Phil O'Shea, the association's president, said 'more effective finance sector co-ordination' and 'creative thinking' was needed. He said all elements of the Island's finance sector — including corporate and trust service providers, the life sector, the fiduciary sector, captive insurance — should be used to leverage opportunities.

He said that to date the various finance sector representative bodies had been 'siloed' in their approach.

Mr O'Shea also believes that the finance sector should be working closely with Treasury prioritise relevant proposals contained in the government's economic strategy.

He said because the EU savings directive is due to only take effect in July there was a danger of complacency taking hold in some circles. However, he stressed the government was doing everything in its power (to negate the impact of the directive]. Last month it appointed three international experts to advise Treasury on global taxation issues and market opportunities.

Mr O'Shea said: 'We believe there are a number of significant issues that the Island has got to contend with if it is going to continue to be a viable and successful jurisdiction in five to 10 years time. Some of those issues have yet to manifest themselves.

'The association's view remains that when banks in this jurisdiction and elsewhere start to communicate with their clients ... (the directive] will have a meaningful impact on our deposit base and the ability of banks to retain clients.'

The EU directive, which is aimed at curbing tax evasion in the EU, will affect individuals who reside in an EU-member state and who hold savings accounts in another state. Under the directive, they must either pay an automatic withholding tax on their bank or building society interest or agree to allow information about their accounts to be sent to their national tax authorities.

Together with other non-EU member territories, notably the Channel Islands and Switzerland, the Isle of Man has agreed to apply the directive to customers of its financial institutions.

However, the IoM and the Channel Islands aim to exclude from the directive people who are tax resident outside the EU, even if they are EU nationals. For example, a UK citizen who is tax resident in Hong Kong will escape. But UK citizens resident in Malta, Greece, Spain, Italy or France will be caught in the net. Funds held in trusts are a grey area and as the directive stands at present, money held in a life assurance bond does not have to be declared or be liable for withholding tax.

Mr O'Shea said it was difficult to calculate how much was likely to be wiped off the Island's deposit base.

'Based on the input we have had from our members we think it will be significant.'

He said the impact would vary depending on the type of bank. Savings institutions, particularly current or former building societies are likely to be hardest hit. 'Similarly the clearing banks have got a lot of retail, individual client business — quite a bit of which is in Europe. The clearing banks will probably be less impacted because they have had the opportunity to develop business in America etc.'

Private and trust banks are likely to be least affected.

Mr O'Shea said the association was not expecting significant job losses. 'The analysis that we've done says the volume of jobs that would be impacted directly by the directive is probably quite limited.

'But certainly our anticipation is that we will see a reduction in deposits and of course that may well have an impact through to tax take. One of the points that we've been seeking to highlight to government is that as we move towards zero taxation strategy they are reliant upon the banking sector particularly to support what might be described as the transitional arrangement.'

Last week Treasury reported that the Island's deposit base rose by 4 per cent in the third quarter of 2004 to top the £30 billion mark for the first time.

Mr O'Shea said that increasing market access to the finance sector would help dilute the negative repercussions of the savings directive. Because the Isle of Man is outside the EU it is more difficult for Island-based financial institutions to market investments in EU member states.

Mr O'Shea said: 'This year we've seen the EU grow from 15 countries to 25 countries. Some of those accession countries were jurisdictions that at an Island level we had been quite keen to go out and develop business links with. I remember a couple of years ago sitting at a business breakfast with a delegation from Poland and really trying to develop that capability. Now Poland is in (the EU].'

Mr O'Shea said the Manx government was aware of the benefits of the Island's finance sector gaining greater access to EU markets.

'The majority of issues that the association is raising are courted within the published economic strategy, so I'm not contending that government is not aware or turning a blind eye ... there is now traction within government, a desire to drive what you might describe as a public and private-based solution towards this.

'But market access is a tricky issue. What we need to do is be clear on what the hurdles are and whether there are any practical ways as a jurisdiction we might be able to overcome the passport issue into Europe.

'If banks on their own right are not going to be able to achieve passporting there might be other parts of our finance sector that can create that capability. And then the banks and others could work on the back of that. We need to think much more broadly across the finance sector. We need to leverage much more effectively the finance sector.

'Our view, certainly in the short term, is that banking needs to be there supporting a number of the other players who can actually go out and front-face the finance sector.'

Mr O'Shea said Isle of Man Finance, Treasury's marketing arm, might be the best vehicle to establish 'a pan-finance sector agenda'.

Around two years ago the Association of Licensed Banks brokered an informal committee called the Finance Industry Forum that brought together representatives finance sector bodies. However, it never really took root.

'It may be that each sector needed to validate what their issues were and to be able to come back to a table with a more defined strategy. My feeling is that a lot of those sectors have now done that. Certainly as a banking association ... we believe we better understand the issues that are facing our industry, and I think we've got better buy-in by our members and therefore will be much more able to take part in a cross-finance sector forum.'

He said the finance sector should collectively be working closely with Treasury to prioritise relevant proposals contained in the government's economic strategy.

'In our view we need to have understood and achieved progress and hopefully resolution of some of those proposals within 12 months.

'Some of the issues are more structural and will take longer. For example, you're not going to crack the key issues around training and development within 12 months. That probably has got a five-year time life. But what you probably do need to do within 12 months is agree how you are going to tackle that issue.'