Originally published in Investment Europe, August 2011
Within a rapidly changing global finance industry, offshore centres are reassessing their identities and their place within it. Guernsey is one of them, but it has a difficult balancing act to strike between reaching out to new business and preserving its identity, writes Luisa Porritt, Staff Writer at Investment Europe.
Offshore centres have been engaged in a hard fought battle since the first wave of the financial crisis hit in 2008. Despite often being preferred by managers over larger jurisdictions for their efficiency and favourable tax structures, and by wealthy investors seeking privacy and protection, politicians have made them scapegoats for the wider industry's failings.
They have an inherent mistrust of offshore centres, labelling them "tax havens" and saying they are accountable for the funding gap dragging down Western markets. But according to William Simpson at Ogier, "the OECD and EU were on the warpath before the crisis-they must have known there was a budgetary problem." He says Guernsey's books were balanced until the EU and OECD saw the tax system as pernicious, now there is a "black hole" as the Channel Island is running a budget deficit for the first time.
Representatives from Guernsey's finance industry think the level of suspicion emanating from larger powers is a disservice to what the island does. While Jersey is undertaking quite an aggressive lobbying campaign, Guernsey's finance industry representatives are instead making a push to capture new business, says deputy chief executive and technical director at Guernsey Finance Fiona Le Poidevin. With the balance of growth transferring to the east, Guernsey has set its sights on Asia. In May, the Hong Kong Stock Exchange's executive committee gave their approval for Guernsey incorporated companies to list on the exchange. A number of Guernsey companies have opened offices in Asia: Law firms Mourant Ozannes will open in Hong Kong in August, Collas Crill is already in Singapore, Ogier in Shanghai. Fund administrators have also broken into the region: Nerine Group was the first Channel Islands trust company to open in India in April.
Moves have been boosted by efforts from Guernsey's political authorities. Last year, the island's chief minister Lyndon Trott signed a Memorandum of Understanding (MoU) with the Shanghai Financial Services Office, and a Tax Information Exchange Agreement (TIEA) was made with Chinese authorities on the same trip. A further trip to Hong Kong is planned this year to improve relationships with the Chinese government and regulatory officials.
Russia is in Guernsey's sights, but the jurisdiction has to be careful not to entangle itself with the wrong kind of business. Le Poidevin recently returned from a fact finding mission in the country, and concludes there are opportunities for Guernsey both to offer structuring for Russian investment funds and for Russian corporates to set up through Guernsey. Certainly, Russia has spending power and is ready to use it. "The mentality is spend now, because it might be gone tomorrow," she says.
"It is perceived as difficult to do business in Russia because it is unsafe. That is misguided to some extent. We're finding good business there," says Le Poidevin. Moscow is reforming its pensions and insurance markets, seen as an important step toward cleaning up its act.
But Guernsey has a reputation to uphold, adds Le Poidevin. It has to be careful not to sacrifice due diligence to draw in Asian business, where that process is less ingrained in the culture. "Managers manage here if they are the sort of people Guernsey wants to see. It's not suited to small start ups, but sophisticated managers with a track record, who want not overly restrictive regulation but not an unregulated domicile either," says Robert Varley at law firm Babbe.
Relations with the EU are somewhat strained. To retain business from the alternatives section of the European funds industry, or alternatives managers outside Europe looking for more regulated structures, Guernsey will have to cooperate with some of the regulations demanded by the region's authorities. Guernsey, alongside fellow Channel Island Jersey, has already said it will be "AIFMD ready", or, able to comply with the controversial Alternative Investment Fund Managers' Directive. The directive, introduced as a response to the 2008 financial crisis but which targets hedge funds, private equity and real estate, industries considered separate from retail banking, has come under a weight of criticism for being rushed through too quickly and trying to encompass too much.
"We are close to the negotiations on AIFMD. We hope for a positive outcome," says Le Poidevin. What that compliance will look like is unclear, largely because details of the directive are being drawn out in staggered phases. Guernsey's authorities are wary of signing up to an unexpected measure. "We don't want something to swing through that we're not expecting," says Le Poidevin. "We envisage getting a passport. But the devil's in the detail."
Being outside the EU means Guernsey can pick and choose directives that suit it. The island is not signing up to the Solvency II directive, targeted at retail policyholders, because it hosts the captive insurance business. That way, it avoids "enormous" costs incurred through additional administration and use of resources. With AIFMD to meet from Europe, and Dodd Frank and the Foreign Account and Tax Compliance Act from the US, "the amount of work is immense", says Le Poidevin. It is in the island's interests to minimise those burdens and preserve its identity, if it can stave off pressure from larger jurisdictions.
For the moment, Guernsey is winning the battle to set up closed ended funds, says Robert Varley at law firm Babbe, where he advises on fund structuring. Some managers choose Ucits funds structured through Dublin and Luxembourg because they are highly regulated, a protection sought by institutional investors. "Managers feel driven by investor requirements, and those investors are increasingly concerned to see a certain level of regulation, compliance and corporate governance," says Varley. But according to him, "the level of regulation and costs of establishment are perceived as better than Luxembourg." Other managers find Ucits expensive and restrictive, while if they lack the expertise to set up that type of fund, using a platform is costly.
Mourant Ozannes partner Gavin Farrell says of Guernsey: "It's a management centre, like the head office". With custodians, lawyers, private banking and wealth services based there, Guernsey is "a jurisdiction which lives and breathes", he says.
All the more important is that it shows signs of diversifying amid rising regulatory pressure. Not only is the island's financial services industry looking to establish business links with other worldwide markets, it is introducing variety to its services. Odey Wealth is one of a few fund providers on the island, alongside Collins Stewart Wealth Management and Argyll Investment Services. Traditionally, Guernsey serves the UK market but Le Poidevin sees it as a positive if the island can do more. "It's healthy for the island because we need to diversify the economy where we can," she says.
But Guernsey's financial services industry and government will face a difficult choice between preserving the island's treasured way of life and expanding to attract more business. Good quality education can be found there up to A level, but Guernsey does not have a university. A number leave and come back, including Graham Harrison at Asset Risk Consultants who previously worked in London. "We need to attract more young people. All small jurisdictions need to think big," he says. Private banking and wealth specialist at PwC Nick Vermeulen agrees. He says Guernsey needs a bigger airport, but the downside is the disruption that will bring.
The real test will be whether Guernsey and other financial centres, despite ostensibly being competitors, can recognise their common interests and partner against pressure from the US and EU. Signs of that are emerging. Last year, Guernsey and Jersey teamed up to open a Brussels office giving them a united voice in Europe. Chairman at Nerine Trust Keith Corbin thinks there is more of this to come. "Trying to achieve regulatory arbitrage is a short term phenomenon. It is important the offshore jurisdictions communicate, they will be stronger standing together than individually.
"International regulation particularly since 2008 is under focus, it will continue that way."
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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