Originally published in The Banker, October 2011
The foundations of Guernsey's modern finance industry can be traced back to the early 1960s when a clutch of merchant banks established operations on the island. In the years since then, Guernsey has established itself as a leading international finance centre.
This position has been reinforced by the latest rankings of specialist finance centres published in this supplement by The Banker. Guernsey has been ranked second only to the Cayman Islands globally, making it the leading specialist finance centre in Europe. We have moved up two places from last year by leapfrogging both Bermuda and Jersey, which now lie eighth and fourth, respectively.
Another of our closest comparables, the Isle of Man, has dropped a place from sixth to seventh. These rankings substantiate what we have thought for some time; that Guernsey has proved more robust in the face of the global financial crisis and its aftermath than many of our competitors.
What is more, The Banker rankings are based on a consistent data set supplied by each centre and principally statistics for the value of each sector of the finance industry to the end of 2010. Since the turn of the year, we have seen several positive developments in Guernsey's finance industry meaning that our position is probably even stronger now than these rankings suggest.
Guernsey has been impacted by the financial crisis, but we have been insulated from the most severe elements. Our finance industry has remained resolute and is now showing signs of recovery. This is not uniform across the industry, but its broad-based nature means that while some sectors continue to be more adversely impacted by the economic downturn, others have seen an upswing or identified new prospects.
For example, the Guernsey banking sector has been through a period of consolidation and restructuring during the past decade, which has seen the number of licensees fall from nearly 80 to fewer than 40 in recent years. This figure has now stabilised, reaching 39 at the end of June 2011.
During the decade, the value of deposits held by Guernsey banks continued to grow from £50bn to a high of more than £150bn until the global financial crisis brought about a reduction in values. Deposits have also now stabilised, reaching £114bn at the end of June 2011. This represents growth of 0.9% during the second quarter of the year yet, contraction of 2.5% year on year. This is a situation we will be monitoring going forward, particularly considering the difficult conditions in the global banking environment.
However, what we are now seeing is the possibility of attracting new entrants from emerging markets such as China, India and the Middle East, who are looking to use Guernsey as a base where they can service the needs of expat clients living in Europe and particularly London. This would provide additional diversity to a sector that already includes a wide variety of institutions, ranging from Swiss banks, building societies, retail banks, private banks and those offering custody services. Indeed, the banks also provide important services to the other sectors of the island's finance industry: fiduciary, funds and insurance.
It has been a period of consolidating our position as the largest captive insurance domicile in Europe and number four in the world. Despite the maturity of our captive industry and the prevailing soft market conditions, we have continued to see growth in this sector. In addition, we have seen increased inquiries this year following our decision not to currently seek equivalence under the EU's proposed regulatory regime, Solvency II.
The fund sector has seen a tremendous fightback since the global financial crisis. The value of fund business in Guernsey was up 4% in the second quarter of this year. This was the eighth consecutive quarter of growth and takes the total to a record high of more than £274bn at the end of June – up 22.5% year on year. The private equity and venture capital sector has seen particularly strong growth and the island's reputation for excellence in this asset class has been reaffirmed by a Private Equity News/State Street survey, where 61% of chief financial officers said that Guernsey was their preferred destination for private equity outsourcing.
Guernsey funds also remain extremely popular for alternative asset classes, particularly where there is demand to access capital markets. Guernsey vehicles can list on the local Channel Islands Stock Exchange, which has more than 4000 securities listed, the Euronext Amsterdam or the London Stock Exchange (LSE). Data from the LSE show that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, earlier this year, Guernsey companies were given the green light to list on the Hong Kong Stock Exchange.
This development reflects a growing trend of supplementing business sourced from the traditional introducer centres of the UK and Europe – and in particular, the City of London, which remains our principal source of new business – with new streams from the 'emerging' markets, such as China, India and Russia where there are increasingly significant pools of both corporate and private wealth.
This is not exclusive to the investment sector, but also Guernsey's fiduciary industry where there are more than 150 full corporate licensees who together hold more than £350bn worth of assets in trust and company structures. A niche but developing area for many Guernsey fiduciaries is Qualifying Recognised Overseas Pension Schemes. Another product coming to market shortly is the Guernsey foundation.
Draft foundations legislation has been published for consultation and we are hopeful that our practitioners will be able to offer Guernsey foundations to their clients from early 2012. The introduction of foundations will provide another tool for practitioners to meet the needs of clients. In particular, we expect the foundation structure will be attractive to clients based in civil law jurisdictions in Europe and also further afield in the emerging markets such as China, Russia and Latin America, where the trust concept is less familiar in common law countries such as the US, Canada, India and the UK.
Guernsey Finance is working with government, industry and the regulator to maximise our returns from the potential opportunities in the emerging markets.
One of our central messages to key decision makers in these regions is that Guernsey is a leading international finance centre offering a range of financial products and services to a global client base to the very highest standards.
Certainly our position has been reinforced by two reports published at the start of this year. The International Monetary Fund commended Guernsey's high standards of financial regulation to the extent that the island scored the highest of any jurisdiction so far assessed; and the Organisation for Economic Co-operation and Development built on its white listing of Guernsey by endorsing the island's commitment to tax transparency and exchange of information – indeed, we have now signed 29 Tax Information Exchange Agreements.
As you can see, there are plenty of reasons to be encouraged about the state of Guernsey's finance industry. There are a number of challenges still to be met, such as EU scrutiny of the corporate tax regimes of the Crown Dependencies (Guernsey, Jersey and the Isle of Man) and finalising details of the EU's Alternative Investment Fund Managers Directive. However, the Guernsey authorities are working together closely to ensure that we are appropriately represented to achieve outcomes that are positive for the future of Guernsey as a leading specialist finance centre.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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