For institutions and for private clients and their advisers, selecting a custodian in an offshore centre is likely to start from a desire to achieve specific legal or tax-planning objectives. The good news is that, as well as fulfilling these technical goals, clients can also derive a tangible added-value in the form of the particular expertise and service quality which their offshore custodian can contribute to the global management of their affairs.

The situations in which an investment fund, insurance or fiduciary structure may need its assets to be held in custody offshore are varied. For example, an onshore fund manager launching an offshore fund may be required to have the funds’ assets custodised in the same jurisdiction as the fund in order to satisfy regulatory requirements, aimed at the protection of investors. This may particularly be the case if the fund is targeting a broad market of international high networth individuals, rather than a more narrowly defined "qualifying investor" audience. Similarly, an insurance company aiming for example to provide an offshore variable annuity product to support US pre-immigration tax planning, will require an independent, offshore, custodian for the annuity products assets, again in order to meet regulatory requirements.

Simple prudence may lead the legal adviser or family office taking steps to protect family assets to prefer that the custodianship of the family’s assets be carried out in a jurisdiction unconnected with any of the countries where members of the family reside. The chosen custodial centre will also, of course, need to be tax neutral for all of the family’s members. More straight-forwardly, the adviser to a UK resident but non-domiciled individual may recommend that their client’s investment portfolio is custodised outside of the UK as part of their overall inheritance, capital gains, and income tax planning.

In addition to meeting their particular legal or tax-planning goals, the institutional investor or private client will also look for certain additional characteristics in their potential custodian and in the jurisdiction in which it is based. These will certainly include solid and acknowledged regulatory standards in respect of securities and derivatives instruments, and specific regulation of licenced custodians; political stability in the jurisdiction; well developed and respected legal systems and courts with a track record of dealing with the legal issues surrounding securities and derivatives; and a sound infrastructure encompassing such matters as air links, telecommunications, accounting professionals and law firms. Investors will also need to be satisfied that the jurisdiction houses substantial banking firms with a specialisation in custody services. Fortunately, a number of such jurisdictions exist, with Guernsey and Jersey in the "offshore UK" arena, and Bermuda on the other side of the Atlantic, being at least three such locations.

The additional value which some clients might be surprised to find in these offshore jurisdictions, if they have not previously made use of them as custody centres, lies in the access to in-depth technical expertise and hands-on experience where the client needs it, which is in the shape of the custody services manager dealing with the clients’ affairs on a day-to-day basis. Most offshore custody operations will be relatively small in scale compared to their onshore equivalents. As a result, senior custody professionals offshore will often maintain close operational involvement with the full range of technical complexities presented by a multi-market, multi-instrument universe of securities, derivatives and collective investment vehicles. This enhances the ability of offshore custody experts to apply knowledge-based solutions to complex or unusual technical situations, and to communicate effectively with their clients and clients’ advisers on alternatives available or pitfalls to avoid.

This expertise applies with regard to investments on exchange-based main and emerging markets, but is perhaps even more valuable in the context of off-exchange aspects of investing. The UK family office, for example, beginning to use an offshore umbrella fund or protected cell company structure to assist in meeting different family members’ investment objectives may not have experienced the time delay which KYC issues can cause to subscriptions via such a structure into collective investment vehicles domiciled in certain jurisdictions. The experienced offshore custodian will have met such issues many times before and can either flag the problem early on, allowing a different investment choice to be made by the investment manager, or will know how best to work through the information requirements, dealing with them in the shortest possible time. Throughout, fluid and clear communication ongoing between the offshore custodian and their client will be a key aspect of the value added by the custody provider.

If smaller scale leads to benefits of expertise both in breadth and depth, and to a high quality of client/custodian communications, especially in dealing with non-standard situations, does the relative lack of scale not limit the offshore custodian, for example in terms of sub-custodian network or in the functionality of the systems available to them? Experience shows that this is not necessarily the case, depending on the strength of the offshore custodian’s partnership with one of the major global custodians for those aspects of service where scale does indeed matter. When this partnership has been developed over time, the offshore custodian can offer the best features of being relatively small (client access to senior custody experts, speed in handling unusual requirements, flexibility of report formatting, closeness of communications with clients; and closeness of teamwork with non-custody technical specialists such as lending bankers, foreign exchange dealers, fiduciary structuring specialists or fund administration experts), whilst still being able to draw on the sub-custody network, corporate action tracking, or electronic reporting platform of their larger "partner" in a fashion which is entirely seamless, indeed invisible from their clients’ perspective.

In summary, whilst legal and tax-planning issues are likely to be part of the decision making process for clients considering appointing an offshore custodian, the calibre and experience of the custody specialists, the benefits of working with smaller scale operations without giving up the advantages of size, and the offshore custodian’s particular skill in interacting on a team basis with banking and fiduciary specialists to deliver an integrated solution to complex requirements all continue to mean that using an offshore custodian becomes a high value-added proposition, well worth examination by institutional and private clients alike.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.