Security Interests (Jersey) Law 2012: Share Transfer Property: Registration Fees

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A decision made 2 August 2013:

Decision Reference: MD-C-2013-0088

Decision Summary Title :

Share transfer property – Registration fees on the Security Interests Register

Date of Decision Summary:

30 July 2013

Decision Summary Author:

Officer,

Finance Industry Development

Decision Summary:

Public or Exempt?

(State clauses from Code of Practice booklet)

Public

Type of Report:

Oral or Written?

Written

Person Giving

Oral Report:

Written Report

Title :

Written Report to Share transfer property – Registration fees on the Security Interests Register

Date of Written Report:

30 July 2013

Written Report Author:

Officer,

Finance Industry Development

Written Report :

Public or Exempt?

(State clauses from Code of Practice booklet)

Public

Subject:

Share transfer property – Registration fees on the Security Interests Register (“SIR”)

Decision(s):

The Minister decided to support the proposed policy position put forward by the Jersey Financial Services Commission (“JFSC”) that security interests taken over share transfer properties purchased by first time buyers should not be charged a fee for registration on the SIR.

Reason(s) for Decision:

A priority for the Government is enabling first time buyers to purchase property. Under the new Security Interests (Jersey) Law 2012 (“the Law”) share transfer properties will be covered when lending is granted on those properties.

Under the Law, in order to achieve the best possible security, lenders will seek to register lending on the SIR. The JFSC propose to set the fee for registrations of 20 years or longer at a flat fee of £150. It is understood that in the majority of cases that fee will be passed on to the borrower.

It is not desirable, or within current Government policy, for a further fee of £150 to be, in reality, charged to a first time buyer of a share transfer property. It is also the case that the Government have stated that the SIR must cover its own running and on-going maintenance costs and provide for repayment of a Government grant for its construction through fees generated.

It is therefore proposed that the Chief Minister supports the policy position put forward by the JFSC that Security Interests taken over collateral that consists of shares representing a property purchased under the reduced first time buyer Land Transaction Tax scheme (pursuant to Article 5 of the Taxation (Land Transactions) (Jersey) Law 2009) should not be required to pay a registration fee on the SIR.

Resource Implications:

There are no direct resource implications for the States of Jersey as a result of this decision. The JFSC will potentially lose in the region of £15,000 per annum in fees from the SIR by excluding first time buyers of share transfer property from payment of a registration fee.

Action required:

That the JFSC are notified that the Minister has made a Ministerial Decision supporting the proposed policy position.

Signature:

Senator I. J. Gorst

Position:

Chief Minister

Date Signed:

2 August 2013

Date of Decision (If different from Date Signed):

Security Interests (Jersey) Law 2012: Share Transfer Property: Registration Fees

FINANCE INDUSTRY DEVELOPMENT

Chief Minister’s Department

5TH Floor, Cyril Le Marquand House, The Parade

St Helier, Jersey, JE4 8UL

Tel: +44 (0)1534 440449

CHIEF MINISTER

Written Report to the Ministerial Decision on Fees for Share Transfer Properties on the Security Interests Register (“SIR”)

This report relates to the fees for the Security Interests Register (“SIR”) which has recently been consulted on by the Jersey Financial Services Commission (“JFSC”) in Consultation Paper No.3 2013.

The Fees for the Register are the responsibility of the JFSC and are determined under Article 90 of the Security Interests (Jersey) Law 2012 (“the Law”). Further, they must be published in accordance with Article 15 (5) of the Financial Services Commission (Jersey) Law 1998.

The JFSC are seeking support from the Government as to the fee structure for registration on the SIR. The JFSC are hosting the SIR on behalf of Government and therefore they wish for the Government to have an active input in the fee structure.

Similarly the Government have advised the JFSC that the SIR should be self-sustaining in its funding and also, over time, cover repayment of the Government grant used for the development of the Law and the Register.

Policy Decision to be made

Through the process of deciding on the proposed fees for the SIR, the issue of share transfer properties has arisen. Share transfer properties are intangible movable property, and therefore within the boundaries of the Law. They are on almost all occasion’s flats. The legal structure of ownership is that shares are transferred in a limited company carrying with them the rights to exclusive occupation of a certain flat in a building. This can be contrasted with the other form of property ownership for flats introduced by virtue of the Loi (1991) sur la co-propriete des immeubles batis. These properties are more commonly known as ‘flying freehold’ properties which is an alternative legal method of owning flats but one that creates an immovable property right. As these properties create an immovable property right, they are not caught by the Security Interests Law and therefore not subject to registration.

However, as outlined above, share transfer properties are intangible movable property and therefore caught by the provisions of the Law. In respect of share transfer properties, lenders will be advised to register a security interest on the SIR when lending against the share transfer property. The lenders will, in almost all cases, pass the cost of registration on the SIR on to the borrower.

A policy issue has arisen which requires a Ministerial Decision to be made supporting the proposed policy position put forward by the JFSC, that security interests taken over share transfer properties purchased by first time buyers should not be charged a fee for registration on the SIR.

Rationale for policy decision

The department are conscious that this issue could span across a number of different areas of Government policy. Share Transfer properties are commonly bought by first time buyers and assisting first time buyers to purchase property is currently a significant part of Government policy.

It is also the case that the new Security Interests Law and Register must pay for its own development and running costs and, over time, recover the grant money expended on its development by Government. The Economic Development Minister stated this to the States Assembly when P88/2011 - Security Interests (Jersey) Law 201- was first adopted by the States Assembly in 2011.

The Statistics Unit have provided the following information on share transfer property sales in Jersey in 2012 and 2011.

2012: 336 share transfer properties sold, approx. 100 to first time buyers

2011: 330 share transfer properties sold, approx. 100 to first time buyers

It has been established that lending on share transfer properties will most likely be for in excess of 20 years on the average mortgage period.

The current proposal for fees under the SIR has been slightly modified by the JFSC following consultation with industry and Government. Under revised proposals those requiring a registration period in excess of 20 years would be charged a £150 flat fee. Registration for periods of less than 20 years will be charged at a fee of £8 per annum payable on registration. Therefore, if a registration fee was going to be charged for lending on share transfer properties, in reality, there would be an additional cost for those purchasing share transfer properties of £150.

For the avoidance of doubt, it is proposed that all security interests over share transfer properties should be registered. The policy issue is only whether to exempt first time buyers from being charged a registration fee.

A second important point is that should the recommendation in this report be followed, there will, in effect, be an extra cost for borrowing over non-first time buyer share transfer properties of £150. This will cause the costs to differentiate from those bought by flying freehold with no comparable charge for those properties. We are conscious of this issue from conversations with the Taxes office who have informed us that achieving parity between share transfer and flying freehold property in purchasing costs was of key importance when Land Transaction Tax was introduced.

However, it should equally be noted that share transfer properties are a very different legal structure to flying freehold properties. They already pay different charges such as annual return fees and are subject to a very different legal regime under the Companies Jersey) Law 1991 to that operating under the law relating to flying freeholds. Therefore, in reality, this parity may already be somewhat diminished.

Finally, it is of note that on the information we have available, most newly constructed flats will be sold as flying freeholds and going forwards this will represent the majority of flat transactions. Therefore the effect of this disparity is relatively small and decreasing as the market for share transfer properties is reducing in size.

SIR: Income vs Cost

We have been able to estimate a projected income through the number of commercial registrations which are likely to be made on the Register. This does not include any estimated income from the registration of share transfer properties.

It should be stated, however, that this estimate is difficult to rely on due to a majority and a minority view in industry on the average length of most registrations. As income will vary with length of registration, it is difficult to provide an accurate estimate.

On the majority view in industry, the income will be in the region of £220,000 per annum. On the minority view it is estimated to be £112,000 per annum.

The current costing of the Register to operate, including funds for future re-development and repayment of Government grant and law development cost over a period of 10 years is estimated at £210,000 per annum.

It is evident therefore that the income vs. cost of the SIR is very finely balanced and exclusion of any further fee needs to be carefully considered.

SIR: Income lost from exemption of first time buyer share transfer

On the figures available, the SIR would potentially loose approximately £15,000 per annum from the 100 first time buyer share transfer properties which would otherwise have been registered.

SIR: Income lost if all share transfer exempt from fees

The potential loss to the register if all share transfer properties were excluded from paying a fee would be approximately £50,400 per annum.

Given that on the current information available the JFSC cannot be sure the SIR will cover the required costs, it would not be sensible to exclude this amount of potential income.

SIR: Other considerations over charging the fee

A group of banking lawyers who represent commercial deals performed in the international finance arena have written to Jersey Finance Limited stating that the proposed fee of £8 per annum is too high and could potentially make us uncompetitive when compared with other jurisdictions. The example they give is that in the UK – the filing of a charge at Companies House is as little as £10 and lasts forever.

Currently, the Jersey Bankers Association has represented the view that this fee is not too high and that it would not cause business to move from the island. Moreover, it is not possible to compare the SIR in Jersey with Companies House in the UK as they are incomparable in nature.

Government and the JFSC would wish to review the fee structure after one or two years to reduce fees if it transpires that the SIR is making a profit. The inclusion of the registration fees for share transfer properties would clearly potentially allow for a greater possibility of that fee structure to be reduced. This may assist in dealing with the concerns raised by the banking lawyers over time although on the current figures available, we do not feel able to recommend that the annual fee is currently reduced below £8 per annum in order to make sure the SIR covers on-going costs.

Conclusion & Recommendation

In conclusion, it is recommended that, in order to keep the annual costs as low as possible for all parties using the SIR, parties with security interests over share transfer property should be required to pay for the registration service with one exception. That exception is the exclusion of first time buyers of share transfer property who the States of Jersey would wish to ensure are not deterred from purchasing property.

The proposal in order to achieve this exemption would be linking those eligible not to pay a fee for registration on the SIR to those eligible to pay a reduced rate of Land Transaction Tax (“LTT”) under Article 5 of the Schedule to the Taxation (Land Transaction) (Jersey) Law 2009. Should the States Assembly choose at a later point in time to review the position on reduced LTT, the position on SIR Registration fees can be adapted accordingly.

It is therefore recommended that the Chief Minister support the proposed policy position put forward by the JFSC, that security interests taken over share transfer properties purchased by first time buyers should not be charged a fee for registration on the SIR.

Officer,

Finance Industry Development

31 July 2013