Copyright Society of Trust and Estate Practitioners, article first published in STEP Journal, Volume 20/Issue 3 (April 2012).
Michael Betley, Managing Director at Trust Corporation in Guernsey, on how the Channel Islands are remaining competitive in the emerging international economy.
The past four years have brought dramatic events in the global economy, turbulence in the financial sector, political unrest in the Middle East and North Africa, and the continuing eurozone debt crisis. The speed of the stock market collapse in 2008 took most by surprise and galvanised politicians to hastily introduce measures to counter the new crippling debts created by two decades of excess. The bull market malaise, where the detail became forgotten in a time of prosperity, has now been stripped away and the bear market scepticism has created a new political and social awareness born of discontent and necessity. This awareness is also reflected in client sentiment and workflows across the Channel Islands.
The fiduciary industry simply acted as a host to the viral effects of the black-box hedge fund strategies and private banking investment and debt products, which, packaged collectively, have destroyed a decade of growth. While the economies of the Channel Islands are not immune to global events, the macro-economic effects are less obvious than elsewhere. The depth and diversity of the financial services sector, in particular, has mostly had a stabilising effect. The demand for quality fiduciary and fund administration services remains high, outlook is less certain than it ever was and there is a real need for clear strategic goals if the Islands are to preserve their status within the premier league of international financial centres.
The themes of the past decade are still evident, and several of these have developed significantly, but there are also new priorities. Taxation is no longer a national issue but has become international, and above all regulation has become multi-tiered and increasingly intrusive.
There have been the results of greater tax harmonisation and, in particular, the full introduction of the European Union Savings Tax Directive. Like many of these initiatives, the results have been far less impressive in tax-take terms than anticipated. While some business (particularly on the banking side) may have shifted its focus to the likes of Singapore, the Islands have not seen any significant negative impact from that regime. It is simply another reporting line to undertake.
The American model of restricting market access through compliant gatekeepers and passing the burden of information gathering and reporting to custodians and thirdparty advisors has been transported across the Atlantic. France has used this approach in its recent introduction of Loi de Finances Rectificative, which was announced in July 2011 and came into effect on 1 January 2012.
It feels like the authorities concerned are keener on tracking down assets belonging to their own citizens than on creating an easier and fairer domestic-tax regime to attract and encourage inward investment. It remains to be seen how successful the new French legislation is and how the US Foreign Accounts Tax Compliance Act (FATCA) will work in practice and what additional tax take and investment stimulus will be achieved. In the meantime, it has created unease and uncertainty, and in many cases a desire to avoid any dealings with those territories.
For Guernsey, the challenges it faces both domestically and internationally have not dramatically changed in them past ten years, although the emphasis and priorities have altered. At the beginning of the millennium, commentators were concerned about regulation, tax harmonisation, industry fragmentation, resource constraints and constitutional change. This was, of course, just after the Edwards Report in 1998 which sparked a series of developments and raised the profile of the Islands' relationship with the UK and Europe.
Ten years on, regulation is still highly relevant and topical. The Channel Islands are seen as being at the vanguard of sound regulation, but while regulation has generally been good for the Islands and has been built into the fabric of most businesses, there's a concern it may be of our own success, perhaps? Clearly there should be a balance.
Over-regulation is damaging, but we want to ensure the regime is fair and robust when it needs to be, while remaining competitive and above all enabling the licensee to develop its commercial activities accurately. The local framework must not hinder business growth but foster it.
The most recent tax changes imposed on the Crown Dependencies came about in October 2009 when the EU Code of Conduct Group determined that the Crown Dependencies were operating unfair tax regimes that needed to be aligned with EU norms. The zero ten policy (zero corporation tax for all domestic and international companies based in the Islands or 10 per cent tax on banking institutions and regulated utility companies, etc) was adopted and, following recent deliberations with the EU Code of Conduct Committee and Economic and Financial Affairs Council, is now likely to remain in place (subject to negotiated minor alterations).
The macro view is a changing landscape that affects most in the wealth-management sector. Many are struggling to keep pace with the sheer number of issues and directives to be addressed. Change management and coping with the dynamics of new global emerging issues is a challenge on its own.
For the Crown Dependencies, there are also domestic issues that businesses face. Fiduciaries, more than ever, need a skilled human-resource base and capital investment into systems and operations, not only to stay in step with the regulatory and client demands, but also to cope with the shifting marketplace.
Traditional markets are in decline and new market opportunities are centred on the emerging economies in Asia and the BRIC countries. However, cultural differences in these new markets make entry difficult and patience is needed for real returns. While the emerging markets in the medium to long term are where the new ultra-high-net-worth clients will come from, traditional markets should not be forgotten.
But traditional markets have changed, as have the attitudes of the wealthy. Post-2008, ultra-high-net-worth clients think differently about the financial advice they get and how they deal with professional advisors. There is now greater scepticism and expectation to receive transparent services demonstrating value.
A common theme emerging is that many fiduciaries are reducing their volume of clients, but increasing the quality and sophistication. In exchange, clients expect better service, clearer charges and a 'value added' approach. Various surveys and reports out in 2011 emphasised these shifting themes.
STEP's survey about the future of Asia trust and estate practice identified some of the cultural differences in Asia. In particular, the current Asian client base is very fee sensitive. It requires inbuilt mechanisms to maintain control, and structuring is generally for asset protection, as many of the Asian economies have a more benign tax regime.
The Society's 2011 report on the future of Canadian trust and estate practice identified a more mature and sophisticated marketplace where it is accepted that advice is required and professional advisors themselves are likely to be more of a target for regulators. Sophisticated investors are increasingly adopting the multi-family office model, which is becoming increasingly popular with key advisors taking on more strategic roles for the family.
The Merrill Lynch Annual World Wealth Report (15th edition), released last year, identifies that India's high-net-worth population entered the top ten for the first time. While the predictions are that Asia will continue to post the strongest regional growth rate of high-net-worth individuals, the US still dominates the world's rich list, with just under 30 per cent of the world's wealthy resident there.
As we have seen from the Middle East, the wealthy merchants and entrepreneurs of the 1970s and 1980s are now concerned by how easily wealth can be dissipated by future generations. Many are adopting the North American and European family governance models in defence. The wealthy in the emerging markets simply have not yet addressed or perhaps witnessed this issue. The realisation will come but it will take time.
The complexity and sheer number of international initiatives can be overwhelming. Managing this while looking for growth and increased profitability will be a major challenge. As a consequence the businesses of the future can no
longer stand still, with the accentuated risk applying to those businesses with a concentrated customer base or product line. Diversification and other risk mitigation strategies have never been more important.
Yet, despite the rapidly changing global outlook and the shifting themes of wealth management, there is still the need and relevance for the professional fiduciary services offered from the Crown Dependencies. And it's clear – as with the position ten years ago – the leaders in the field today are likely to be different from the leaders in ten years' time. Those who can adapt to the changing dynamics and create opportunities for delivering excellent service and value are more likely to succeed. More than ever a clear direction and ability to embrace cultural variations is necessary to cope with the pace and technical change that is now commonplace.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.