Guernsey’s international outlook reaps rewards

The tiny Channel Island of Guernsey,  with a population of just 63,000, and often cut off from the UK mainland and its neighbour and friendly competitor Jersey by dense clouds of fog, is punching above its weight in financial services more than ever before. 

This unlikely success story, despite a poor general reputation of “offshore” financial centres in the global community, is really down to three reasons: stringent regulation, internationalisation of services from a UK base and a continued push to move higher into the corporate and wealth continuum, away from the retail-style banking services of old.

Although the recent royal visit of Sophie, Countess of Wessex, to commemorate the 70th anniversary of liberation from German occupation has injected a warm glow into the island’s business community, most finance firms are no longer looking to the UK for the future of their business growth.

For local players such as Canaccord Genuity Wealth Management, managing £11.2bn (€15.7bn) in assets, this internationalisation of the investor base has many practical implications. Despite being Guernsey-based, deputy chief investment officer Justin Oliver is spending increasing time with clients in the Middle East, addressing regional investment concerns and helping them meet income targets through diversifying investments across the bond spectrum and into real estate and infrastructure.

Much of Canaccord’s client base comprises trustees and fiduciaries based in the Channel Islands and London, but many ultimate beneficiaries of these entities are living further afield.

“At headline levels, the number of new trusts formulated by UK residents in Guernsey has fallen significantly as the [tax planning] benefits have eroded,” says Mr Oliver. “It seems to me fiduciaries and trustees are having to look further afield for new business and consequently so are we in the investment industry.”

For Mr Oliver this means a focus predominantly on Middle and Far Eastern customers. “For these clients, there is much more of a willingness to take risk,” with Indian opportunities featuring prominently in their investment plans.

“When I travel to the Middle East, I am asked about my views on the Indian market maybe three of four times each day,” he says. “Clients want to focus on their regional indices, in the same way clients in London want to focus on the UK market. They want to look at their region first.”

In reality, Mr Oliver confesses to being “slightly wary” of investing in India, despite tremendous gains in 2013. “There has been a marked slowdown in financing of investment and infrastructure through bank lending, due to slow growth in bank deposits,” he says.

Nevertheless, he wants to step up analysis of the region to closer match needs of prospective clients. “In the back of my mind, I know if we want to make a compelling proposition, from a portfolio construction perspective, we need to start focusing more on other regions, to build up resource and capability.”

There is clearly a change of mindset slowly seeping through the investment firm. Reductions to weightings in Japanese equities, despite the popularity this asset class is enjoying at competitor groups, is a case in point.

“Japan is a very small part of our benchmarks, perhaps 3 per cent maximum,” confides Mr Oliver. “We found we were spending 50 per cent of our time talking about this market, and felt it is time to talk about other markets, which make more impact on our client portfolios, like the US.”

But even a focus on US equities can prove overpowering and Mr Oliver is planning to establish a far more diversified approach to asset allocation.

“Much of our research is currently US focused,” he says. “We need more research on the Far East, India and China. Internationalisation should not just be about the source of clients; we also need to look at opportunities from an investment perspective.”

While improving service quality, Guernsey wealth managers and trusts must not allow costs to spiral out of control, says Mr Oliver, revealing that costs are already of “huge concern”. 

“In this competitive market place, we are not just up against Jersey, but many other financial centres,” he says. “We need to be careful we don’t price ourselves out of these areas. If the cost of doing business in Guernsey is too high, companies will go elsewhere.”

Staying ahead of competition also means keeping up innovation levels in Guernsey, say practitioners. Legislation enabling establishment of foundations, which came into force in January 2013,  is referred to as “the red convertible in the car showroom” by Marcus Leese, partner at island law firm Ogier.

“We still establish nine trusts for every foundation,” he says. “But it is a very visible, novel and tangible structure for a common law jurisdiction to offer and has created a great deal of interest in Guernsey as a jurisdiction among advisers and clients.”

Clients attracted to this fiduciary equivalent of luxury goods are likely to do other business in Guernsey instead, says Mr Leese, who reports more interest from the Middle East, Eastern Europe and Asia. “London remains a huge, deep international market and centre,” he says. “But the more progressive businesses in Guernsey have been and are making efforts to look at more diverse markets.”

While it is becoming more difficult to do business with clients in politically contentious regions, there are also increasing numbers of potential clients willing to set up Guernsey structures to hedge against political instability.

“Clients in Russia have become more concerned since the Ukraine crisis started, in terms of both civil unrest and political and economic issues. Doing business in that region is more difficult after the introduction of sanctions,” he says.

“But this has also reinforced for clients in that region the importance of offshore structures and geographical diversification. In times like this, reputational issues and the rule of law come to the fore.”

One of the most important factors for clients, says Mr Leese, is a certainty that structures which own their assets – be they wrapped in a trust, company or Foundation – are located in a jurisdiction with independent judiciary, where the rule of law can be relied on.

Wealth creators in Russia and the Middle East are also an increasing part of the client base for Guernsey fiduciaries Saffery Champness. “A lot of our clients have no touch base with the UK, so we are moving more and more into specialised areas. We are in internationalisation mode,” says Lisa Vizia, a director at the firm, which is also building up expertise on the African continent.

“Africa is producing a lot of wealthy entrepreneurs and individuals looking for good structuring advice,” she says.

But developing markets are not the only targets for the island’s law firms and fiduciaries, with the US increasingly prominent in the sights of practitioners.

“If we look at the statistics and analysis about growth regions and the next raft of millionaires and billionaires, the US will have the largest share,” says Michael Betley, chairman at Trust Corporation International. “It will continue to grow, though maybe not at the same pace.”

Unlike Swiss banks, Guernsey has only pursued legitimate business in the US, says Mr Betley. “With the IRS [Internal Revenue Service] so aggressive, all our US clients are totally paranoid about being tax compliant and they are prepared to pay for that. The US has all the ingredients we like: they share a common language with us, they like to use trusts, they are willing to engage and they need to deal with second, third and fourth generation family issues.”

He contrasts this to some more suspicious Asian clients, wary of ceding control of assets to trustees and reluctant to pay for more than a “thin veneer” of tax planning structures.

Typical among Mr Betley’s clients is the expanding cohort of “accidental Americans”, who have forgotten – “conveniently or otherwise” – that they are US passport holders, are married to an American or were born in the US, often creating tax liabilities there.

“There are an awful lot more of these accidental Americans out there than we probably realised,” he says. “If there is a US passport which has been gathering dust in the draw somewhere, they need to make a decision: do I surrender it or embrace it and use it?”

In addition to setting up structures to protect interests of private clients, Guernsey firms are deriving revenue by incorporating funds, in particular those investing in private equity, real estate and infrastructure.

Guernsey’s attraction to fund groups include a flexible approach to the European AIFMD rules, allowing alternative funds too opt in or out, that is to either become fully licensed to sell funds across European borders, or to carry on placing tranches of funds privately with institutions and family offices. 

“What Guernsey is trying to do for private equity is remain in play both through private placement and passporting to the market throughout Europe,” says Matt Horton, director of fund administrators Aztec Financial Services (Guernsey).

“Private equity likes private placement as it fits in quite well. If you are distributing a private equity fund, you should not be going to all and sundry,” he says. “It is aimed at relatively lower numbers of family office style investors.”

Most of the alternative-style funds set up by Aztec have less than 100 investors, most of whom wish to negotiate their own terms of entry into the investment vehicle. “This is not a unitised structure where every investor gets a stake,” says Mr Horton, whose successes involve setting up the Inflexion private equity fund in 2010 and helping grow this from £375m (€524m) to more than £1.5bn, across a variety of structures, with the help of several other administrators.

“Unitisation is about good technology and economies of scale, but not good margins. For Guernsey, sticking with big stake ventures, with good margins, means better revenue for the long term.”

Rather than using technology to help market funds to a mass-market clientele, he prefers to innovate for clients who may have a smaller number of customers. Indeed the challenge faced by firms such as Aztec mirrors that which the island’s industry faces as a whole.

“We have invested heavily in technology, which allows us to move away from fund administration towards risk management, helping banks and advisers consider the risks they face,” says Mr Horton.

This involves giving major clients a breakdown and analysis of up to 400 portfolio positions. “Our key message is about moving up the value chain,” he says.

This new approach is shared by the likes of Mr Betley at Trust Corporation International. “We are much less retail than we have ever been. The number of appointments with clients in Guernsey is decreasing, but revenue is increasing,” he says. “More product-driven, cost-conscious clients are winding up and going elsewhere.”

He compares the Guernsey change in customer profile to the situation in the Cayman Islands back in 2001, when the Caribbean jurisdiction decided to become the key incorporation centre of hedge funds, moving away from private client business.

“Guernsey is going through a similar sort of process,” says Mr Betley. “It is not as deliberate and efficient, but the pace of evolution has sped up, and the type of client is becoming wealthier and more complex.”   

Potential roadblocks

Guernsey faces a number of challenges to its success as a financial centre for structuring assets of wealthy clients and companies.

One of these is capacity and availability of high quality employees. Government-imposed limits to population growth through immigration and restrictions on housing sales and construction present significant barriers to expansion of financial services, says Marcus Leese, partner with Guernsey law firm Ogier.

“This means we have to be efficient and effective in terms of what we do to get the best performance with the people we have,” he says.

Competitive pressures are also increasing. “We are not the only offshore centre that does the things we do,” he adds.

But existential pressures from both foreign governments and supranational bodies are constantly “questioning the value of what we do,” says Mr Leese. “It is so important we remain engaged with the international community and promote the positive things we do as an offshore centre,” he says.

Financial centres such as Switzerland and Liechtenstein have operated according “to a different set of rules,” which led them to suffer from a series of scandals which Guernsey has avoided, says Mark Biddlecombe client services director at Nerine Trust.

Guernsey fiduciaries are however better supervised than contemporaries on the UK mainland, he believes, particularly since the introduction of trust regulation in 2000.

While Guernsey has concentrated on creating structures to facilitate succession planning, rather than encouraging tax evasion, this distinction has been wasted on the UK public which sees “a croc of illicit gold, which they think is here,” says Mr Biddlecombe. 

The biggest challenge to Guernsey’s future is a lack of knowledge of the island’s business, agrees Philip Radford, a director at fiducuaries Saffery Champness Guernsey. “The perception of us being an offshore tax haven can be damaging,” he says. 

“There are plenty of examples since 2008 where people have found it convenient to point fingers and throw sticks. Some of it may have been true in the past. But I have complete confidence that if you run a fine tooth-comb through Guernsey alongside any other financial jurisdiction, the level of non-compliance in Guernsey is almost negligible.”

Guernsey is vetted to the same standards as the UK by the IMF, says Dominic Wheatley, chief executive of industry promotional body Guernsey Finance, which recently commissioned a report from KPMG to analyse the economic benefits provided by Guernsey to the UK and Europe.

The report estimates that European investment managers earn £1.8bn (Ä2.5bn) of fees from managing Guernsey funds and that the vehicles facilitate £25bn of inward investment to the UK from institutions globally. “The report demonstrates Guersney’s expertise as a fund centre and as a facilitator of global investment into the UK, European and global economies,” says Mr Wheatley.