treasury?
The Minister: Yes, that comes back to the Treasury and the income on that goes into our general revenue under the current arrangements. 210 At the time the deal was structured we were anticipating that there would be an increase in the share price cumulative of 7% a year, so we are currently well ahead of that. But, as Mr Christian has said, there is no guarantee that is going to continue: it is a traded commodity, the share price can go down as well as up.
215 Q19. Mr Butt: But now there has been some planning application called in by the Secretary of State and it has been approved now, I believe, the planning issue that was holding things up. Does that affect the Isle of Man at all, or the shares?
Mr Christian: I would suggest that it affects the Isle of Man as a shareholder in a very positive 220 way. The whole idea of the underlying fundamentals of Pinewood at the time of the investment, it was suggested that stage utilisation was going to go up and that stage utilisation increase would lead to a shortage of stage space. The company probably best placed to address that stage space shortage in the UK was Pinewood, because we had a significant amount of land which potentially could be built on. 225 The great difficulty was that that land was greenbelt land, it was zoned as greenbelt and, as you will know, you are not allowed to build on greenbelt. But following a planning application, a planning refusal by the local Council, a subsequent planning enquiry which took place at the end of 2013 and the beginning of 2014, the Secretary of State for Communities upheld an independent inspector’s appeal judgment that the planning permission should be granted. That 230 is a huge catalyst to allow Pinewood to grow its business – so as a shareholder that should be very good news.
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Q20. Mr Butt: Good. One more question please, Mr Chairman. 235 I also noticed a few months ago that Wales became involved in it, which seemed to me initially quite concerning: were they trying to muscle in on revenue that might come our way? I just wonder if you could help me with that. What effect does that have on our investment, Wales being involved as well?
240 Mr Christian: It has no direct effect on your investment at all. I cannot speak for Wales because I must leave them to speak for themselves, but I imagine Wales saw a model that was rather interesting from a film investment point of view. I would imagine they saw an opportunity to make investment into films that they could bring into the area without offering subsidy.
245 Q21. Mr Butt: They are doing the same as us then, they are investing in the shares as we did?
Mr Christian: No, they are not investing in the shares, they actually put a fund up and then made some further money available to buy some premises. They have bought some warehouse premises which are going to be converted into studios which Pinewood will then lease from 250 them. So, overall around about the same amount of total investment, just structured in a slightly different way: whereas they have the studio benefit, we have the shareholding benefit. Whether we should be concerned or not, I think it is only good news from our point of view because it brings another like-minded investor into the market, investing in exactly the same way as we want to invest – and an investor who is keen to invest alongside the Isle of Man. 255 I think it can only be good news; it is certainly not a competitive thing. It is interesting that within the Pinewood agreement that was undertaken and executed with the Treasury, with Pinewood film advisers, Treasury had to give consent to that. So there was complete transparency throughout the negotiation of the Wales agreement because Treasury basically had to give their consent to that happening. Treasury had negotiated a fairly robust control in 260 that regard.
Q22. Mr Butt: Okay, that is a good question actually to come to next. The Treasury has the Development Fund, the £25 million: but what evidence do you have, Mr Teare, on the actual work that Mr Christian is doing, and the work he does? 265 Do you have any control of that at all, as Treasury?
The Minister: Yes we do, we have the ultimate control. Mr Christian is not a discretionary fund manager, he is a fund adviser, so in effect he will source out what he thinks is a suitable project. He will then come to Treasury and then it is up to Treasury to decide whether that 270 meets our, shall I say, risk appetite I think is the best way of putting it – whether we think that is appropriate, does it bring the appropriate level of economic benefits that we are expecting from the investment. So, as it were, the final decision finishes with Treasury.
275 Q23. Mr Butt: Can I ask a final one now, Mr Chairman? How does this investment compare in terms of revenue for the Isle of Man, compared to your investments with the rest of your investment funds?
The Minister: Well, it has not matured yet. The problem that we have is the long timescale 280 between the investment when the film was being made, as it were, and then the subsequent post-production process until it is actually marketed and it appears on the screen or television, satellite, or whatever. So, overall there is quite a long time frame. A good illustration of this is the film that was made on the transition over into this new arrangement with Pinewood: it is called Belle. That has just been released about a month ago
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285 and the current receipts – I checked on this earlier today – is just under $10 million. But it takes some time for that to actually start flowing back to us.
Q24. Mr Anderson: Can I just ask in there: we had no control over the naming of that film did we? 290 The Minister: It is spelt with an ‘e’. (Laughter)
Q25. The Chairman: Can I just try and get my mind around all of this? We took £12 million approximately and we bought a share of Pinewood Studios: that is one 295 part of the transaction. Pinewood Studios then created Pinewood Film Advisers, who advise the Isle of Man Treasury on how to invest the £25 million which you keep in your name in the Isle of Man, or wherever you choose to place it. Is that basically a summary of the how it works?
300 The Minister: It is, in effect, yes.
The Chairman: Yes? Okay. I just wanted to confirm that because it seems like a pretty good deal to me.
305 The Minister: Well, as I said before, it is early days.
Q26. Mr Butt: Can I just recap on the NX days, Mr Christian? I presume the films that were made in that period, and in the earlier period, there is still revenue that comes in from those as the years go on. Is that right? 310 Mr Christian: That is correct, yes; and again, as part of the transition and part of the Treasury agreement CinemaNX effectively ceased to trade – or at least it ceased to have a major engagement to trade when the Pinewood deal took effect. Again, because of the structure of NX there are a number of films within NX where some of the rights are held in the NX name – which 315 again is not unusual. They are all charged to the Treasury so there is security over all of those. Part of the safeguard there is that basically – certainly for the term of the Pinewood deal, i.e. five years – NX must remain in existence. So whilst it has gone off the radar, whilst it does not trade anymore, the company is still wholly solvent. It still sits there fully compliant, it still has an obligation when it collects money to pay that money over to the Treasury – although I would say 320 in the vast majority of cases when there is any money due on any titles invested by NX, that the money will flow through independent collection accounts anyway. So NX does not actually hold a great deal of cash on behalf of the Treasury, it flows through independent collection accounts and is paid to a very specific charged account for the benefit of the Treasury.
325 Q27. Mr Butt: So, films like Closer to the Edge and Waking Ned are still making money presumably, and that money still flows through to the Isle of Man in the end?
Mr Christian: That is absolutely correct, yes. A little more flows from Closer to the Edge than from Waking Ned – 330 Mr Butt: It is more recent.
Mr Christian: It is more recent, but it is… Again, I would just like to take the opportunity to say that when we make films like Closer to the Edge you can judge whether or not the film 335 recoups its budget. You can see all of the empirical data in terms of press coverage, in terms of events and popularity, in terms of visitor numbers.
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There is a direct correlation between that film and a great deal of the growth that takes place, and so therefore that is the real power of film: the real power of film is to expose the location. Again, this whole thing started back in 1993; for a very good reason it started in the 340 Tourism Department, and that was no accident.
Mr Butt: I have got to say Closer to the Edge is a great film. The Guy Martin effect has certainly helped the TT and the revenue from that. I know you have your critics, but I think that is one thing that cannot be criticised. 345 Mr Christian: Thank you.
Q28. Mr Anderson: Mr Butt touched on it earlier… you talked about the Welsh investment to the film industry. With our investment have we actually stolen a march on the other regions, 350 now, of the UK as far as film is concerned? Are you now in a position where you sit to capture the films that are best for us, but maybe others would like to have?
Mr Christian: Yes, I think it is true to say that we have something that very few other jurisdictions can offer, and very few other regions can offer. It is still fiercely competitive out 355 there. The Film and Television Tax Credit basically provides a 20% subsidy to a film-maker when they are shooting wholly in the UK. That is still available to an Isle of Man-set film, but at a slightly lower rate because we classify in Manx expenditure as what is known as ‘bad expenditure’ so we cannot claim the whole benefit. But regions such as Northern Ireland, for example, have made a huge success with the Game of Thrones which is an enormous television 360 phenomenon – just an absolutely huge success. We would never be in a position to be able to do something like a Game of Thrones because that is all based on subsidy money – as well as tax credit it also has a lot of regional subsidy. So we can never be as competitive in terms of pure free money: that is never going to happen unless we change our appetites to offer some subsidy, which I do not think we will. 365 We have to compete in a different way. So we have suite of products that – whilst on paper might not look quite as attractive – when you put them together with Pinewood investment, put the Pinewood brand with the type of investment we can make, then we do become rather more competitive. It is also, I would say, not necessarily just a regional thing, the disadvantages that we face 370 being on the Island. Clearly we face a geographical limit, it costs money to come here and make a film. But more so there is, at the moment, a huge amount of money going into the UK film industry which is entirely tax-driven money: it is Enterprise Investment Scheme money. Some of these schemes will give an investor 103% of their investment back, so if they invest £150,000 they are guaranteed to get a 103% of their money back, whether or not the film makes a penny 375 – it is just money that is given away. The main EIS funding is not quite as generous as that, but is still a very significant hedge. We can use those sorts of tools but they are not what you would call the more ‘plain vanilla’ tools. Pinewood being what Pinewood is, a very long established traditional business, and the Isle of Man Government being what the Isle of Man Government is, which is an investor that wants to 380 invest in something which is whiter than white, we absolutely stay away from these more exotic products, as I might call them. But that is not to say that others do not go into those and, when they are using them, then that is creating a big advantage for them. So, we have gone a long way to overcome some of the difficulties that we did have; we are more competitive, but it is an ever-changing landscape out there. 385 The Minister: The point I would make with your indulgence, Mr Chairman, is that the so- called subsidy scheme in the UK has been extended now to 2019, so that gives us a longer
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profile: it goes out certainly beyond our investment management agreement which was for an initial five-year period. 390 Also, too, when Pinewood signed an agreement with the Welsh it started quite a lively debate in another devolved assembly as to how Wales has stolen a march on them.
Q29. The Chairman: Can I just ask: is there anything that the Isle of Man could be doing to assist you in your role? Apart from giving subsidies… 395 Mr Christian: Yes, I think probably… we have got a suite of products now and an association with a brand that gives us an enormous advantage and certainly, relative to where we were, we are in a great position. Some of the things – just answering Mr Butt’s question from earlier – I alluded to earlier as to 400 opportunities that might arise in the future, certainly it was always going to be worth a conversation with the Isle of Man as to whether or not the normal DED incentives and benefits for incoming business, for inward investment can apply, because we are in terms of, for example digital delivery, we have an e-gaming sector which needs connectivity 24/7, it needs high levels of security and I can imagine some time down the road in the film world in the delivery of film, 405 that there are going to be opportunities for the secure delivery of products from a secure jurisdiction. So, just like the Island created the environment for e-gaming it might be that we can see some of these spin-offs, not necessarily in direct filming, but that we can look to create environments for some of the offshoots that might come from the relationship. So that is 410 probably where the Island is going to help us more in the future.
The Chairman: I think that covers the film industry, now maybe we can go on to… If you wish to –
415 Q30. Mr Butt: Before you go, is there anything else you want to tell us that we have not covered, Mr Christian?
Mr Christian: No. Thank you for the opportunity to come and describe what is going on. I would say that everything in terms of the fundamentals that were suggested might come to 420 fruition, are coming to fruition. I think we have gone the fundamental investment case right – it certainly appears that way. I think we just get on and do the job and do it to the best of our ability, and hope we can build on a very solid foundation that we have created over this first, almost two-year, period.
425 The Chairman: Thank you very much for coming and for the information you have sent out recently, very recently, today. It is very much appreciated, thank you.
Mr Christian: Hot off the press! You are very welcome, Chairman. Thank you very much. 430 Mr Christian left the Chamber at 3.02 p.m
EVIDENCE OF Hon. W E Teare, Minister and Dr M Couch, Chief Financial Officer, Treasury
Mr Anderson: Now we take the gloves off, Mr Chairman! (Laughter)
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Q31. The Chairman: No, we don’t work that way! Minister, I wonder if you could just give us an update on your areas of endeavour since our 435 last meeting on 28th June last year?
The Minister: Right, if I could just start with the rebalancing. We are certainly on track to rebalance by this time next year but that is, as I said in another place, the primary rebalancing. There will still be a need to rebuild our reserves and to deal with the drawdown of those 440 reserves, and improve our liquidity over a period of time. I think, really, that we have already taken £91 million out of our anticipated budgets, out of our spends, and the economy is still growing, it is still positive. So it has always been a bit of a tricky balance between reducing expenditure by, in effect, pulling back on Government expenditure and impacting upon consumer confidence because, if the consumers are not 445 confident, the knock-on to spend and the economy is then adversely affected. So, overall, the economy is still growing. This last year, 2013-14, the accounts were better than anticipated, they were £14 million better than we anticipated at the time that we presented the Budget. That was a combination of lower-than-expected expenditure on the part of Departments but also, too, a higher level than we expected of tax revenue. Tax revenue was 450 about £5 million higher, and that was predominantly through ITIP tax. So, it appears that in some sectors the earnings are a bit stronger and there are more people in employment as well. So the economy is still holding up, still expanding and we are facing, as it were, a more favourable scenario than when I spoke to you last year.
455 Q32. The Chairman: Can I just ask a quick question here? Last year we were very concerned with the exact figure of the drawing down from reserves. Could you tell us what that figure would be as at the end of 2014 for the rebalancing programme?
460 The Minister: Yes, it will be in the region of £91 million that we will be withdrawing over the three-year cycle. The money that we have got, in effect, the stronger income and lower expenditure position than we had last year, will be reflected in the allocation of reserves when we present the Budget next year.
465 Q33. The Chairman: Do you have any idea what you might be drawing down in the next year?
The Minister: I do not expect any… I would be very surprised if we had to draw anything from reserves next year because that is the main part of the rebalancing. But, as I said before, we will 470 have to take steps to rebuild, for example, the Capital Fund, the Legal Reserve Class Fund, the Insurance Fund; and there is a whole range of funds, so we must rebuild those. We need in the region of £50 million to £60 million to accomplish that.
Q34. Mr Butt: A good question actually: where will you get that money from without using 475 the reserves?
The Minister: We will take various proposals under the fiscal strategy to our colleagues in Tynwald, and it will be up to Tynwald to make that decision.
480 Q35. Mr Butt: Is the big problem the Capital Fund rebuilding, because that is the major fund that is going to be diminished within the next year or so, isn’t it?
The Minister: That is correct. At the end of this year we anticipate there will be, I think, £51 million in the Capital Fund, whereas we need £60 million a year and there is only, under current
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485 arrangements, £30 million a year going into that fund. So we will need to, in effect, double what is going into the Capital Fund at the moment.
Q39. Mr Butt: Is one of those ways you are planning to do… I think you announced in the last Budget to actually charge Departments interest on their capital loans in future? There was a 490 moratorium for some years on that, wasn’t there? The Minister: That is correct, yes.
Q40. Mr Butt: Is that going to happen?
495 The Minister: That is certainly one of the scenarios that we are looking at, but we are just about to start our negotiations with the Departments; we will be having the first departmental meeting on Monday. So over the course of the next three to four weeks we will be discussing with the Departments and also managing their expectations.
500 Q42. Mr Anderson: Yes, could you just… building on that really. There has been a welcome drop in unemployment of late, and I am just wondering do you see that trend continuing really? You touched on the economy still being quite strong. Unemployment is obviously a way we can haemorrhage money. Do you see unemployment continuing to tail off? 505 The Minister: My own personal view is I do not think it is going to get considerably lower than where we are now, because there is a section of the community who, for one reason or another, do not engage with the workforce. It is regarded in the more developed economies that the lowest level of unemployment is the in the region of 2½%. To get it significantly below 510 2½% is difficult because you have got to match the available skills with the jobs. So what we need to do is just to try and incentivise people to move back into the workplace, and that is one of the workstreams that we are looking at now.
Dr Couch: I think there are two aspects of that, and I think the Minister has alluded to both of 515 them. One of them is to ensure that the benefits system in due course is reconfigured to encourage people into the workplace. There is always a risk in a social welfare system than it can be more advantageous to be out of work than in work – so that is something that is being looked at. The second one is more challenging in some ways, because this involves a number of 520 Departments working collaboratively, and that is the skills gap. So you can either look at young people at 16 or 18 as they come out of secondary education, and ask what skills do they have. Compare that to what skills we think the economy is asking for, and see whether they match. I think it is probably common knowledge here, as in many developed economies, that there may be a mismatch at this point. I think that a combination of Economic Development, 525 Education and Children etc, working together, that – and it always seems a slightly pejorative term, the ‘NEETS’, the not in education, training, etc – we could focus more on that group of young people. And Government, if it is going to intervene, would be giving them additional training to get them skilled to meet, for example, the engineering sector, or the ICT sector, etc.
530 Q44. Mr Anderson: So of the 2.2%, or whatever… what percentage make up NEETS of that 2.2%?
The Minister: It is about 15% the last time I looked. It is 15% of the 2%, so it is quite a significant figure. 535
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Dr Couch: We can give you an accurate figure if you wish. As a gross approximation it is probably a couple of hundred young people in that category.
Q45. The Chairman: Can I just ask a question about what you have just said? 540 Are you implying – and I am not being judgemental in this, I am just trying to understand it – that perhaps we ought to be not necessarily waiting until they become NEETS, but we ought to be having a level of control at the secondary education stage on the syllabuses that are offered?
Dr Couch: I can give you a personal opinion, which I do not think is from your CFO, and it 545 would be probably, yes. And again, if Prof. Barr was here he would give you a far more eloquent explanation. But there is always a separation, I think, isn’t there, within the education system between pure education and building skills? To an extent I think educationalists tend to win over skills builders. Again, I think this debate is certainly happening on the Island, and it is happening in many 550 countries, which is whether one ought to swing a little bit more towards skills building. And this would, for example, be looking at young people who do not want to go to higher and further education. How do we encourage them to build the skills that they could plug directly into value-added jobs for our economy? 555 Q46. Mr Butt: Going back to the general economy, Minister. What is our relationship with the UK at the moment in terms of our VAT rebalancing we were going to do? I think this time last year you said it should be done by this time this year so, a year on and I wonder where we are up to with that? 560 The Minister: A good question and I can understand people’s quite rational concern about it. The data collection exercise in respect of individual households that was completed in January, the results have just been analysed now. There were over 900 respondents to that survey, so it has been a big data collection exercise. 565 We are currently working on finishing off the Business Survey and that is designed to capture approximately 80% of the business activity, so it is a very deep survey. We hope to be in a position to go back to the UK by the end of the third quarter and agree the final pounds/pence distribution during the winter. So when I come to present the fiscal strategy which I have promised to do at the next Budget sitting, I will have that information. 570 Q47. The Chairman: We did receive by e-mail today the Household Survey, embargoed, so I am not going to talk about it until Monday. So if that is the first part of it, presumably – ?
575 Dr Couch: That was the first one, yes, that has been published because it has a wealth of information that will be useful both to Tynwald and to the community, I think. That forms one of the components of the information gathering that we had agreed with the UK that we would do.
Q48. The Chairman: The draft accounts that have been published – I have only been through 580 the first part of those – but are there any areas in there where you feel that you need to talk to them or comment on them?
Dr Couch: From my perspective the Minister has mentioned the general points which we are paying attention to, so I do not think I have anything to add particularly. 585
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The Minister: The only thing I would especially like to draw your attention to is the rundown in internal reserves – I did allude to that earlier, that we would have to rebuild them once we get the primary rebalancing completed.
590 Dr Couch: If I may, when the UK Chancellor delivered his budget in March, he was saying that in his view sustainability of public finances was to have each year a healthy current account surplus. Now, obviously in our case, we had a position where we used to have a healthy current account surplus and much of that was invested into our reserves, infrastructure projects, etc – I am teaching Granny to suck eggs on that. 595 We have then had the re-factoring of our income, so for a period we have used some of those rainy day funds which is perfectly appropriate fiscal management, and we have dropped down a level. The key question now is: do we wish as a country to rebuild those reserves? And, if we are to do, we have to get back to the healthy current account surplus. 600 So, as the Minister was saying, and as he announced in his Budget this year, we will achieve the rebalancing next year which this Government has promised. The question beyond there is sustainability, and it is getting that right balance.
Q49. The Chairman: I note that the reserves are £195 million less than they were last year, if 605 you take the total. How much is that caused by… and I am looking there at market value. How much of that is caused by market fluctuation, or how much is caused by depletion?
Dr Couch: If we look at the external managed reserves, it was a good year in terms of income earned, so that is a combination of capital gains when you dispose of pieces of portfolio and 610 dividends, etc. So that was, in rough terms, about £80 million in. But in terms of the rest of the rebalancing plan, etc, from the externally managed reserves we took over £120 million out. So, some of those values are up on the investment earning side and down on using the reserves. In terms of the internally managed reserves as we have covered a few minutes ago, there are 615 some key areas that we are concerned about, which is the gradual erosion of the Capital Fund, which of course is used to do all of the Government-commissioned capital projects. There are a number of smaller funds which, if they became fully exhausted, that expenditure which may need to continue will flip over immediately into the current account and causes a different type of problem to manage there. 620 So, I think really, I come back to the theme as the Minister did, for the next few years we need to pay a lot of attention. And I think we would need to brief Tynwald regularly on fiscal strategy and getting that balance right for a long-term future.
The Minister: Building on Dr Couch’s comments about a long-term sustainable future, 625 Treasury are concerned about the sustainability of the National Health Insurance Fund. This year for the first time the NHI Reserve will reduce by £5 million – that is on page 31 of the Pink Book. So taking that together we are, as I say, concerned. We are not panicking, do not get me wrong: what we are looking at really is putting small steps in place now, in the next 12 months or so, which will eliminate the need for drastic 630 measures 5 or 10 years down the road. We can do it now, and do it professionally, and make a sustainable future for the next generation.
Q50. The Chairman: But the internal reserves, the depletion of those is about what, £13 635 million in a year, in total?
Dr Couch: Yes.
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Q51. The Chairman: Fine. And just so I am getting the right ones, you are talking about the Medical Indemnity Funds 640 and things like that – that category of funds?
Dr Couch: Yes.
The Minister: There was a comment made in another place that these expenses should be 645 put through the Departments’ revenue expenses, but the difficulty is they tend to be very lumpy. We cannot predict accurately what the cost will be in any particular year. So, take the Medical Indemnity one, it might be £200,000 one year and £2 million the next year. You just cannot tell.
650 Q52. The Chairman: It probably would be wise then to have lots and lots in there, wouldn’t it?
The Minister: In an ideal scenario, yes!
655 Dr Couch: It would be prudent!
Q53. The Chairman: Do you have anything on the General Accounts, gentlemen? No? Obviously one of the things which has exercised our minds greatly has been the Sefton, because we did do the report on the Sefton and obviously we have an almost proprietary 660 interest in it – not as much as you do, but… Do you have any comments about how you perceive the deal to be at the moment?
The Minister: The deal at the moment, once again it is early days, but it does seem to be working. Since the restructuring went through they have paid the Government in terms of 665 gambling duties, ITIP, NHI and other taxes, approximately £2.8 million. They are major employers on the Island, they are bang up-to-date with all their commitments to Government, and on top of that they have paid off £2 million to their creditors. So those smaller unsecured creditors who had been in position when the restructuring took place… if that restructuring had not gone through they would have been right at the end of the 670 queue and arguably there would be nothing left for them.
Q54. The Chairman: The interest income from the Enterprise Loan part, the £1.3 million, and also for the Middlemarch, which is the leaseback of the parking spaces and also the interest on the loan: how much income have we received from those items? 675 Dr Couch: The yield is 5% on both, so I think on the loan so far we have received about £62,000. The Middlemarch rents – have we got that figure with us – (The Minister: £17,000.) Forgive me, Middlemarch, the lease is £160,000 per year of rent. So, again all of those things are squared away up-to-date, we are not having any issues with 680 default as such. Again, if we compare that to our externally managed investments, the yield is remarkably similar: I think we achieve about 5% to 5½% in good years on external investments. So a 5% yield purely in investment terms is a good deal for the Government.
Q55. The Chairman: So you have actually received in excess of £3 million from that 685 organisation within the last 12 months?
Dr Couch: All components together, yes.
Q56. The Chairman: Everything added together?
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690 The Minister: In the region of £3 million since the restructuring, yes. And, too, the way that the £1.3 million loan has been structured is that the longer it is in force the more expensive it gets, so that is an incentive to them to pay us back early.
Q57. The Chairman: So there is one figure if they pay it back in year four, and another figure 695 if they pay it back in year five? It is more expensive in year five if they pay? The Minister: That is correct, yes.
Q58. The Chairman: So the more over three years they go, the more they pay?
700 The Minister: That is correct, yes.
The Chairman: It certainly paid off the Enterprise Loan, didn’t it?
Q59. Mr Butt: Just on that, I know it is early days and no decision has been made yet… But 705 has any decision been made in terms of what we do about that loan now it has been declared ultra vires? Not illegal, but ultra vires. Is there an opinion, as to what…?
The Minister: We will be going back to Tynwald as mandated in the July sitting with our 710 proposals for dealing with this. We are currently reviewing the situation and waiting further advice.
Q60. Mr Butt: So there is no benefit, really, in asking for the money back at the moment if they are paying off the loans and if they are paying their interest etc, we are actually benefiting 715 from that?
The Minister: Well, it is a performing loan. If you look at it this way: if the money was in the bank we would be getting a fraction of 1%.
720 Mr Butt: Yes, okay, thanks.
Q60. The Chairman: With the issue of the Ci65, and with what has happened with the Sefton loans – which I have my own views about – do you actually feel that your role as the financial gatekeeper for Government has been impacted at all? Or you are being undermined, or anything 725 like that, in your role as making sure that everything that goes through Government is perfectly legal and perfectly financially correct, and documented according to the way Departments have to do things?
The Minister: I will ask my technical expert, Malcolm, to deal with that. 730 Dr Couch: It is a challenge, but I suppose if I give you the components, and then feel free to ask more questions as we go through… This Government on behalf of our community spends over £900 million per year; so in terms of purchase invoices of supplies of goods or services, we are dealing with about 3,000 invoices a 735 week. So, a very active Government. That means that the Treasury, which is actually a small Department really, much of the financial management and the control environment is devolved. So within the main Departments, you have an accounting officer who in theory, answering directly to the Minister, is responsible for all that goes on in terms of their devolved responsibilities. Each of those 740 officers is required to have a finance officer who monitors the finances.
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It is an interesting word to use, ‘gatekeeper’, because I suppose ultimately much of what we do will be at the end of processes that Treasury will be asked to give concurrence to certain things, once a Department or a board or a body has decided that is the right thing for it to do. I think in terms of being a gatekeeper we have law, we have the directions that Treasury can issue 745 – which I suppose sometimes are in the form of guidance and sometimes they are in the form of ‘Thou shalt…’ commandments. We have tools such as our Central Accounting System where in theory we can monitor all that is going on. And then there are people: so there is my role, there is the role of my officers, there is internal audit which can go in and look at various things. 750 So, if you ask me whether… and it is a moot point, so forgive me. I am not commenting on Ci65 and Sefton; I am an officer doing certain things. But I do not believe that, even if they were construed to be mistakes of some kind, that necessarily is – and I think the phrase that had been passed to us ‘eroding the gatekeeper role’, damaging it, or necessarily making it appear to be ineffective. Because what I see, what the Minister sees in the Treasury board every week, is to 755 some extent an aspect of this enormously busy organisation that we see. As I said to another Committee, which I think some people may have potentially misinterpreted, the knowledge of the exact perfect way to do things across Government may vary, and I think that my team is there partly to watch that and try to be the gatekeeper, partly it is to educate, and partly it is to lay down new track if rules need to be changed. 760 That education is constant, because if you think about an organisation… I mean, the public sector roughly is what, 8,500 to 9,000 people, and as with any organisation there is a turnover of people each year and people changing roles, etc, and they come in. Part of Treasury role in terms of financial control is to try to ensure that when people come in they are aware of the rules, they are aware of the processes that they should follow, etc. And occasionally they will 765 slip. Do I ultimately at the end of the year through my role, or does the Minister through his role, still feel it is appropriate to stand up and say, ‘We know what is being spent on behalf of the public; we know what the reasons were; we are happy that the environment that that is discharged in is appropriate’. I think the answer is, ‘Yes in aggregate’, but there will always be 770 things going on. Sometimes they come to the floor of Tynwald for all the right reasons – it could be scrutiny, it could be for approval. But it is the standard thing that we try – sometimes we do it very well and sometimes we do not – to be the serene swan, but underneath the water there is frantic paddling going on all the time. 775 So, in other words, we are dealing with many things in the financial control environment constantly. And I think that our gatekeeper role is not being eroded, it is just that things happen and need to be dealt with occasionally.
Q61. The Chairman: I understand the role in a general day-to-day situation but I suppose 780 really what I am saying is: does your role get eroded, possibly against your will, because of political pressure to do certain things, ‘Let’s get it done quickly; we have got to do this…’? The Sefton was a very urgent thing, although it went on over a long time, going backwards and forwards between Treasury and DED; and I just wondered whether you sometimes feel uncomfortable that there is some political pressure there which you are not happy with about 785 what is going on?
The Minister: Well, how it is all wrapped up in reality, there are democratic decisions in this world, and parliament and Council of Ministers are no different. So we will work with democratic decisions. 790 Q62. The Chairman: But do you feel that sometimes those decisions are eroding your controls?
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The Minister: Well, there is a dichotomy here, because on one hand Treasury is being accused of being the heavy hand of Government; and on the other hand we are accused of not 795 being an effective gamekeeper. So, because we are being accused on both sides maybe we are right.
Q63. Mr Butt: I think the Chairman has hit the nub of it, really. It would seem almost that Treasury is arriving at the party a bit too late sometimes, and they are actually having to pick up 800 the pieces when things are going wrong somewhere else. That may be not true, but that is an impression that is given to us on our various committees. I wonder if you have got a comment on that?
The Minister: No, I think we all have different perceptions of what goes on in life. 805 Q64. Mr Butt: Okay, thank you. Can I just ask about FD8 waivers? (The Chairman: Yes.) A very specific question which came from the National Insurance debate we are having. When Treasury needs to actually use financial regulations to, say, maybe not going to a 810 tendering process, or whatever: who actually guards the guardian as far as the Treasury is concerned? If you need to have an FD8 waiver within Treasury, who monitors what your decision is and who is your overseer to say whether you are doing the right thing or not? At the moment you oversee other Departments and say, ‘Yes’ or ‘No’, over FD8 waivers and 815 other financial regulations; but, when it is within Treasury, who does that role?
Dr Couch: The decision in terms of granting an FD8 waiver is taken by the Treasury board, so it is the Minister and the Members assembled –
820 Q65. Mr Butt: I think the point I am making is that now that you have Social Security in with you, and maybe you need to commission some work and you need to have an FD8 waiver... Who is going to look after you and say you can or cannot do it?
Dr Couch: Well, again I would ensure that in those circumstances I think that the board would 825 rely upon me and my senior officers to screen things as they come through. So I think there would be multiple checks and balances –
Q66. Mr Butt: What do you mean by the board?
830 Dr Couch: Well, this is the Minister and the Members, forgive me. Although it could be seen that we are guardians of ourselves, I think that the checks and balances in there are sufficient. And it may be that the Social Security Division, which joined us in April, is dealing with certain types of things and may need to engage consultants or suppliers in certain circumstances, which may go through full procurement, may need to be given to a single contractor or supplier 835 through the FD8 waiver process, and we will go through that process. I do not think that Social Security joining Treasury gives me any more risk as CFO than having Income Tax, which is relatively autonomous, or Customs and Excise which is relatively autonomous – they are similar types of operation. All I need to make sure is that those officers that I have a direct managerial input to, know what is required of them. 840 Q67. Mr Butt: So you are saying in effect that your ultimate sanction is your Minister and your Members of the Department?
Dr Couch: Well, the ultimate sanction is, ‘Treasury says no’.
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845 I have, I suppose in terms of my staff, disciplinary sanctions etc, but also I could say that something that was being worked up was either not ready or it was not appropriate to go to Treasury. So I could block it before it went to Treasury. I think there are multiple checks and balances. As I was saying earlier to the Chair, I think that in terms of the overall environment of 850 Government and the boards and officers etc, we have got to constantly strive that everybody runs to the same template. And I think as I accepted, and I am sure that the comments from the Committee are, that occasionally that will be challenging for us.
Q68. The Chairman: Is there any document in place which says the Treasury board can 855 approve Treasury FD8 waivers?
The Minister: No, there is not, because basically we would not be given… An FD8 has to come from the Treasury in favour of another Department. So because we are the same Department what we would do is, as Malcolm said, it would come to Treasury and Treasury then would be 860 faced with the decision: are we content to let that transaction to go through on the basis presented? And it is exactly the same when we give an FD8 waiver, but it is done in a different format.
Q69. The Chairman: It is simply the fact that again, it is potentially the gamekeeper being the 865 poacher: it is the same Department. I wondered if there was just a piece of paper somewhere which said, ‘In the event that Treasury wants an FD8 waiver the Treasury board can approve it’ – because there is not much further up the line you can go.
Dr Couch: No, and there is not, because Treasury cannot give direction to itself, and FD8 is a 870 financial direction.
The Minister: As I say, we do in effect go through the same process.
Q70. The Chairman: Okay. 875 Social Security: has it caused any problems bringing it in? Data protection issues – ?
Dr Couch: No, I do not believe so; and in actual fact, Chair, I would go back to what I said just now which is that the Social Security Division is our primary provider of benefits, both national insurance related and revenue related, and its dealings with the members of the community 880 who need benefits are in high confidentiality. There is a law applying to the Division and its officers in terms of how they deal with the community with benefits, and it is different law but it is a very similar situation to the Income Tax Division dealing with people’s income tax affairs, and companies’ income tax affairs; or the Customs and Excise Division dealing with businesses’ VAT affairs. 885 So I do not think it has caused any new issues. There are no novel data protection issues, and it is simply because the work is circumscribed and has its own legal basis.
Q71. Mr Butt: Okay. The reform of benefits and the means testing ideas etc: they are not being done within your 890 own Department, are they? It seems to be the other Minister, Mr Robertshaw, is doing those reforms etc, so I wonder how that works because it is within your Division, within Treasury… How does that work? You have got two Ministers in effect.
The Minister: He is working with us in view of his intricate knowledge which he gained over 895 the last nearly three years in situ. So he has got the knowledge and I think it would be wrong really for us to ignore that knowledge, and keep that input.
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So I am still responsible for it, I am working with Mr Robertshaw – or Mr Robertshaw is working with me, whichever way you want to put it. But we, Treasury, had a presentation from Ci65 three weeks ago and that was very helpful and we expect a final report will be made to 900 Treasury shortly.
Dr Couch: Yes, and there are numerous aspects of this, all of them profoundly important to the future of this country. You mentioned, Mr Butt, means testing. One of the issues that I am sponsoring – a working 905 group and this involves officers from many Departments – is, can we get to a position in reasonably good time where the citizen, if there needs to be a means testing for any service, has a one-stop shop? So, can we unify? At the moment we have got various things that are means tested, ranging from support for students through to standard benefits that we are all aware of; and then the child benefit is 910 means tested now. Ideally you would want to have a single point of contact so that anybody that we know who lives on the Island who needs to have the means test goes to ‘the means testing unit’, or whatever, and that is done and it can be radiated out. In terms of the review of Social Security and National Insurance: again, incredibly important 915 and, again as we have said in another place, the capacity of Government to manage that sort of very senior policy issue was limited, which is why we knew there was a need to have external consultancy support with that. And although Treasury has both the National Insurance and the benefits side now, we will be using the skills and knowledge both at the political level and the officer level from different places. 920 Q72. The Chairman: Can we move on a bit now to some international stuff? When are we due the next inspection from an external body into our compliance with the international regulations?
925 The Minister: The first one we expect will be the next IMF, and we think that is unlikely to be before 2017. But maybe before that there will be the MoneyVal review and that could well take place in the first half of 2016. We will be analysed, compared, against the Financial Action Task Force recommendations. As time has moved on since their previous reviews the regulations have changed, so there 930 will be considerable work required to prepare ourselves for those reviews, and Malcolm is working on that now.
Dr Couch: Indeed the last big report was 2009 so they are expected to run every five, six, seven years, so that timetable is there. 935 I think our challenge in terms of preparing for the next one, as the Minister said, the FATF revised its recommendations – I think it was in February 2012 – and also said that when countries were to be assessed, the system would be different. So the previous ones where you had recommendations and they would say what sort of law you had in place, and they would check what sort of law you had in place, now the expectation is that when the visitations and 940 the reviews take place they will say, ‘Yes, we can see your law, how do you operate it in practice; what is the effect in your jurisdiction of how you are managing anti-money laundering, countering the financing of terrorism activities etc’? It is much more challenging. One aspect of that, for example, under the new recommendations, is that a country should have something called a ‘national risk assessment’. If you put that in very simple terms you 945 should know what the vulnerabilities are of your jurisdiction to money-laundering or terrorism funding coming in. You should know who might seek to exploit those vulnerabilities if you have them, and you should also know exactly how you are managing them.
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So, again that work will be starting before the end of this year, I think, on building up a national risk assessment, and that is all in preparation for the MoneyVal which is a European 950 Union… it is like a fellow body of the IMF who can do these sort of standards reviews. So, yes… if I do not sound too waffly, I will stop and be more concise. The work relating to these sort of reports is almost constant. The next major report we expect will be delivered in 2016-17; but the work is there in the background all the time.
955 Q73. The Chairman: There have been some comments about the efficacy of the Financial Crime Unit. Does that cause you concern with reference to these particular inspections?
Dr Couch: It has to do, Chair, because it is one of the key recommendations, that you have to 960 have a financial intelligence unit, is what the IMF and FATF say; and that should, through reporting by businesses and people in your jurisdiction, be aware of the risks. The Financial Intelligence Unit is part of the Financial Crime Unit, so at the moment we have a hybrid unit which looks at financial intelligence, which is reports coming in from the business community, and the investigation of potential crimes, and indeed their prosecution. I think there 965 are some challenges in terms of how that piece of our anti-risk apparatus is managed, how it works, what its performance is. So again, that is all under review. I am very close to the Chief Constable in terms of monitoring that, as is the Chief Secretary and others, and we will determine how to reconfigure that. I do not think the Committee should take comments that may have been made to say that there is a failure. I think it is rather that as 970 with so many things in life you need to ask yourself from time to time, ‘Is what we have…’ – which was configured let’s say 10 years ago – ‘now fit for purpose in the face of new circumstances’? I think with the FCU we are at that point which is partially triggered by preparing for the next review. So, is it fit for purpose now, and perhaps the view is developing that it is not, so the 975 question then is, ‘What do we need to change to make it absolutely ready’?
Q74. The Chairman: You are really saying that needs to be in a state of constant updating as well? (Dr Couch: Yes.) It may have just stood still?
980 Dr Couch: Yes, and at this point, because the risk assessment in a way will be, I suppose, trying to mimic the report or the review that will be done by the MoneyVal team. And I suppose if we do that really scrupulously there is… at least in theory, it may throw up issues that we have not been fully aware of before. So, again, there will be things that come and say, ‘Well, that does not look quite fit for 985 purpose’. So, again, on and on we do a rolling programme of keeping things up to date.
Q75. Mr Butt: We have passed a lot of legislation in here in the last three to four years – financial regulations and legislation – and we were told this is to keep us up to date with the expectations of these organisations. 990 So what you are saying in effect is that we have got the legislation in place, it is how we actually use it and monitor it, and develop it; that is what you are saying, isn’t it? We have got the legislation in place but we need to –?
Dr Couch: If I give you an analogy, Mr Butt, it is almost that maybe in the past they would go 995 and look and see what is in the shop window, and now they want to come and look in the store room.
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The Minister: There is some more legislation still to come through, the Designated Non- Financial Businesses and Professions Bill 2014, that will be shortly introduced into the branches. 1000 So that will help us with our compliance.
Q76. The Chairman: How much of a problem is it… ? I can think of one thing specifically, legitimate consideration, which the legal fraternity here are not happy with, with the last piece of legislation that I put through here. 1005 How much flexibility can you have with this? If they say, ‘We want to say that if we have taken money, and we have got legitimate consideration for it, therefore we are not guilty of laundering money’. And that is prevalent within the legal community, because there was tremendous pressure for us to withdraw it, as you are probably aware. How do you handle that? 1010 Dr Couch: I think with Anti-Money Laundering/countering the Financing of Terrorism work, there are some things which most of us would look at and say, ‘That is absolute; it is very clear what is required’. And to an extent, for example as I said just now, you must have a financial intelligence unit, you must have facilities in place that businesses can report to you suspicious 1015 transactions, so that is absolutely clear. There is probably a fairly limited area where the recommendations are less clear-cut and therefore a jurisdiction will need to interpret them and put something in place that is appropriate to that jurisdiction. And, yes, I think sometimes the interpretation of the Treasury or the Home Affairs Department, or the Financial Supervision Commission, or the IPA, or 1020 whichever, will be one way, and parts of the business community will be another way. I do not think that will ever change; it comes back to what I was saying, this rolling, keeping things fit for purpose. But I think there is sometimes some leeway. I suppose I was going to say that no business likes to have more burden put on them, they do not want to have significant changes, and if we think about the constant pressure in terms of 1025 money-laundering, stopping that, the new burdens that will come on them from Automatic Exchange of Tax Information, the US FATCA and the equivalents in Europe etc. We have to be, as policymakers and as sponsors of law, very sensitive to that because I think the weight on some types of businesses, especially those that maybe only have a small number of principals, is becoming very heavy indeed. 1030 Q77. Mr Butt: You just mentioned FATCA, Mr Couch: when is that coming into operation? When will that have a practical effect on our businesses here? Is there a date for that yet?
Dr Couch: I think it starts next week. The actual clicking into place of it being real, is next 1035 week, and then businesses will need to do the preparatory work. I think the first major exchange of information with the USA will be next year; the first major exchange of information with the UK will be the year after. So, yes, it is all happening now.
1040 Q78. Mr Butt: And that is one of the things that could affect a small business quite heavily, couldn’t it, in terms of the resources for that?
Dr Couch: Yes.
1045 The Minister: I think, though, it should be recognised that if they did not have some arrangement in place, say, for example, if we had not adopted the stance that we did, which was Government to Government reporting, it would have meant that any business which wanted to, in effect, have access to the US market or to US dollars, would have to register themselves.
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So it depends where your business is based really. For those who do not have an exposure to 1050 that market then there should be minimal problems.
Q79. Mr Butt: The other point we wanted to raise is the beneficial ownership, the register of beneficial owners. My understanding is that in the Isle of Man we perhaps do not need that because we can find 1055 beneficial owners fairly simply; but the UK was sort of insisting, I believe, that we should have one. The Americans obviously want one as well. What is happening over that? Are we holding out on that one?
The Minister: We are just about to go to consultation on that. The UK is not insisting, they 1060 have advised us that it should be something that we should consider, and our stance is similar to the other CDs and the OTs – certainly Jersey have consulted now, Guernsey is just about to go, I think. So what we are, hopefully, demonstrating is that our system which requires company managers to keep up-to-date records of who are the beneficial owners of the company and the 1065 structures behind them, so that if there is the request from a competent authority in another jurisdiction to get this information, we can go straight to the company and get the information knowing full well that it is up-to-date. The difficulty with a central registry is that, by implication, it could well be out of date. So what we are saying is that our system works: it has been tried, it has been tested, we have never 1070 failed in a timely manner to respond to a request for the information.
Dr Couch: And I think for the information of the Committee, our system is fully in compliance with the FATF recommendations, so that the variant that we have of obliging businesses to maintain this information, and if the Regulator seeks that it must be delivered, that is perfectly 1075 in accordance with what the FATF says. In terms of the UK, hot off the press, this week they have published their draft Bill which will seek to set up their new structure, and I am still studying it – as a number of other officers in Government are – but it seems to be even less than they had said publicly last year that they were intending to do. My first reading of it, it looks remarkably similar to the Isle of Man system. 1080 We can bring more at a later date, but that is the way it looks at the moment, so it does not even seem to be a public register: it is an obligation on businesses to maintain the beneficial ownership of significant owners or significant shareholders on their premises that could be inspected by others if needs be.
1085 Mr Butt: It is important to record, to put it on record, that we are compliant, I think that is –
The Minister: Yes we are, and we also need to recognise too that the Isle of Man, for over a decade, has had a requirement that Corporate Service Providers and other financial institutions have to be regulated. That is not what we are seeing in other jurisdictions, so our standards that 1090 are already high – and, as I said before, they have been tested and they do work.
Q80. The Chairman: Can I just confirm that in a week’s time when FATCA starts, it is a two- way transfer, (Dr Couch and The Minister: Yes.) so they will just send you a set of data which you will just accept in and put it in whatever format you want, and use it then? 1095 Dr Couch: Yes.
The Minister: Yes, it is… sorry to interrupt –
1100 The Chairman: It is Delaware; I always think about Delaware. We can never get… !
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The Minister: It works, too, through the multiple convention and assistance in tax matters as well. We are part of the early adopters group and that is going to be – I think it is 30 or 40 in the early adopters group – that is going to be shortly extended to 60 countries and, instead of having individual tax exchange agreements, anybody who signs into the overarching agreement 1105 will in effect provide for the free flow of information. So that is going to widen it as well.
Dr Couch: How many ‘Manxies’ have significant investments in Delaware, I do not know.
The Minister: We will find out… 1110 Q81. The Chairman: That is the problem: no-one knows! Just one very local issue, is that… I go to two Department meetings and at both of those Department meetings recently we have had complaints that they have not been able to have access to Axapta. 1115 Trying to keep the budget at Health, manually, is proving to be a little bit difficult. I just wondered when the budgets are likely to be loaded up and all the consolidations done, and all that sort of stuff?
Dr Couch: It is almost complete now, Chairman. I think there have certainly been some 1120 challenges in terms of configuring the Central Accounting System for the reorganisation of Government; significant parts of budgetary code blocks have had to move – so, what was DCCL no longer exists, that has moved out, etc. I think you are right, that departmental finance officers could have done some longhand work through spreadsheets etc, to get to the same position that they used to be able to do very 1125 quickly. Treasury apologises for that; however, I think we are almost there now so things will start to sort themselves out now.
The Chairman: I am sure most of the finance officers will be very happy to hear that. 1130 The Minister: Yes, it has not been an easy process because we could not really start the detailed planning, as it were, until Tynwald had agreed to the reorganisation – and that only went through, I think, in January, so we did not have much time. In addition to that, on top of the reorganisation there has been the centralisation of various functions as well. 1135 So the underlying codes for the individual functions in the various Departments have had to move as well. So it has given us some issues, identifying which cost codes should move. But, as Malcolm said, it is settling down now – but hands in the air, we do apologise.
Q82. The Chairman: Just two more questions, if I may? 1140 When we had the presentation on the change of the methodology for the tax cap, at that time it was being stated that there was approximately 70 people who were taking advantage of it. I just wonder how many of them are taking advantage of the new one, where you have to commit for five years? 1145 The Minister: I have had an update on it. I did speak to the Assessor earlier this week, and bearing in mind that the general trend of people is to leave it until two minutes to midnight and then act – bearing in mind that they can make the decision up to and including the 30th – we have 40 signed up so far. I think that is a 1150 good take-up because in effect what they are committing to is £120,000 for five years – in fact I have had a request, or the Assessor had a request, to see whether we could extend that period.
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Q82. The Chairman: I was interested in seeing how many people were deferring income to take advantage of it in subsequent years, and what you are saying is that it does not appear to 1155 be that great a number?
The Minister: As I say, we have to recognise that some high net worth individuals’ income, as it were, as opposed to capital, the income tends to be volatile, so in fairness to them they need more time to look further along the horizon before they will make a commitment to a five-year 1160 period.
Q83. The Chairman: That is fine. And my final question really, is: you brought in the taxation for retailers who are more than £500,000. I just wonder how much income that has generated? 1165 Dr Couch: Well, that was introduced last year, and it was on an accounting period basis so it would not start to be paid until 12 months after the end of an accounting period that was covered. So I think, this financial year is the first time we will start to see the flow so, if you forgive me, 1170 I do not think we have the figure yet. The expectations, as the Minister announced last year, we have not seen anything to indicate that those figures would not be realised.
The Chairman: That is fine; that is it from me.
1175 Q84. Mr Anderson: Just on that, can I ask: would that mean a reduction in the income coming in from the UK to correspond with that?
Dr Couch: No.
1180 Q85. Mr Anderson: There would not? So we would not be losing something from another source that would have been –
Dr Couch: No, the system was that if you had zero here and whatever the corporate rate was in the UK, then all of the profits from the Isle of Man remitted to the UK were taxed at the UK’s 1185 rates. Now that we are taking some tax from those retailers, especially the UK-parented ones, we will take our piece and then it is discounted from what they pay in the UK. So for the company at consolidated level there is no change, but we are sharing the revenue between the two.
1190 The Minister: So at least we do get a contribution to recognise the cost to the infrastructure.
Q86. Mr Butt: Just one general question, if I may, about business confidence in the Isle of Man. We now have a Department of Economic Development which has no leader, in effect. I 1195 wonder, with your contacts with the business community, what they think about the situation of a ‘rudderless’ Department; and how soon will a Minister be appointed, do you think, to change that? Has it affected business confidence, do you think?
1200 The Minister: No. I did some canvassing last week, as the Committee would probably expect, and the confidence has not been affected. It is still there – like everything else it depends who is appointed to the role. But certainly I have got no knowledge of when the replacement appointment is likely to be made. That is the gift of the Chief Minister, not the Treasury Minister.
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1205 Q87. Mr Butt: So it is not you then, Mr Teare?
The Minister: No…
Mr Anderson: Not that you are aware… 1210 Dr Couch: Not yet!
The Minister: That might not accord with your view, Mr Butt, but the fact is, no!
1215 Q88. Mr Butt: So there are no moves that we know to replace the Minister, as such, at the moment?
The Minister: Well, the Chief Minister is not on the Island today, he will be back on Monday.
1220 Q89. Mr Butt: I realise it is not for you to say, but you think business confidence has not been affected adversely by this?
The Minister: No, I do not, because we are a team, it is not a one-man band here: you have got the Chief Minister, myself, Minister Robertshaw and the other Ministers as well. We work 1225 together as a team, it is a collegiate approach, and even tonight I am out in the business community attending a dinner. I did make it clear to Economic Development that if there were any gaps in the diary which need to be covered by a Minister from a PR point of view – because I cannot act as a Minister in another Department – but if they wanted a Minister to go out and do a presentation, or 1230 whatever, on behalf of Government, then as long as my diary was clear I would certainly do it. As I say, we do work together as a group.
Mr Butt: Okay, thank you.
1235 Q90. The Chairman: Is there anything you want to ask us, or say to us, or anything?
The Minister: No, just to say thank you.
The Chairman: Well, thank you very much for attending. 1240 It has been very useful, with Mr Christian as well, and yourselves, it certainly gives some more information and thank you very much for attending. I now declare the meeting closed.
The Committee adjourned at 4.00 p.m.
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