Originally published in HFM Week, Guernsey Special Report, June 2010
Ken Bradley and James Sherbourne of Barclays Wealth discuss Guernsey's funds heritage and its lasting appeal as an international hedge fund domicile.
Guernsey has over five decades of experience in the funds industry but how has it weathered the recession and is it still a good place to do business? Barclays Wealth's Guernsey director Ken Bradley and vice-president of the Intermediary and Institutional Wealth Solutions team James Sherbourne examine the past, present and future of the island's funds industry.
Recent figures published by the Guernsey Financial Services Commission show that the value of investment funds under management and administration in the island increased by £13.2bn (7.2%) during the first three months of 2010. This was the third successive quarter of growth and takes the total value of funds to £197.4bn – a year-on-year rise of £21.5bn (12%).
Its place as an international market is illustrated by the fact that Guernsey funds are now promoted or sponsored by leading institutions in 45 countries.
Guernsey Finance chief executive Peter Niven recently said that the island can be cautiously optimistic about the funds industry, which was another step down the road to recovery. Barclays Wealth's experience is that the island has every reason to be optimistic.
In a position to respond
You only need to look at Guernsey's history to know that the island is used to responding. Trust and private banking was predominant in the 1990s but as funds began to grow, the island started to adapt and Guernsey has used this experience to continue adapting.
One of the island's key strengths is its independence. As a Crown dependency, yet with its own government, the island has the ability to change as and when it needs to. There is no doubt that Guernsey needs to align itself to the UK but it can operate with some sense of autonomy.
Guernsey also has an excellent regulatory environment. The island was the first place to have a regulated Financial Services Commission through the foresight of John Roper and that has enabled us to be creative and flexible as and when it was required.
Guernsey Finance, the States of Guernsey and the Guernsey Financial Services Commission are all very supportive of the funds industry and this strengthens our position. They work incredibly well together for the good of the island. Their goal is to keep business here and develop it.
This regulatory environment is complemented by the skills and expertise that can be found locally. The cost of doing business in the island is reduced because of the highly skilled and efficient workforce. This is especially important now because the markets have been contracting, it's harder to deliver returns and there is a lot more focus on costs. The size of the island also helps significantly as we often have existing relationships with the people we need to deal with.
We are confident that Guernsey still has a pull and that we will see an increase in business especially from the Cayman Islands who have suffered through their alignment with the US.
What does the future hold
From a UK perspective then it's difficult to say what it will look like because of the AIFM. However, from Guernsey's perspective, its expertise and flexibility to adapt will create the opportunities for fund incorporation and fund management. There will be increased outsourcing and this cuts both ways – we will lose and gain business through a focus on the things that the island is good at. Providing the responsibility remains in Guernsey, then the island's reputation will not be impacted by outsourcing. Outsourcing has been enhanced by technology and companies investing in technological advancements will be able to work more efficiently and take on additional work.
One of the challenges for the island will be staffing. The States of Guernsey has recognised that the funds industry needs expertise but that may not be people who are Guernsey-born. That is positive as the island is in an excellent position to source business providing it can meet the staffing requirements and that will always be a balancing act for companies in the island.
In the short term, Barclays Wealth in the Channel Islands doesn't believe the spotlight of the new coalition government will fall on the islands, as one of its main focuses will be to keep London as a top business centre. The government will need to protect that and it's important that they do, as Guernsey is tied to London's success.
Guernsey as a funds centre is highly regarded as a jurisdiction which goes beyond expectations to maintain standards and transparency. There have been a number of recent regulatory developments which are very specific to the funds industry.
Revised codes of practice
The Codes of Practice issued under section 35 of the Fiduciary Law have been updated and can be summarised as follows:
- The names of the AML/CFT legislation and the AML Handbook have been updated.
- The names of the trust and company laws and related terminology have been updated.
- The description of the "four-eyes" requirement has been updated to reflect recent changes to the way that is set out in the Fiduciary Law as follows:
- The Codes have been amended to reflect that the AML regime now requires financial services businesses to have in place procedures documenting the risk assessment both of its business as a whole and each of its business relationships and policies, procedures and controls to forestall, prevent and detect money laundering and terrorist financing as follows:
- The words "aggregate annual" have been deleted from the description of acceptable professional indemnity insurance excesses as, in practice, licensees have not been held to an aggregate annual excess limit of 3% of turnover and such a limit is not obtainable in current conditions.
Enhanced regulations came into effect on 1st January 2010 and these include:
- Customer categorisation;
- Annual review submitted to GFSC annually signed by CEO and compliance officer;
- Decisions to postpone execution must be documented;
- Opting out of best execution by the client must be in writing;
- Best execution policy disclosed to clients and monitored;
- Restrictions on allocations to officers and employees;
- Monthly (formerly six monthly) valuations for investment management unless customer advises in writing that they require them less frequently;
- Mandatory valuation report on at least an annual basis;
- Enhanced client money rules;
- Conflicts of Interest;
Capital adequacy rules
These came into effect on 16 April 2010 and include the following:
- Increased capital requirements;
- PII cover required for most investment-licensed entities £300k min or 3 x total revenue;
- The introduction of pro forma calculations which take account of risks to which the business of the licensee might be subject;
- The introduction of a liquidity requirement;
- The recognition that a licensee should not rely on loan support from another group company for the purposes of meeting its capital adequacy;
Code on corporate governance
This is currently in the consultation stage.
Guernsey and Barclays Wealth's global strategy
There is no doubt that Guernsey, and indeed the Channel Islands as a whole, is an intrinsic element of Barclays Wealth's global strategy. This has been recently demonstrated by the decision for the Channel Islands to be the first of Barclays Wealth's jurisdictions to launch a new service looking after intermediary clients who have complex and specialist banking and investment requirements.
The Intermediary and Institutional Wealth solutions team (IIWS) has been developed following feedback from clients that they require more specific solutions tailored to their complex needs.
The IIWS team, which will see a 40% increase in headcount for the team across the Channel Islands, will provide clients with a range of world-class investment and banking products, as well as product and platform solutions which will allow clients to access the full capability of Barclays Capital and Barclays Group.
Barclays Wealth is also investing £350m in an infrastructure upgrade which aims to make Barclays Wealth the world's number one wealth manager.
It has already been demonstrated that Guernsey is an integral part of that ambition.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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