Originally published in MENA Fund Manager, October 2009
Guernsey benefited from the flight to quality during the worst of the financial crisis but is now looking to establish itself as the domicile of choice for the next generation of MENA funds. MENA FM speaks to William Simpson, Managing Partner at Ogier; Martin Tolcher, Managing Director of Legis Funds Services; and Stuart Place, Marketing Director at Argyll Fund Services.
MENA FM: How does Guernsey differ from other fund jurisdictions and what advantages does it offer potential Middle East fund clients?
William Simpson (WS): Guernsey is a regulated jurisdiction and does not offer unregulated fund structures. There are two types of fund: the authorised fund and the registered fund. The authorised fund is subject to a higher ongoing regulation and to review by the Guernsey Financial Services Commission (GFSC) upon and as a condition of establishment. The registered fund provides for a regulated fund, although the GFSC do not conduct a review of the fund prior to establishment, instead of relying upon due diligence and certification by the Guernsey-based administrator. Registered funds can be established quickly. It is possible to transfer between two different statuses, both of which are provided for under the same governing law.
The advantages for Middle East clients are (a) on either basis a regulated fund in a well-respected jurisdiction and a convenient time zone and (b) in respect of registered funds, a speedy establishment. The fact that Guernsey has no un-regulated funds means that it is generally one of the best regarded jurisdictions for regulated funds. However, flexibility is retained in that funds established outside of Guernsey may be administered in Guernsey, subject to complying with certain requirements. Such funds would not, however, be regarded as Guernsey funds nor would they be regarded as regulated.
Martin Tolcher (MT): Guernsey's ongoing legislative changes, especially in streamlining the regulatory approval process for open-ended and closed-ended funds, together with the continued perception of Guernsey being very well regulated and being particularly strong on corporate governance, enables it to maintain its position in the very top echelon as a fund jurisdiction.
With respect to Middle East fund clients, Guernsey is able to offer structuring and servicing to meet the requirements of Shariah funds and Islamic finance. The various fund types that can be established in Guernsey are such that they are flexible enough to ensure compliance with Shariah law.
Stuart Place (SP): In comparison to other jurisdictions, Guernsey has taken a lead in fund administration for a number of years. This is in part due to the fact that the approval process by the island regulator, the GFSC, places a greater onus on the licensee, as opposed to the product, which focuses more on ensuring that Guernsey and its licensees meet international regulatory standards. As an asset manager, being based in Guernsey gives Argyll the ability to offer some unique products – the GFSC does not take the view that they know best and as such, we are able to launch innovative offerings that we might not be able to in other jurisdictions.
MENA FM: In what areas is Guernsey currently experiencing growth?
MT: Despite the current economic downturn, which has resulted in a reduction in the value of assets under management and administration in Guernsey due to performance, we still see positive signs with respect to new fund business being established in Guernsey. Property fund structures, where the ultimate assets are increasingly located in the MENA region and Eastern Europe, as well as the more traditional areas of the UK and Continental Europe are being launched, as are venture capital structures.
SP: Guernsey-based firms have certainly benefited from a flight to quality in recent times. What's more, the long-standing reputation of Guernsey combined with the efficiency with which products can be launched has led to a rise in assets under management year after year. In times of financial difficulty, as has been recently experienced, people often find that putting their money into premier financial centres provides a sense of security, and this has had a markedly beneficial impact on Guernsey, and other jurisdictions like Guernsey.
WS: Guernsey is currently experiencing growth in funds of all types, but predominantly private equity, infrastructure and property funds. Hedge funds and funds of funds are slightly less prevalent.
MENA FM: What challenges has Guernsey faced as a result of the current economic climate and what measures have been taken to tackle them? Have any of these challenges been turned into an advantage?
MT: In common with other fund jurisdictions, Guernsey has been impacted negatively because of the current economic climate, in that clearly there is a downturn in the number of new funds being established, and those that are take longer from establishment to launch and are often looking to launch with assets lower than those originally targeted. This has also resulted in fund promoters focusing more on consolidating and restructuring existing funds and examining the service levels of providers, especially administrators and custodians.
Potential investors in the funds too are far more demanding in terms of the jurisdiction, corporate governance and service providers. However, such challenges should be seen positively for Guernsey, since its reputation as a well-regulated jurisdiction, with high- quality service providers positions us well not only to demonstrate to existing funds – their promoters and investors – the benefits of being in Guernsey, but also to potential new funds and promoters for when the upturn starts.
WS: The principal challenge has been in respect of sizing businesses to the current workload. However, there have been very few redundancies in Guernsey and, generally speaking, the workload for all financial services businesses has held up well. It is likely that businesses will nevertheless focus more keenly on resource planning and cost control going forth. No obvious gaps have appeared in the regulatory control exercised by the GFSC as a result of the current economic climate. However, Guernsey is likely to take all reasonable measures in support of developments in other jurisdictions, such as the UK and Europe, for the purpose of ensuring financial stability, countering financial crime and preventing tax evasion.
The less than customary annual increase in business, due to the current economic climate, has also caused businesses to consider more closely the geographical source of work. This has been a positive aspect for the jurisdiction, leading to a greater interest in the Middle East and Far East as a location for source of work.
SP: While, domestically speaking, Guernsey has been less affected by the global financial climate than many conventional jurisdictions, the effect of the downturn on the entire financial services sector, and the subsequent impact on Guernsey itself, cannot be ignored. However, that said, the island is still benefiting from continued innovation, and (to give an example) several businesses are currently developing their expertise in Islamic finance – in September alone, three seminars on the topic of Islamic finance are set to be held in Guernsey. Although the economic downturn was somewhat expected, the extent of the crisis was surprising to many and looking forward, I believe that lessons can be learnt from the Islamic model.
MENA FM: What is the domicile doing to attract business from the Middle East? What developments been made?
MT: As mentioned previously, Guernsey is already well positioned to deal with business from the middle East, whether that be for Shariah-compliant structures, or where promoters establish funds for investment by individuals from the region, without any such Islamic restrictions. Legis Funds Services is highly experienced in both areas – we administer, for example, a closed-ended fund investing in Lebanese venture capital opportunities, as well as open-ended funds of funds, established as Protected Cell Companies (PCCs), seeking investment from individuals and entities from the region. Legis also administers a PCC listed on the internationally recognised Channel Islands Stock Exchanges (CISX) that includes a Shariah-compliant Sukuk and Murabaha investments. It is important for the Guernsey lawyers, custodians and administrators to ensure they have the expertise to service such vehicles. Within Legis Group, we have such Shariah-law expertise.
It should also be remembered that not only is Guernsey continually looking to attract business and clients from the Middle East, but also sponsors and promoters are looking to the MENA region in which to invest. For example, Legis Fund Services is the administrator of a recently established open-ended fund investing in real estate in Dubai.
SP: The majority of the Middle East is tax neutral, and it is clear why Guernsey, an established financial centre that imposes no taxes on external investors, is considered to be a natural home for Middle Eastern products. Additionally, we have the Channel Island Stock Exchange, and the ability to do exchange listings can potentially give Middle East products a better route to market, particularly in Europe, without being compromised by being in a conventional jurisdiction like the UK, where tax can inhibit performance. Guernsey Finance, the island's promotional agency, is also working to attract business from the region and has visited the Middle East, and attended fund conferences in the region, on a number of occasions.
WS: Guernsey Finance will be active during the latter half of this year in the Middle East and a number of the finance businesses in Guernsey are despatching representatives to visit different countries in that region for the purpose of promoting their firm and Guernsey. There is no need to change the structure of Guernsey regulation or indeed provide for any different legal structures for this purpose. All current requirements are adequately catered for by the legal and regulatory framework currently in place. However, Guernsey does need to and is taking steps to make Middle East clients more aware of what is currently available. Additionally, there is a level of growing knowledge and awareness in Guernsey of individual requirements of Middle Eastern clients, in particular, in some cases, in respect of Islamic finance.
MENA FM: What opportunities do you see arising for Guernsey in the near future?
SP: We are seeing continued active investment into the Middle East, with a number of Middle East and North Africa funds established over the past few years - for example, Argyll Investment Services itself is currently responsible for a recently launched property fund in Dubai (the Bluestone Fund), in a region which is continuing to develop in a number of areas, such as development finance.
In terms of fund products, Guernsey has established itself as a centre of excellence, particularly with regard to pension funds. The concept of a pension in Guernsey has, historically speaking, always been a fiduciary concept as opposed to an insurance-based promise. Today, a rising number of international investors – often ex-pat or retired ex-pats – located in third-party jurisdictions want their pensions affairs to be handled in a neutral jurisdiction and Guernsey has worked hard to become the pensions jurisdiction of choice.
MT: In order for Guernsey to be positioned to take advantage of opportunities in the near future, it needs to continue to demonstrate the highest standards, be that of the regulator and/or the local service providers. Earlier this year, Guernsey secured a position on the OECD "White List" of offshore jurisdictions, which are considered well regulated and tax transparent. Opportunities will arise for Guernsey, as it continues to adapt and be flexible in meeting the demands of the international regulatory community, fund sponsors and promoters, and investors.
WS: The economy worldwide appears to be improving and investment opportunities abound. Guernsey has retained and in some areas slightly expanded its workforce in the financial services sector. It is well known for regulated funds, as discussed previously, in a broad range of areas. It is likely that Guernsey will benefit significantly from the upturn in investment activities in Europe in any event. However, continuing efforts in the Middle East and Far East present a real opportunity for Guernsey. It is a strong, but less well known, competitor to the jurisdictions which are currently popular in those areas.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com .
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