Originally published in the STEP Journal, September 2011
Peter Niven, Chief Executive of Guernsey Finance, explores how Guernsey has continued to be at the forefront of developments in the fiduciary industry.
"Change is the law of life. And those who look only to the past or present are certain to miss the future," said John F. Kennedy. Those words may have been uttered by the 35th US President but they are actually appropriate in the context of the Guernsey fiduciary industry. Not only is the profession of trust and estate planning rooted in making arrangements for future changes in circumstance but Guernsey's fiduciary sector has been continually at the forefront of developments in the industry.
Sector trends
Guernsey's fiduciary sector has been a mainstay of the Island's finance industry during the last 50 years. Looking back over the last decade we can see that superficially the sector hasn't really changed.
Today, there are some 150 full corporate licensees (as well as more than 50 licensed individuals who can act as directors, co-trustees or trust protectors) employing nearly 2,300 members of staff. These figures are not particularly dissimilar to those from ten years ago.
However, technological developments assisting the administrative functions for maintaining and indeed, enhancing this wealth have allowed us to significantly increase assets held in trusts and companies in Guernsey so that the total value now stands at more than £350 billion.
During the last 10 years, the ratio of the number of independent trust companies to those owned by corporate entities from other sectors – notably banks – has remained fluid. Yet, regardless of formal ownership status, there has been without question ever-increasing integration and cooperation between sectors.
For example, the close links with the banking sector remain and notably these providers benefit from the assets coming into the fiduciaries. At the end of June 2011 deposits with the 39 licensed banks in Guernsey reached £114 billion.
These figures have also been swelled by the Island's thriving investment funds industry, where the value of funds under administration and management reached a new record high of more than £274 billion at the end of June 2011. On the back of such success, fiduciaries have increasingly looked to develop a funds presence in terms of providing administration and company secretarial services.
Guernsey's asset management and stockbroking sector now has more than £81 billion under management, including increasing amounts from fiduciaries, especially those providing trust structures for international pensions – as well as Qualifying Recognised Overseas Pension Schemes (QROPS) where Guernsey has become the market leader – and life insurance products.
The cell company concept was pioneered in Guernsey for our pre-eminent captive insurance industry but both the Protected Cell Company (PCC) and now the Incorporated Cell Company (ICC) are being increasingly used within the fiduciary sphere.
Additionally, the partnership structure has been a familiar concept in the investment world for many years and yet more recently it has been adopted by the wealth management sector to offer the Family Limited Partnership (FLP). The FLP provides similar levels of asset protection and flexibility in management to a trust but allows lifetime gifts without the charges to Inheritance Tax.
Companies, trusts and foundations
This growing use of innovative wealth management solutions adds a further dimension to a jurisdiction with tried and tested company and trust law.
Guernsey's reputation for case law of seminal importance has been given further weight by the recent landmark Privy Council ruling in favour of an appeal by Spread Trust Company Ltd against Hutcheson. The Privy Council judicial committee ruled that trustees could be exonerated from their own gross negligence without breaking their duties en bon père (as a good father).
There has also been growing sophistication of the use of companies and trusts. An example is the development of the Private Trust Company (PTC). Instead of employing a professional trustee, some settlors are choosing to establish their own trust companies to act as trustees of their family trusts.
A PTC does not provide fiduciary services to the public and can be established by private individuals or commercial enterprises. With the focus on just one family, often with the involvement of its members, the PTC's greater understanding and its dynamics gives increased assurance that decisions will be made quickly and sensitively to the specific interests of the family.
Guernsey introduced a new Trusts Law in 2008 and this included abolishing the personal liability of directors, particularly as a way to encourage greater use of PTCs. Some of the other most significant changes included the introduction of Purpose Trusts and the removal of limits on the length of a trust's duration – allowing perpetual trusts.
That year also saw the introduction of a new Guernsey Companies Law and in parallel a new Guernsey Registry, where the use of the latest online technology allows a more streamlined process for incorporations to be processed in as little as 15 minutes.
The Registry also includes the office of the Intellectual Property (IP) Registrar. Guernsey is now fully TRIPS (Trade Related aspects of Intellectual Property Rights) compliant and IP has become a key driver of new business to the Island as we continue to introduce a cutting edge suite of IP legislation, including image rights.
We have also recently published draft foundations legislation. The introduction of foundations will provide another tool for practitioners to meet the needs of clients. In particular, we expect the foundation structure will be attractive to clients based in civil law jurisdictions in Europe and also further afield in the 'emerging' markets such as China, Russia and Latin America where the trust concept is less familiar than in common law countries such as the US, Canada and the UK.
I'm hopeful that by early next year Guernsey practitioners will be able to offer a foundation which enables clients to preserve and enhance their wealth and assets through a highly regarded structure in a reputable jurisdiction.
The international stage
Guernsey's reputation was further enhanced earlier this year when the IMF published six evaluation reports which commended Guernsey's high standards of financial regulation, supervision and stability along with our robust criminal justice framework.
10 years ago Guernsey became one the first jurisdictions to introduce an effective licensing and supervision system in relation to trust administration services, company management and ancillary services. The law brought into effect in early 2001 means it is the businesses that manage and provide fiduciary services that are regulated, rather than the trusts themselves.
This was introduced just prior to the 9/11 attacks in the United States, which precipitated a greater focus on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). However, even today, some of the larger economies globally do not regulate trustees and yet this was a move made by Guernsey more than a decade ago.
Guernsey's position is reinforced by the fact that the IMF judged the Island to have high levels of compliance with the international standards against which it is assessed, including the Financial Action Task Force 40 Recommendations on money laundering and 9 Special Recommendations on terrorist financing.
The 9/11 attacks also ushered in a new focus on tax transparency and Guernsey signed its first Tax Information Exchange Agreement (TIEA) with the US in 2002. The other major global event of the last decade was the financial crisis of 2007/8 and this also proved to be the catalyst for further scrutiny of such arrangements.
Guernsey's proactive stance meant that it was within the first wave of jurisdictions placed on the OECD 'white list' at the conclusion of the G20 summit in London, April 2009. The Island has continued with this approach and earlier this year the OECD endorsed our continued commitment to tax transparency and exchange of information.
We have now signed TIEAs with 29 jurisdictions globally, including recently Argentina which is our second with a Latin American country following on from Mexico earlier this year. While we look to extend this network, the local authorities are also pursuing the Island's removal from (mainly outdated but still operational) 'blacklists' and the potential for Double Taxation Agreements (DTAs).
In addition, financial institutions in Guernsey were given 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 EU Saving Tax Directive.
The right conclusion
This continuing work to maintain and enhance Guernsey's reputation internationally places the Island in a very strong position. However, we are currently facing challenges in a variety of guises, for example the corporate tax regimes of the Crown Dependencies have come under scrutiny from the EU.
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 and in the case of corporate tax, we are committed to maintaining a regime which is both internationally compliant but also competitive.
It is in recognition of such developments that 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 continuing to take steps to ensure that it remains an attractive domicile for trust and estate clients going forward.
We are conscious of the past and the present but very much have our eyes fixed on the future.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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