Originally published in Private Client Practitioner, Guernsey supplement, November 2008
The wealthy and how they are served is changing. Trust practitioners in particular are looking closely at the evolving face of clients and their needs. In Guernsey, there appears to be an understanding that to continue to grow, change is necessary. Investec Trust's Jane Kerins argues that it is those trust specialists that adapt with innovation that will see continued success.
It goes without saying that recent months have seen the greatest upheaval in the financial world for a very long time. The very nature of wealth and what the wealthy do with their money, is under scrutiny and changing. There are those that believe those who hold the wealth now will be very different from the high-net-worth individuals of the future. Shaped by financial crises and changing needs, those clients will be looking to a financial services industry that recognises the changes and caters to them.
Despite there being a distinct lack of concrete figures, the consensus appears that there are more than 140 licensed fiduciaries in Guernsey in 2008 (and around 60 personal license holders) with more than £250 billion in assets under administration on the island (source: www.taxanalysts.com/, GuernseyFinance.com; Guernsey Financial Services Commission).
These figures have fluctuated around the same levels for the past eight years prompting some observers to suggest the heyday may be over for Guernsey's trust industry. Indeed www.taxanalysts.com/ said in October last year: "Guernsey's long-established fiduciary sector has matured and has entered a period of low growth (at least in terms of business volume)."
It could be argued that the figures do suggest stagnation but the historic data does not demonstrate the current fundamental changes taking place globally, both in terms of the type of client Guernsey might attract in the future and, the services the trust industry will need to provide to cater to their needs.
The historic make up of clients has been very heavily weighted towards the high net worth individual or family, often UK non-domiciled resident. Investec Trust has a predominantly international private client base with a specialist service, in particular corporate trust structuring. It would be fair to assume this is a reflection of Guernsey's fiduciary client mix.
Changes to legislation
While the underlying questions in our industry are perhaps much the same – finding the right answers for international families against a backdrop of continuous change – the mountain of new legislation is challenging. A particular highlight of the last year has been the changes to the rules for non-UK domiciled residents.
The proposed changes began with the premise that all non-UK resident trusts were avoidance vehicles and that all benefits from trusts should be taxable.
Further, trusts were largely to be treated as transparent for settlors with gains arising on UK assets or non-UK assets being taxed on an arising basis. Trusts appeared likely to become more of a liability, with the possibility of worldwide tax on distributions from trusts. Intense lobbying brought about material and positive changes to these rules.
The changes result in an increase in complexity and, arguably, potential exposure for non-UK resident trustees.
Going forwards, trustees will need clear investment and distribution strategies, which take into account not just the source and nature of profit but also the timing of realisation and distribution.
More generally the matching rules for capital payments have changed. The new "last-in, first-out" rule will mean trustees should not be considering distributions without considering what gains can be realised to maximise the benefit of taxation at the 18 percent capital gains tax rate. Clear records and good UK tax awareness will be prerequisites for effective administration. It is easier than ever to get it wrong and more specialisation in administration matters is to be encouraged.
It might be argued, and certainly for Investec Trust, that the UK Finance Act changes are an opportunity to set ourselves apart by being on the ball and anticipating client need in the new complex world. However, it could also be said that, with such complexity, there is a natural desire to broaden the client base; to have less exposure to UK non-domiciliary clients. The Guernsey trust industry is not alone in looking to attract the growing number of wealthy clients from former Eastern Europe, Asia and the Middle East. Trust practitioners need a deep understanding of the cultural differences, the differing needs and the regulatory frameworks available if they are to really seize the opportunities to develop new business in these regions.
The patriarch of a Middle Eastern family may wish to address succession planning; he may have concerns about providing for his daughters as well as his sons in a way that cannot be challenged under Shariah law. A Russian millionaire businessman is kept awake at night worrying about political stability and safeguarding his assets, whereas the Asian entrepreneur worries about family and wants to protect and enhance what he has such as Guernsey offers longevity, stability and transparency; setting itself apart from younger, less regulated, less experienced jurisdictions, providing the client with credibility and a robust structure able to stand up to scrutiny.
Providing the right environment
Understanding the needs of international clients in an ever-changing world is only part of the process. Providing a common sense business focussed approach to legislation and regulation is as important.
It has never been Guernsey's policy to introduce "designer" legislation or "product-driven" regulation to boost business. Guernsey takes a long-term view for the benefit of the finance sector.
In March 2008, The Trusts (Guernsey) Law, 2007 (TGL 2007), came into force replacing The Trusts (Guernsey) Law, 1989 – and this, with the objective of creating a framework to preserve Guernsey's position as one of the leading jurisdictions for the provision of trust and company services.
Guernsey has also considered those clients from civil jurisdictions that may struggle with the trust concept.
Foundations, identified as being a viable alternative to the trust and a flexible asset holding vehicle, have become increasingly popular across the wealth management world. With this in mind Guernsey is working towards the introduction of foundations and the regulations that are required.
Guernsey has been innovative in its quest to maintain and build on its market share. The Island has proven it is not complacent and has increased the depth and breadth of its offering to the world of wealth management. It has willing regulators who see the competitive advantage in reacting to market demand and putting in processes quickly which meet the market's needs.
Peter Niven, the chief executive of Guernsey Finance, the promotional agency for the Island's finance sector, was quoted recently as saying: "We are not resting on our laurels. We are looking at the further development of the framework for fiduciaries so that local practitioners can offer the widest range of products and services."
For the Guernsey trust industry the future is not about size but about thinking. It is less about administrative processes and more about understanding. The world is changing and it is being a specialist and knowing what we do and doing it well which will allow Guernsey to remain centre stage in the international finance world.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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