There are currently about 54 banks operating on the Isle of Man. Although this number has slightly decreased in the past 5 years, the quality and size of banking operations have significantly improved. Notable banks such as the Royal Bank of Scotland International, the Royal Bank of Canada, Coutts (Northern European HQ), and Merrill Lynch have recently established their presence on the island. NatWest has also moved its offshore business to the Isle of Man.

Several international banks with branches on the island offer global payment-processing solutions. Additionally, Manx Telecom provides a secure e-payment platform based on the island, allowing Island businesses to engage in multi-currency and Sterling-based transactions, expanding their product reach globally.

Initially, Manx Internet banking faced some challenges but in recent years, most well-known Manx banks have started offering Internet banking facilities.

Deposits in the year ending March 31, 2007, increased by GBP6.56 billion (16.65%) to reach GBP45.95 billion, as reported by the Financial Supervision Commission. By the end of March 2005, over 20 banks had capital ratios exceeding 20%. (The capital adequacy of Isle of Man incorporated banks is measured based on risk-weighted factors in line with the Basel Capital Accord.)

The banking industry on the island is primarily dominated by subsidiaries or branches of major UK clearing banks and some foreign banks. Most banks in the Isle of Man focus on providing private banking services to UK expatriates and foreign nationals. These services often extend beyond deposit-taking to include establishing and managing trusts, as well as overseeing the companies and assets held by those trusts, including investment management. With the growth of other sectors in the Island’s finance industry, such as captive insurance, life assurance, collective investment schemes, investment management, and ship management, these organizations have substantial funds to invest and therefore require investment management services. Some banks also act as trustees for collective investment schemes.

Banks in the Isle of Man operate under either a full or restricted banking license. The Financial Supervision Commission regulates the banking and investment industry through the powers granted by the Financial Supervision Act 1988 and the Investment Business Act 1991. To obtain a domestic license, a bank must have a physical presence on the island. On the other hand, an Offshore Banking License allows banking activities to be conducted from outside the island through a locally-incorporated bank on a managed basis.

The Financial Supervision Commission implements a system of supervision based on quarterly or half-yearly financial reports. Additionally, banks are required to submit annual audited accounts that are reviewed by qualified accountants with professional indemnity insurance of at least £10 million.

For tax purposes, a “managed bank” according to the Banking Act 1975 refers to a bank that operates on the island without local premises or staff but is operated by an approved local bank. Since July 12, 1989, the Treasury has the authority to exempt, for a specified period, all or part of the profits or income of a “managed bank” from income tax. When such exemption exists, the Assessor cannot demand income tax deduction from payments made to non-residents or pursue income tax liability of non-residents on such payments.

An application for exemption must be submitted to the Financial Supervision Commission. Exemption is granted only if the Treasury is satisfied that the bank:

• Does not engage, directly or indirectly, in any banking activities with any Isle of Man resident other than a bank
• Has been granted a license under the Banking Act 1975
• Is managed by the holder of such a license

Fees for exemption applications can be determined by the Financial Supervision Commission through an order. Banks granted exemption must produce necessary accounts and documents if required.

Unlicensed banking operations, known as ‘brass plate’ companies, remain a problem and are investigated by the Enforcement Division of the Financial Supervision Commission when reported.

The Banking Act (as amended) recognizes the contractual duty of a banker to maintain customer affairs confidential and the customers’ entitlement to confidentiality. There are only a few limited exceptions to these principles, outlined in the Financial Supervision Act 1988. These exceptions include cases where disclosure is necessary to assist criminal proceedings or to enable the FSC to fulfill its statutory functions.

All banking license holders are obligated to participate in the Depositors Compensation Scheme, which is managed by the Financial Supervision Commission. The scheme protects deposits up to 75% of the first £20,000 per depositor, including the equivalent value in foreign currency deposits. The scheme does not cover secured deposits or deposits with an original term to maturity exceeding five years.

The scheme was successfully implemented following the default of BCCI, which had a branch in the Isle of Man.

In July 2001, the government announced the establishment of a financial ombudsman, making the Isle of Man the first Crown Dependency to have such a system. This enables customers worldwide to access an independent dispute-resolution scheme that covers financial institutions based in the Isle of Man. The ‘Financial Services Ombudsman Scheme’ handles complaints related to financial advice and products across various personal finance areas, including banking, credit, insurance, and investments. The scheme is open to individuals with financial complaints against an Isle of Man firm that the firm has been unable to resolve.

In June 2005, the Financial Supervision Commission initiated a project to update the Banking (General Practice) Regulatory Code 1999. The project aimed to align the code with current requirements and incorporate recommendations from the International Monetary Fund (IMF) following their inspection visit in 2002.

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

In February 2006, the Commission published its approach to Basel II adoption.

The Commission states: ‘The EU issued the Capital Requirements Directive (CRD), which requires all regulators of member states to implement it. Although adoption was encouraged from January 1, 2007, the CRD includes a provision that banks committed to the standardised approach by January 1, 2008, can continue reporting under Basel I during 2007.

‘The Isle of Man is not part of the EU and has no legal obligation to require locally incorporated banks to report under Basel II from January 1, 2007, or January 1, 2008.’

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

The Commission will require locally incorporated banks to report under Basel II, using the standardized approaches, from January 1, 2008, with some flexibility on a case-by-case basis for later adoption.

Basel II implementation will necessitate minor changes to the Banking (General Practice) Regulatory Code 2005, as amended. These changes will primarily focus on capital, risk management, and reporting forms (specified in the schedule to the Code). Additionally, the Commission anticipates using guidance notes to supplement the Code and ensure compliance with Basel II principles outlined in Pillar 1 and Pillar 2.