Although it boasts a thriving private equity industry, Guernsey must lessen its dependence on UK-sourced business and diversify into other areas if it is to prosper, writes Yuri Bender of PWM.
Along with other islands and landlocked territories, fast transforming themselves –from 'offshore' havens to international financial centres – Guernsey is undoubtedly suffering from the recession.
All practitioners on the tiny, picturesque and often fogbound island, lurking between the UK and France, agree the "good old days" of continuous expansion in all areas of banking and financial services are over. What is increasingly becoming clear is that Guernsey, and its competitors, must carefully select those niches in which they hope to prosper and allocate resources accordingly.
For Guernsey, the undoubted area of success has been setting up and running private equity funds, as more wealth managers look to offer opportunities to private clients, interested in diversifying portfolios. It has certainly helped that Guy Hands has made the island his home, along with his Terra Firma Capital Partners group, one of Europe's largest private equity firms. Other major players including Apax, Permira, French group PAI and Nordic house EQT also run funds from Guernsey. "Private equity has been the most prevalent asset class for Guernsey by a long margin," says Ben Morgan, a partner at law firm Carey Olsen, responsible for setting up "well over half" of the £280bn (€320bn) of fund assets managed from and registered on the island. Fund assets domiciled in Guernsey have risen 60 per cent over the last three years.
Since Schroder Ventures dipped its toes in the water and set up what is believed to be Guernsey's first private equity fund 25 years ago, other groups have not been shy to follow. When private equity groups look to choose a jurisdiction, they simply want a location which already boasts several other firms and is acceptable to investors, claim practitioners.
"They want the jurisdiction issue to be neutral; they don't want to draw attention to it when raising money," says Mr Morgan. "So you are likely to choose the same place as the competition when launching a new fund. That has benefited Guernsey."
In fact Guernsey firms need to be careful about not singing their message too loudly in the wrong places, says Mr Morgan.
"You never get asked about Guernsey in the community of referrers who know our island," he says. "If you go up to a London lawyer, well versed in alternative investments, you will lose their attention very quickly if you attempt to sell Guernsey as a jurisdiction to do business in; they know it already and so do their clients, so you would be wasting your time."
Where the island does need more publicity is further flung countries in Asia, Latin and North America.
"There are huge parts of the world where the Guernsey brand does not have penetration and where it can compete successfully with other jurisdictions," he adds.
Guernsey has plans to partially adopt Europe's far-reaching Alternative Investment Fund Managers Directive (AIFMD). Island practitioners are keen for costs to be minimised and excessive due diligence measures calmed.
"Most institutional investors have vast teams of people who go in to do due diligence and negotiate fees, meaning much of the AIFMD is of no benefit to them whatsoever," believes Mr Morgan.
'Dual regimes' from July 2013 will enable distribution of Guernsey products into both EU and non-EU markets. Regulations from Guernsey need to be "sensible, flexible and proportionate," Mr Morgan says, "allowing only good guys to operate from this island. We are never going to get it 100 per cent right, but Guernsey does a better job of regulation than most onshore jurisdictions. The roots of most scandals are firmly onshore, even where there is an offshore element."
Ogier, Carey Olsen's key Guernsey competitor, sees the forthcoming EU regulations as broadly positive for the island, although the journey may not be a smooth one. "AIFMD could potentially provide an enormous opportunity, but it may be a bit of a rollercoaster ride," says the firm's partner and practice head William Simpson.
Like Carey Olsen, Ogier is happy to exploit strong links with London and other European jurisdictions, although there is an increasing recognition that diversification of new business will be necessary.
"More than half our business is associated with the City of London," says Mr Simpson, adding that London has the benefit of not just the Channel Islands nearby to conduct "taxneutral" business, but also Luxembourg and Dublin.
Although the fund groups setting up on Guernsey normally have a London base, the greater part of their investors come from developing markets in the Middle East, North Africa and Central and Eastern Europe.
Clients from these countries are also increasingly coming to Guernsey to set up structures to protect their wealth and transfer it securely to the next generation. Trusts are much more tightly regulated here than in onshore jurisdictions such as the UK, while families can also choose to tie up their wealth using a company or foundation structure.
"The concept of trusts – on the private wealth side – is not so easy to explain in Eastern Europe and Russia," says Mr Simpson. "It can be slightly challenging to say to some of these people: 'give me all your money and trust me to look after it'."
That is why recently-introduced Foundation legislation has proved attractive to clients from some further-flung territories. "Foundations have been particularly interesting for clients from common-law jurisdictions, that don't have the familiarity of trust as a concept," says Alan Pearce, managing director of Royal Bank of Canada (RBC) Trustees in Guernsey.
The new structure offers them the same amount of confidentiality and asset protectio, without actually handing over control of the assets, he says. Private clients disillusioned with organizing their banking and financial affairs in other jurisdictions are coming to Guernsey in increasing numbers, says Mr Pearce, with wealthy individuals concerned their details may be shared with foreign authorities.
"Clients from UBS have come to us and said they were worried about remaining with Swiss banks," he says.
What is more, clients from developing economies, who previously banked in Geneva, are beginning to favour the Channel Islands as their regulatory standards become better respected internationally. Guernsey has signed 40 tax information exchange agreements and is top of the compliance league for financial centres, according to figures from the Financial Action Task Force, which polices financial centres. Using a local structure to avoid tax in a foreign country is a criminal offence under Guernsey law.
"Latin American clients used to do their banking in Switzerland, but that is now changing, as the offshore islands come off country blacklists," says Mr Pearce. "We are becoming centres of advice, particularly after the reputational damage Switzerland has suffered during the last few years."
Russian clients too have had problems using Switzerland and are becoming interested in using Channel Islands banks to organise succession planning. Mr Pearce reaffirms these are people who do not want to avoid tax, but keep a low profile when it comes to attention from their competitors and governments.
"Taxes in Russia are not high, with a 13 per cent top rate. Russians are not moving their assets for tax reasons," he says. "Just like Latin Americans, it is for fear of confiscation and disclosure. But they also want access to London's capital markets."
Wealthy Chinese individuals are also looking wider when organising financial affairs.
"Most Chinese individuals will not now create a trust in the jurisdiction of Hong Kong, as it is considered too close to home," says Mr Pearce, referring to the expected change of the territory in 2037 from a Special Administrative Region (SAR) to a fully integrated Chinese province. "Any trust being created now will need to last well beyond that date."
In fact Guernsey is the centre of excellence for RBC's Asian clients, with the island office playing a key role in establishing the RBC Wealth Management operation in Hong Kong. For RBC, the private client trust side is integral to the wealth management business and employs 380 people across Jersey and Guernsey. Relocating wealthy Asian families to Vancouver and elsewhere on the Canadian West Coast and structuring their investments remains a major plank of the business.
"A lot of the newer wealth is being generated to the East and we are able to tap into that through the core teams we have," confirms Sean Bougourd, head of private banking for SG Hambros in Guernsey.
The group employs 250 individuals across both islands. Many transactions for their clients are typically made in London and the structures put together in nearby Guernsey, less than an hour's flight away. But the further away the client is based, the more challenging the relationship, he admits.
"The easiest clients to deal with are the local ones, where you knock on their door, take them to dinner and drive them home afterwards," says Mr Bougourd. "It's a much longer drive if a client is based in Eastern Europe or Asia."
Due diligence becomes more difficult the further you travel, agrees Charlie Roger, head of Collins Stewart Wealth Management in Guernsey, about to be re-branded as Canaccord Genuity Wealth Management under its new US owner. The group runs £9.5bn across Geneva, London, the Isle of Man and both Channel Islands. More than one third of the group's 300 staff are in Guernsey, where the entire operational platform is based.
"David Cameron and Gordon Brown are flying out for mutual love-ins with the Chinese and other jurisdictions," says Mr Roger. "We are all out there trying to get business from emerging markets, which may or may not have human rights issues. Therefore we have to take a risk-based approach to client acquisition."
The commodities boom of 2008 to 2010, predominantly in Russia, has led to wealth creation and a need for clients to diversify away from the gas industry into other jurisdictions and asset classes, says Ken Bradley, head of Barclays in Guernsey. "Typically they want to invest in a prime UK property through structures which Guernsey can assist with."
Like most practitioners in the island capital of St Peter Port, which has many finance houses tucked away in the undulating, historic backstreets, Mr Bradley is well aware that such arrangements are looked at suspiciously by many commentators in London and the US. "The UK and Europe are going through significant changes, which are very anti-free market," he says. "Freewheeling Reaganomics was the flavour of the 1980s and 90s, but today the climate is the exact opposite. We live in a different era with its own challenges."
Guernsey has ridden the economic and regulatory storm well, although has not emerged completely unscathed says Fiona Le Poidevin, chief executive of Guernsey Finance, whose role includes marketing the island's capabilities internationally. The Channel Islands are still being targeted unfairly by politicians and media commentators, who need to think about the wider contribution to business, says Ms Le Poidevin.
"We have had flat GDP growth, but are inextricably linked to our main markets of the UK and wider Europe," she says. "Pressure from the UK Revenue has made it difficult for us, with international pension business effectively closed down and we are very disappointed with that, but are moving onto bigger and better things."
Ms Le Poidevin takes encouragement from the fact that UK Liberal Democrat leader Nick Clegg recently praised the Channel Islands for their contribution to the UK economy at his party conference. "It is a long time since we have heard that kind of accolade from a politician, so hopefully we are turning a corner. We now need to do more to educate the general population, not just business."
Originally published in PWM, April 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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