A former top civil servant in the British Foreign Office said yesterday it may be time to “explore” the issue of independence for some Overseas Territories, especially in the Caribbean, as he revealed that a governor or two had broached the topic with him “in private”.

Lord McDonald of Salford, giving evidence at a hearing of the Constitution Committee of the House of Lords, described the OTs, historically, as the “scraps of empire” and said some “posed a jeopardy” to Britain’s reputation in the area of financial regulation.

Lord McDonald said many of the territories were now financially independent from Britain “but the way they have done that gives me pause”.

He said: “Financial services are very, very important to many of the territories, and the way they're run in the territories seems to be not particularly transparent. And there I think we should get hot and heavy, because it is the UK's reputation on the line if things go wrong in the Virgin Islands or Cayman or Bermuda.”

He was asked by committee chairman Lord Strathclyde what value the territories brought to Britain and whether there was a need to “redo” the 2012 White Paper on the OTs.

Lord McDonald, who was permanent undersecretary for Foreign and Commonwealth Affairs and head of the diplomatic service between 2015 and 2020, replied: “I think we could look again fundamentally at the relationships.

“It’s now more than half a century since this model was launched … I’ve already said that we decided then that independence was not a viable option but, in the 21st century, it may be this should be revisited.

“One or two governors have had that conversation with me in private. Given the reputational risk and the determination to do it the local way, well, let’s explore taking that to the max, ie, independence.

“I think it’s a long time since we’ve really looked at that. I think it would particularly apply to the Caribbean because there are lots of small countries in the Caribbean [and] they wouldn’t stand out if they were to tread their own path.”

The cross-bench peer added: “The relationship with the United States would be very important in those circumstances.”

Lord McDonald was giving evidence alongside Sir Philip Barton, who was permanent undersecretary at the Foreign, Commonwealth & Development Office between 2020 and 2025, with the latter sounding a note of caution about exploring independence.

Sir Philip said Britain would need to be “confident there's a possibility of moving to a fundamentally different approach to these territories for it to be worth embarking … on that exercise”.

He said he was not convinced there was a better model than the present one for the OTs.

Sir Philip also noted that two territories were the subject of sovereignty claims — a reference to the Falkland Islands and Gibraltar — and airing a discussion about Britain’s relationship with the OTs “may end up giving the wrong kinds of signals to those who have ambitions”.

He said: “It's just worth thinking through some of the signals that would be sent around the UK's commitment to the territories if there was a fundamental review of their status.”

Earlier during the hour-long session, there was a question about the risk of embarrassment to Britain from the territories with regard to financial regulation.

“How near to a really good outcome are we on that or is there still work to do?” asked committee member Lord Waldegrave.

Sir Philip said it was a “work in progress” but noted that Gibraltar had “cleaned up their act” and was the first territory to have a publicly accessible beneficial ownership register.

He said progress was “too slow” by some territories with regard to those registers but questioned the benefits of alternatives to “persuasion and capacity-building and helping” such as more “extreme measures” like legislation.

He said: “My own view is that, in the end, it is much better to work with and through the territories and their political leaders to achieve the outcomes than to enact from the UK and have a crisis around that.”

Lord McDonald said he “disagreed a little bit”.

The former diplomat added: “I think we can and should be tougher.

“I acknowledge that all these small territories are trying to make their way in the world and that financial services has, over generations, appealed to them.

“I acknowledge that Gibraltar has completely cleaned up its act. But others … the Virgin Islands, Cayman, Turks & Caicos — they are a vulnerability to the United Kingdom and they, in the end, need us more than we need them.

“ … given the jeopardy to our reputation, we need to get a bit clearer about what we require.”

Asked if he believed the British Government was taking that seriously, he replied: “No, I don’t. I think the tail wags the dog too often.”

Lord McDonald placed Bermuda third, after the Falklands and Gibraltar, in terms of “good access” to Whitehall, adding: “I think the financial sector is probably a key to that.”

The Lords Constitution Committee is reviewing a joint 2023 declaration between Whitehall and the 14 OTs, including Bermuda.

Representatives from Anguilla, the British Virgin Islands and Montserrat are due to give evidence at a hearing today.

Yesterday, Lord McDonald told the committee the OTs got much more attention now from the British Government than previously but it was still “rather patchy” and “still feels to me like an unstable and incomplete relationship”.

He said: “The territories are very different from one another, which is one of the complications.

“The territories want very much more from us than we are able to give, which is another complication.”

He said the OTs were “nobody’s priority. Correctly so, because everybody dealing with them, including the FCDO, has a dozen or more other, more urgent priorities.”

The geopolitical climate was discussed, with committee member Lord Griffiths referring to US president Donald Trump’s foreign policy, saying the “Donroe Doctrine” was “being invoked more and more”.

Committee member Baroness Hamwee asked how Britain would respond if there was a security threat to a territory.

Lord McDonald said the geographical isolation of the OTs provided a level of protection but, as was found with the Falkland Islands in 1982, “not complete protection”.

Sir Philip said that during his tenure the department increased support for the territories in terms of border security and internal security levels.