18 October 2004
Officials and financial industry practitioners in Jersey and Guernsey are mostly too polite to point it out, but in any comparison between offshore financial centres they possess a certain climatic advantage – not that it might seem particularly evident on a wet and gloomy winter’s day off the Normandy coast.
However, when Hurricane Ivan devastated the Cayman Islands in early September, law firms and consultants were among the international businesses that chose to relocate staff temporarily to the Channel Islands, among other locations. The two islands are already carving out a promising business in the provision of disaster recovery facilities.
Escaping the violent storms that have devastated large areas of the Caribbean over the past three months is only one reason, and a relatively small one, why members of the financial services industry in Jersey and Guernsey are feeling optimistic these days, certainly compared with one or two years ago.
There is a palpable sense that the upheavals caused by a succession of international regulatory and legislative initiatives have largely been dealt with, and reassurance that, for the most part, the islands’ own regulatory bodies, while requiring adherence to rigorous international standards, are not seeking to push ahead of the pack – an issue that has been a cause for concern in recent times.
The regulators in the Channel Islands are anxious to be seen to be doing their job in a way that does not place unnecessary burdens on companies. Peter Neville, director-general of the Guernsey Financial Services Commission (GFSC), insists that his philosophy is to maintain Guernsey’s competitiveness without letting standards slip.
“What’s important when regulating an industry is to approach things in a fair and pragmatic way,” explains Neville. “The commission works very hard at keeping in touch with industry and liaising on existing and proposed regulations. Obviously, we must meet international standards, but we do this in consultation with industry. The aim is to meet those standards but not to get ahead of them. By maintaining close contact with industry we ensure that we implement the requirements in the most effective and least bureaucratic way possible.”
Although Jersey and Guernsey did not suffer in the same way as more retail-orientated jurisdictions such as Luxembourg from the three-year bear market in equities, the (albeit hesitant) rebound has helped to rebuild the confidence of investors and encourage more activity among product providers.
Both islands have moved to end discrimination between offshore and domestic companies, a measure demanded by the EU, by lowering their corporate income tax rates for all companies to zero. This decision has boosted the offshore business sector, even if, particularly in Jersey, there is concern about how the government will subsequently balance its budget.
Meanwhile, the introduction by Jersey earlier this year of its Expert Funds Guide has given the jurisdiction a kick-start in its drive to attract more of the global surge of money that is seeking out alternative investments. Guernsey, which up to then had been perceived as a more attractive jurisdiction for funds, is planning to introduce new guidelines itself in the coming months in order to not be left behind.
The extremely positive market response to the Jersey initiative has highlighted a key opportunity for the Channel Islands; since alternative funds are not covered by the EU’s Undertakings for the Collective Investment of Transferable Securities (UCITS) legislation and its single market, they are not at the same disadvantage compared with EU jurisdictions that have mostly killed off the islands’ traditional retail funds business.
It also helps that the servicing of alternative funds is, to a much lesser extent than traditional funds, a commodity business where profitability comes with economies of scale and massive investment in IT systems. Where skills and sector expertise are more important, smaller jurisdictions can compete more effectively with the major fund centres.
Although the introduction of expert funds in the spring is likely to have had at best a marginal effect on the figures, the signs of a general upturn can be seen in the latest business figures from the Jersey Financial Services Commission (JFSC), the island’s industry regulator.
According to the JFSC, bank deposits increased by 1.25 per cent to £157.6bn, a new record, during the three months to 30 June; funds under investment management grew by 2.2 per cent during the quarter (and 27.5 per cent over 12 months) to £36.6bn; and the number of company incorporations, which plummeted at the end of 2002 and early 2003, rose to 584, up 32 per cent from the same period a year earlier.
It is a similar story among deposit-takers in Guernsey, according to Peter Symes, managing director of Yorkshire Guernsey, who notes that total deposits from some 13,000 customers reached the £1bn mark earlier this year. However, the sector is still bracing itself for the impact of the EU’s Savings Tax Directive, which is due to come into force in June next year.
Banks and building societies on the two islands say they are ready to meet the challenge of the directive, which in the crown dependencies means offering individual customers resident in EU countries the choice between deduction at source of a tax on interest income starting at 15 per cent and rising in 2011 to 35 per cent, or disclosure of their investment to their home tax authorities.
However, institutions express irritation about the additional burdens imposed by the directive, since estimates of the overall proportion of interest-bearing deposits held in the islands by EU-resident individuals run as low as 10 per cent of the total. If EU countries are expecting a windfall from the tax, they are likely to be disappointed, says Phil Austin, head of the industry-backed promotional body Jersey Finance.
“We’re lucky because we happen to be putting in a new IT system anyway, so we were able to incorporate the option of either retention tax reporting or full disclosure,” says Symes. “A lot of other people have had to spend a great deal of money in getting their systems ready. One bank’s already spent more than £200,000, not including writing to their customers and the amount of time it will take to input all their details.”
Mort Mirghavameddin, chief executive at Investec Bank (Channel Islands), adds: “The tax itself is not a problem, but there are systems and compliance issues that fall squarely on the firm. My concern in the very long run is that if there’s a completely level playing field, the countries to benefit will be those that offer a superior intellectual capital and service.
“Pricing will be similar across the board, but in Jersey, Guernsey and the Isle of Man, it may be more difficult to hire the right quality of graduates. Clients may choose to put their money in Germany or Switzerland instead. The focus may turn instead to specialist areas such as trust administration for high-net-worth individuals, and the banks that remain in the Channel Islands will mainly be servicing those areas.”
Mirghavameddin says that recruiting suitably qualified staff in a tight labour market is already a problem. “It’s difficult enough to get people to move from a Barclays or Goldman Sachs to Investec within London, let alone when it involves a major change of lifestyle,” he says. “But in terms of getting licences, the GFSC and the housing authorities have been very good. They recognise that if you want to stay in the forefront, you need to be able to bring in quality people with the right specialisation. The process of obtaining licences has got a lot less painful.”
Other changes have been for the better, such as the recognition of the Channel Islands Stock Exchange (CISX) by the UK’s Inland Revenue. Chief executive of the CISX Tammy Menteshvili says: “This means that we’re recognised as being of international standards and that investors in listed securities can enjoy the same rules as for those listed in the UK.”
In Jersey, there is satisfaction that the decision to end corporate income tax has been resolved, despite some popular opposition to the first major change to the island’s tax system in 60 years. “There’s inevitably some opposition because people are being asked to pay more personal tax to maintain the competitiveness of the finance industry,” says Austin at Jersey Finance.
He notes that Jersey’s finance and economics committee has put forward five proposals to recoup the tax revenue lost through the zero corporate tax level, of which four have been approved by the States of Jersey, while a fifth, a sales tax, is currently being reworked and is due to be considered again in February.
Austin is also sanguine about the impact of the Savings Tax Directive. “We do very little Continental European private client business, never have done,” he says. “When I was at HSBC here, we looked at every part of the world other than Europe, because the group had subsidiaries in European countries. While we have to go through the motions of preparing for the directive, the impact will be relatively little.”
Austin has played a leading role in helping to develop markets abroad for Jersey’s financial services business through conferences, seminars and other events in London, New York, Asia and especially the Middle East. Another Jersey delegation, headed by the island’s leading politician Frank Walker, is heading for the Gulf in November, with stops scheduled in Abu Dhabi, Dubai, Bahrain and probably Qatar. This visit, Austin says, will showcase specific products and services offered by Jersey companies.
The Guernsey financial services industry is looking to Talmai Morgan, chief executive of the Guernsey Promotional Agency since July, to lead a similar effort to boost business. The appointment of Morgan, previously director of fiduciary services at the GFSC and before that managing director of Bermuda Trust (Guernsey), came after practitioners indicated that they wanted someone with direct professional experience of the sector to succeed John Bridle, who had headed the agency since its launch three years ago.
He believes that Guernsey has benefited from the international spotlight on its business from international regulatory initiatives, highlighting developments such as the creation of a training agency to boost professionalism within the industry. “We have a large, experienced and increasingly well-qualified workforce,” he says, noting that today international financial centres need critical mass in order to thrive, or even to just survive.
“In the past few years we’ve seen a peeling off of places which can’t hack it because, with the best will in the world, they can’t meet the international standards required, whether in terms of anti-money laundering compliance or the quality of service which the modern international client demands,” adds Morgan. “In hindsight, the spotlight we’ve seen over the past six or seven years has done us a lot of good.”
Increasingly, regulation in the Channel Islands involves close relations with counterparts abroad, particularly in the UK. This has been highlighted by issues such as the alleged mis-selling of split capital investment trusts, many of which were domiciled in the islands, and the near collapse of insurer Equitable Life, which sold policies outside the UK principally through a Guernsey branch.
Peter Neville, director-general of the Guernsey Financial Services Commission (GFSC), says: “The Equitable Life difficulties have raised a number of issues of real concern for Guernsey policyholders. Most of these are specific to the business of that company, but others are of broader significance. We, with everyone else, are awaiting developments in the UK.
“Cross-border regulatory issues are the subject of specific, regular meetings held with the appropriate staff at the FSA [Financial Services Authority]. The commission’s aim is to ensure, as far as possible, that we are fully aware of any issues that might affect the interests of those who purchased policies through the Guernsey branch operation. This can only be achieved through close liaison with those responsible for the prudential supervision of the company.”
He believes that the dealings over Equitable are part of a broader pattern of cooperation. “The commission also holds regular meetings with the FSA to discuss issues of general application to insurance business which have a cross-border perspective,” he continues. “For example, where the Guernsey business operates through a subsidiary or branch operation of a UK regulated company.
“Those meetings cover a broad range of general topics as opposed to the specifics of any particular business operation. In order to facilitate the smooth exchange of information that is a necessary part of these meetings, the commission has a memorandum of understanding with the FSA.”
A major area of business for the Channel Islands, like other dependencies of the UK and the British Crown, remains the fiduciary and corporate services market, where initiatives over the past three years to regulate trust companies and individual trustees are credited, by some practitioners at least, with giving the islands a significant marketing tool.
Although there has been a handful of public and legal spats with practitioners disgruntled at the decisions of the authorities, the exercise has proceeded relatively smoothly, according to Peter Neville, director-general of the Guernsey Financial Services Commission (GFSC).
“Fiduciary regulation first came into force in April 2001, and the regime has been fully operational for some time, although there are a handful of existing businesses whose licence applications remain to be finally determined,” says Neville. “There are various reasons for this, including the winding down of the trust company’s activities.”
Neville, who notes that Guernsey currently has 153 holders of full fiduciary licences and 53 personal fiduciary licensees, says the legislation has to some degree prompted consolidation in the industry, mostly as a result of small and one-man trust providers joining forces or being acquired by larger players. However, there have also been instances of new specialist firms being set up by industry practitioners. Neville says: “As we expected, we saw an initial round of consolidation at the time regulation first came into force, but the effects of that were worked through some time ago and more recent changes have primarily been driven by other factors, such as international groups reviewing in which jurisdictions they should have a presence.
“As well as consolidation, we’ve had healthy numbers of new licence applications. Consolidations and mergers do not necessarily have an impact on overall levels of business in the bailiwick, which appear to have held up well.”
At the same time, concerns have been raised about the readiness of the authorities to match legislative initiatives in other jurisdictions, notably in the Caribbean, where new types of trust have been created in recent years to cater to the perceived needs of clients that traditional trust structures do not adequately meet.
Examples of new developments in trust legislation include the Cayman Islands’ Star Trusts, a purpose trust structure, and the British Virgin Islands’ (BVI) Vista Trusts, created last year specifically to meet the requirements of settlors who wish to leave the companies they own to descendants without requiring trustees to interfere with management or sell shares in order to diversify the trust assets.
Although the Crown dependencies have been wary of joining this dash to create innovative trust structures (some of which have not been properly tested in international courts of law), there seems little sign that practitioners believe Jersey and Guernsey are in danger of losing business as a result.
Steve Meiklejohn, head of trust and estate planning with the Ogier Group in Jersey, says it would be an exaggeration to say that developments in the trust field in other offshore centres such as Cayman and the BVI might threaten Jersey’s position as a leading jurisdiction.
“It would be wrong for me to say that the industry is not looking on with interest at developments in other jurisdictions,” says Meiklejohn. “And we’re also always minded to take into account representations from the big private banks, in particular as to how they’d like to see our trust offering develop. I sit on the Trust Law Reform Committee, which is reflecting on all of these matters at the moment.
“That said, I don’t believe that either the Star Trust or the Vista legislation represent real threats to Jersey. Under the Vista regime, trustees are prevented from seeking directions from a court in the absence of representations having been made to them by beneficiaries.
“A good number of London lawyers who I’ve spoken to express grave reservations about this element of the legislation in particular, and I certainly haven’t heard that either intermediaries or private banks in this time-zone are looking to take advantage of the legislation.”
Meiklejohn notes that while Cayman Star Trusts appear to be “reasonably widely” used, the concept of a part-purpose, part-beneficiary trust is known to Jersey law, although it is not governed by specific legislation. “I’ve never felt that because Jersey doesn’t have equivalent legislation that we’re losing out as a jurisdiction,” he insists.
Neville says the authorities remain openminded about new types of trust, but remain to be convinced that there is a significant need for such structures. “Our regular discussions with industry bodies help us to gauge to what extent there is a call for amendments to trust law and a recent round of meetings did not suggest any real demand for such changes in Guernsey,” he concludes.
Simon Gray is editor of International Money Marketing. This article first appeared in the October edition of the magazine