With the growth in the number of offshore financial centres the level of competition between them increases. Jurisdictions have found it more and more difficult to differentiate themselves from competitors especially in the well established businesses of investment, trust and company administration and insurance.

With the announcement of the development of a Channel Islands Stock Exchange based in St Peter Port and the introduction of a number of improvements to general company law, such as the migration of companies, Guernsey is working hard to ensure that it remains competitive and continues to hold a leading position.

This strategy can be seen in the introduction of the Protected Cell Company (PCC), a unique vehicle developed last year which is already attracting international interest and generating worthwhile new business in the investment fund and captive insurance sectors.

PCCs are corporate structures in which the assets of different share classes are free from the liabilities of other share classes. It affords each individual share class the same limited liability that would be obtained if separate corporate structures were used for each different category of investor.

PCCs are well-suited to umbrella funds, particularly those which have classes based on gearing or make use of derivative products. Each fund is a separate "cell" whose assets will be kept separate from assets of other cells. Under the PCC law, the assets of each cell will only be available to the creditors of that cell.

The downward spiral of markets in the Far East illustrates how unexpected reversals can affect investment fund fortunes and, perhaps, in certain circumstances, cause friction over rights to assets between investors in different share classes. If the net asset value of one class nose-dives, there may be a temptation for loss-taking investors to claim on the fund's better-performing classes.

Some investment funds have already moved to ensure such questions do not arise. Clariden International Investments PCC Limited, for instance, is one of the newer open-ended investment companies authorised by the Guernsey Financial Services Commission.

PCCs also appeal to businesses which previously did not warrant the establishment of their own captive insurance company. These businesses will be able to participate in a captive with other businesses without exposing themselves to the risks of the other participants. In addition, the PCC structure will be particularly useful to captive insurance companies which wish to ring fence distinct areas of risk and activity.

Whilst the introduction of PCCs demonstrates Guernsey's ability to develop sophisticated vehicles and be at the leading edge of offshore financial services, it is often forgotten that the island never set out to be an international financial centre. Low taxes applicable to residents of the island since the 1950s, together with the security and stability enjoyed by Guernsey have resulted in many of the world's leading financial institutions establishing a presence on the Island.

It is true to say that in the past Guernsey has been most reluctant to change laws purely to attract financial business. This explains why Guernsey was one of the last offshore jurisdictions to introduce a trust statute. Trusts had been established under Guernsey common law since the early 19th Century and certainly during the 1970s the trust industry had seen significant expansion.

There was considerable debate over whether a trust law was needed. The concern was whether a statute would restrict the development of trust business. Previously, trust deeds, whilst being exceptionally long documents, included every conceivable power. The trusts created, therefore, were extremely flexible. This adaptability was also seen as a competitive edge against other jurisdictions which had chosen to codify their law.

The Trusts (Guernsey) Law 1989 was introduced after much consultation with the professional community on the Island. In practice the Law has provided a simple and effective basis for administering trusts. The Law requires the highest standards of conduct from trustees. It includes a unique concept of a trustee acting 'en bon p‚re de famille', that is, as a good father would act in the best interests of his children. The Law has only been amended once when The Trusts (Amendment) (Guernsey) Law 1990 was enacted to clarify the right of settlors to establish trusts in Guernsey which may contradict the testamentary laws of their own country.

However, Guernsey has not followed the majority of other offshore jurisdictions in passing legislation for the establishment of asset protection trusts and purpose trusts, designed to attract very specific types of new business. A concern that such legislation would not necessarily bring the quality of business the Island is seeking governed this decision.

The introduction of International Companies (IC) in 1993 may have been the turning point when the Island recognised that to compete in the international arena it was necessary to have specific legislation to bring business to Guernsey.

ICs are companies which are liable to pay local income tax at an agreed rate of up to thirty per cent. This increases the range of tax paying options for foreign investors who wish to conduct international business through a Guernsey based entity. Before ICs were introduced, there were only two options. Companies could pay the standard rate of income tax at twenty per cent on all the income of a locally registered company, or they could not pay tax at all by electing to fulfill the requirements of a Guernsey incorporated 'exempt' company.

A significant number of ICs focus on commercial activities but most are engaged in group finance operations. Some are branches of companies incorporated in a wide variety of foreign jurisdictions.

Guernsey continues to be the leading jurisdiction in Europe for the establishment of captives. An important newcomer to the Island last year is the international captive and reinsurance management group, SINSER Holding Limited. Another significant development was the creation of Generali International Limited following the acquisition of the Sun Alliance International Life Assurance Company Limited by Guernsey-based Generali Worldwide, part of the multinational Generali Group. Generali is the seventh largest insurance company in the world and Europe's 40th largest company by market capitalisation.

Guernsey's legislative efforts in 1998 are anticipated to be focused on further regulation. It will be one of the first offshore jurisdictions to introduce a Fiduciary Business Law. The Law has been under discussion for a number of years and a Joint Working Group was formed last year to ensure consultation between the regulators and the trust sector.

As evidenced by this approach to fiduciary legislation, Guernsey takes considerable care before introducing new legislation and certainly does not pass laws in the vain hope of attracting new business. However, maintaining its position as a leader will require further innovations and I believe these can be expected in the years ahead.

This article provides a general outline on the subject at the time of writing. It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.