Originally published in Global Assets Online, March 2011.
Writing in this publication at a similar time last year, I provided an overview of Guernsey's development as an international finance centre during the preceding twelve months. It was rather like a school report which read that there had been significant success in meeting the challenges that came our way and we would be looking for similar progress in the future.
Looking back over the last year then it is a case of more of the same. We have not been completely immune from the global financial crisis but the Island has to a large extent remained resilient in the face of the economic downturn. In addition, perhaps the most significant fallout from the crisis has been the increased international focus on so-called 'tax havens' or 'offshore' centres and we are pleased to say that Guernsey is being consistently recognised as within the very top tier of international finance centres.
In short, Guernsey has maintained its position at the top of the class.
The Island has been impacted by the financial crisis but we have been sheltered from the most severe elements. Our finance industry has remained resolute and is now showing signs of recovery. This is not uniform across the different facets of the industry but in fact 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.
Total deposits held by banks in Guernsey stood at £116bn at the end of September 2010 – down 0.7% during the third quarter of the year and 3.5% year on year. It was disappointing to see the slight fall in the value of deposits held by banks in Guernsey but this was less than 1% during the third quarter and in fact the picture is more complex than it might seem at first glance.
We have seen downward pressure on deposit levels, particularly in Sterling, as various banking groups continue to reorganise themselves in the wake of the financial crisis. However, Kleinwort Benson's migration of its Channel Islands operation from Jersey to Guernsey earlier last year, so that it could continue its private banking under new ownership, has offset some of this impact and is an extremely encouraging development in the longer term.
The picture for Guernsey's funds sector is more positive. The value of funds under management and administration in Guernsey was up 6% in the final quarter of last year. This is the sixth consecutive quarter of growth and takes the total to a new record high of more than £257bn at the end of December 2010. It also means that the value of business increased 40% year on year. These figures show that our funds industry has bounced back very well from the global financial crisis and we have clearly outstripped some of our closest competitors.
It is also very positive to see strong growth split across both Guernsey open and closed-ended funds and also the non-Guernsey schemes where some aspect of management, administration or custody is carried out in the Island. A significant increase in the number of these non-Guernsey funds entering into service level agreements with local licensees earlier in 2010 has notably boosted these figures but our Guernsey closed-ended funds also continue to attract a lot of interest, especially from promoters in alternative and niche asset classes and where there may also be a demand to raise money through capital markets.
Indeed, data direct from the London Stock Exchange (LSE) shows that at the end of December 2010 there were considerably more Guernsey incorporated companies listed on its markets – UK Main Market, Alternative Investment Market (AIM) and Specialist Fund Market (SFM) – than there were entities from any of our competitor jurisdictions. In addition, a new survey from Private Equity News / State Street has found that more than three-fifths (61%) of chief financial officers chose Guernsey as their jurisdiction of choice for private equity outsourcing, principally fund administration.
I believe that Guernsey has benefited from the greater certainty provided by the agreement for the framework of the EU's Alternative Investment Fund Managers (AIFM) Directive. There is much work still to do in relation to the Directive but the continuing efforts of government, industry and regulator mean that the Island is well positioned. Guernsey's funds industry has a very positive story to tell and this is something we are looking to harness, not least at this year's Guernsey Funds Forum which takes on Wednesday 11th May in London. It is a half day conference and exhibition hosted by TV news anchor Alastair Stewart and featuring speakers such as Jon Moulton, Chairman of Better Capital.
From an insurance perspective, it has been a period of consolidating our position as the market leader. Guernsey is the largest captive insurance domicile in Europe and number four in the world. In addition, approximately 40% of the leading 100 companies on the LSE with captives have them domiciled in the Island. It is reassuring that despite the maturity of our captive industry and the prevailing soft market conditions, we have continued to see growth in this sector.
The number of insurance licenses issued in the Island last year was slightly up compared to during 2009. There were 47 new insurance licenses issued in 2010, comprising 12 international insurers – pure captives, Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and ICC cells – and 35 PCC cells. This took the number of international insurers to 341 and total international insurance entities to 675 at the end of 2010. Additionally, the Island's international insurance sector has seen the value of business increase markedly over the last few years so now there are gross assets of £23.4bn, a net worth of £8.1bn and premium written of £3.4bn.
Importantly, early this year, the government and regulator jointly announced that Guernsey has no plans to seek equivalence with Solvency II. We have carried out a thorough evaluation of Solvency II and believe that, as things stand, seeking equivalence would not be right for our insurance market which is a world leader in captive insurance. Indeed, the treatment of captives under Solvency II remains uncertain and so we will be keeping a close eye on this and Solvency II as a whole to assess progress and how it might impact our market in the future. In any event, we remain committed to meeting internationally accepted regulatory standards as set by the International Association of Insurance Supervisors (IAIS) and endorsed by the G20.
This position not only provides certainty but ensures that we maintain and enhance our competitiveness as a domicile to captive owners and other niche insurers looking for an environment that meets the needs of their businesses. In fact, I have heard that some service providers are already receiving a number of inquiries from firms looking to establish reinsurance vehicles in the Island.
Guernsey's fiduciary sector has been a mainstay of the Island's finance sector over the last 50 years and today we play host to more than 150 licensed fiduciary providers, ranging from large multinational organisations to local, independent operations. Together they hold more than £300bn worth of assets in trust and company structures.
A niche but developing area for many Guernsey fiduciaries is pensions business and in particular, Qualifying Recognised Overseas Pension Schemes (QROPS). Our infrastructure and expertise has been a significant factor in Guernsey establishing itself as the leading jurisdiction for this and related products such as Qualifying Non-UK Pension Schemes (QNUPS). Well-regulated providers offer schemes with major advantages for clients. For example, Guernsey schemes provide the option to withdraw a lump sum of up to 25% tax free. The good news for clients is that the Guernsey Government, The States of Guernsey, has also recently agreed in principle for this to be increased to 30%. The detailed legislation has now been drafted and will come before the parliament during April. Assuming this is given final approval then the change will be backdated so that in essence it will have come into effect from 1st January 2011.
This comes at the same time as the publication of a draft code of practice for local QROPS providers. A committee of the Guernsey Association of Pension Providers (GAPP) has been working on the draft code and an exposure draft of a new code of practice has now been released on the association's website www.gapp.gg. The draft will be reviewed in light of the comments received and it is intended that that final code will be issued by 31st March 2011. The move towards a voluntary code of practice emphasises the proactive nature of our sector in relation to best practice. Similarly, the Guernsey Income Tax Office takes a positive approach to ensuring that our schemes continue to retain HMRC approval. The security and stability which this offers is of significant comfort to clients and a major factor in the Island becoming the jurisdiction of choice for QROPS. There is also great potential in being able to specialise within other niche areas such as film finance and intellectual property (IP) as they develop over the coming years.
What we are also seeing is that the fiduciary sector is continuing to service existing business from the traditional centres of the UK and Europe but the maturity of these markets means that the major growth area for new business opportunities is further afield in the emerging markets of the Far East, the Middle East, India and Russia where there is increasing private and corporate wealth. Guernsey-based firms are increasingly seeking to take advantage of these opportunities. For example, fiduciaries Nerine Group and Louvre Group have established offices in Hong Kong, law firm Ogier is offering Guernsey legal advice from an office in Hong Kong and Guernsey-headquartered fund administrator International Administration Group (IAG) has also recently opened an office in Hong Kong. Indeed, there are potential opportunities within the emerging markets for a broad cross-section of Guernsey's finance industry.
Guernsey Finance is working with the industry to identify possibilities within the Middle East, India, Russia and the Far East and in particular China. We have had a representative office in Shanghai for more than three years now and the strength of the relationships we have built is highlighted by the fact that towards the end of last year, on behalf of the Guernsey Government, the Island's Chief Minister, Lyndon Trott, signed a Memorandum of Understanding for exchange and cooperation with the Shanghai Municipal Financial Services Office. In addition, during November last year, the Guernsey Government has also signed a Tax Information Exchange Agreement (TIEA) with the Chinese central government tax authorities.
The TIEA was the 19th such agreement that the Island has signed with another jurisdiction and since then, we have also signed similar agreements with Canada, Romania and South Africa, taking the total signed by the Island to 22. Guernsey was within the first wave of territories placed on the OECD 'white list' that was published at the G20 summit in April 2009 and our commitment to tax transparency and exchange of information has been endorsed by the OECD's Global Forum in a report published at the start of this year. The Guernsey Government has also announced that financial institutions have a window from 1st January 2011 to 1st July 2011 for moving to automatic exchange of information as part of equivalent measures the Island adopts in relation to the EUSTD.
In addition, during last year the IMF visited Guernsey to carry out an assessment and in January this year they published their evaluation reports which commended Guernsey's high standards of financial regulation, supervision and stability along with its robust criminal justice framework. As part of these reports, Guernsey was assessed as having a high level of compliance with the international standards against which it was judged – the 25 Basel Core Principles for Effective Banking Supervision; the 28 Insurance Core Principles of the International Association of Insurance Supervisors; and the Financial Action Task Force 40 Recommendations on money laundering and 9 Special Recommendations on terrorist financing.
Guernsey has during its 50 years as a finance centre and particularly during the last decade or so faced scrutiny from the UK Government (the 1997 Edwards Report and the more recent Foot Report), the EU, the IMF, FATF and the OECD/G20. The Island has always cooperated in these processes and on each occasion been placed within the premier division of international finance centres.
The right conclusion
Guernsey never rests on its laurels though but is always looking to the future. We are currently facing challenges in a variety of guises, for example corporate tax rates and a revised EUSTD. Having said that, we have also been challenged many times in the past and the Island has always proved more than capable of adapting to survive. Now the Island has stepped up its representation within the corridors of power in both the UK and also the EU, where we have joined forces with Jersey to establish a Channel Islands Brussels Office (CIBO). In short, Guernsey is doing everything it can to ensure that the Island remains at the top of the class of international finance centres.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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