Originally published in the Captive Review, Guernsey Report, October 2008
Christopher Anderson Of Bedell Cristin Guernsey Outlines The Latest Regulatory And Legal Changes In Guernsey
To quote Peter Shilton: "If you stand still, there is only one way to go, and that's backwards." Guernsey has, clearly, been heeding Shilts' advice as the last year has seen a huge number of legal and regulatory changes:
- the tax regime in Guernsey was overhauled on 1 January 2008;
- a new Companies Law was introduced on 1 July 2008;
- during 2008, the Guernsey Financial Services Commission (GFSC) released a number of new regulatory requirements aimed specifically at insurers.
This article discusses the impact of these developments on the insurance sector.
Prior to 2008, a very large number of the companies established in Guernsey were exempt companies. That meant that they were not regarded as resident in Guernsey for tax purposes and did not pay tax on any income they received from non-Guernsey sources – even if that income was remitted to Guernsey. Since most exempt companies did not have any Guernsey sourced income the exemption meant that they did not pay Guernsey tax at all.
From 1 January 2008 only collective investment schemes (for example, funds) established in Guernsey remained eligible for exempt status. All other companies became subject to tax on all of their income at the applicable rate. However, for 99% of Guernsey companies (including, notably, Guernsey licensed insurance companies) the applicable rate is 0%. Accordingly, the tax changes have had no financial impact on Guernsey insurers.
New Companies Law
The Companies (Guernsey) Law, 2008 is the single most significant piece of companies legislation in Guernsey for almost 15 years. The new law consolidates over 10 separate laws and ordinances, including the protected and incorporated cell companies ordinances.
However, it is not just a consolidation of the existing rules. The new law heralds a modern, high speed company formation process, provides increased flexibility for Guernsey registered companies in a number of areas and imposes a number of additional obligations on companies and their directors.
At around 600 pages it is impossible to distil all of its contents into a brief note but what follows are some of its key features.
- Better, Faster, Stronger
The new streamlined company formation process and the creation of the new web accessible Guernsey companies registry is one of the most important changes brought about by the new law. Guernsey companies can now be formed in 24 hours for a standard fee, within two hours for an additional fee and, from September 2008, within 15 minutes for an even higher fee.
Prior to the enactment of the new law, each Guernsey company was formed by order of the Royal Court of Guernsey with the prior consent of the GFSC and the Law Officers of the Crown. Consequently, the formation of a new company rarely took less than two days.
Those regulatory consents were principally concerned with the identity of the beneficial owners of the new company. Under the new law, those consents are no longer required. Instead, responsibility for ensuring that appropriate checks have been conducted on the owners of the new company lies with the licensed corporate service provider responsible for forming the company.
This attitude is consistent with the GFSC's developing approach to regulation under which responsibility for ensuring day-to-day compliance is pushed back onto Guernsey's licensed institutions with the GFSC reviewing, inspecting and auditing the activities of those licensed institutions. Guernsey's latest fund approval regime, the registered fund, is a case in point.
All documentation relating to companies is available online and is fully searchable. Thus company searches – vital for verifying the status of a company – can now be conducted seven days a week, 24 hours a day. So there is no longer any excuse to duck out of those 3am completion meetings!
- Single Member Companies
Under the new law a Guernsey company need only have one shareholder – the old requirement was a minimum of two. As a result, nominee shareholders (whose role is to hold one or more shares on trust for the beneficial owner) are commonplace on the share registers of Guernsey insurance companies, and may even charge a fee for providing such a service. Under the new law nominees can be dispensed with and all of the issued shares can be held direct by the parent company. However, care must be taken to ensure that a quorum can still be obtained at general meetings with only one shareholder – in light of the previous requirements, a typical Guernsey company's articles often provide for a quorum of two shareholders.
Prior to 1 July 2008, a Guernsey company was only permitted to make dividend payments from "profits available for the purpose". The old companies law provided little guidance as to what constituted profits and, consequently, it was quite common for companies, including insurance companies, to effect a court approved share capital reduction in order to create a distributable reserve of "profits" out of which dividends could be paid or shares redeemed or repurchased.
Under the new law, there is no restriction on the funds out of which a Guernsey company can pay a dividend, provided the company meets a solvency test. For insurance companies this will mean satisfying the solvency requirements imposed under the Guernsey insurance law. This change provides hugely increased flexibility to Guernsey insurance companies wishing to make dividend payments. There is a catch though. Given the restrictions contained in the old companies law, the articles of association of most Guernsey insurers contain a restriction on the payment of dividends otherwise than out of profits. Accordingly, in order to take advantage of these provisions, insurers will have to amend their articles of association to remove that restriction.
- Revised Indemnity Provisions
Most jurisdictions restrict the indemnities or exclusions from liability that can be granted to directors of a company. Under the new law, the Guernsey law restrictions on a company indemnifying its own directors in respect of a breach have been tightened.
Under the new law, a director cannot exclude any liability arising from his negligence, default, breach of duty or breach of trust. Also, a director cannot be indemnified against criminal fines, regulatory penalties, criminal or civil defence costs (where the case is lost). Notably there is an exception for indemnities provided under insurance policies. In light of this, directors of licensed insurers in Guernsey should consider their D&O insurance cover and should look closely at existing indemnity provisions to ensure that they withstand the new restrictions imposed under the new Law. Likewise, insurers writing D&O policies which respond only to the extent that the company fails to indemnify its own directors or officers may find themselves writing broader cover than they had anticipated.
- Own Solvency Assessment
The GFSC has introduced solvency requirements for licensed insurers which apply in addition to the minimum solvency requirements set out in the Insurance Law. Under the new regulations, each Guernsey licensed insurer is required to determine the level of capital resources it requires – recognising that the board of directors of an insurance company are in the best position to assess that company's individual solvency requirements.
The requirements accord with the latest solvency standards issued by the International Association of Insurance Supervisors. However, it is submitted that the regulations merely formalise a process that any prudent board of directors would already undertake.
- Corporate Governance
Finally, the GFSC has issued a revised code on corporate governance applicable to licensed insurers. The code has been expanded and contains some quite detailed provisions in relation to the management of a Guernsey licensed insurer, particularly in relation to the risk assessment and management responsibilities of licensed insurers. The expanded code reflects the ever-increasing importance of corporate governance in today's business world.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.