26 July 2010
The Channel Islands offer exciting opportunities as financial recovery looms, but how do they differ and what does the future hold? By Robin Smith and Ben Morgan
With the world economy poised for a recovery and greater fiscal and regulatory pressures being exerted on global businesses, it is perhaps unsurprising that a number of these businesses are looking to offshore centres such as Jersey and Guernsey to provide them with new opportunities. There are, however, many differences between Jersey and Guernsey as offshore jurisdictions, including the type of business that each island attracts.
To the outside world Jersey and Guernsey are often seen and referred to together as one jurisdiction, the Channel Islands. Of course, the islands each have their own government, a similar constitutional relationship with the UK and the EU and low tax regimes. They have similar regulations, strong court systems and robust yet flexible company law. City lawyers often point to the flexibility of the islands’ corporate law and good regulation as key drivers for choosing the Channel Islands. Both are in the top 25 in the Global Financial Centres Index Report.
In some cases it is the differences in law and regulation that drive business to either Jersey or Guernsey. However, following a well-trodden path as opposed to carving a new one is equally important to clients to reduce costs on repeat or similar transactions. Clients and their onshore advisers can be reluctant to change without very good reason.
Guernsey is known for its captive insurance industry. Captives have been attracted to Guernsey for more than 20 years because the island quickly introduced a regulatory regime that provided the right framework. The introduction in 1997 of protected cell company legislation, an insurance-led initiative, enhanced its attraction, a clear case of specific legislation attracting work to the island.
In contrast, Jersey first seized the opportunity with property unit trusts (PUTs) and now has a considerable number of PUT structures holding many key UK commercial properties. Guernsey also has a significant number of PUTs, but it was Jersey that took the market share, not driven by a particular piece of legislation, but due to its early experience of these structures.
The islands openly compete to attract business. Jersey has since caught up with its legislation on cell companies, illustrating that the proximity of the islands means that inevitably a good idea does not go unnoticed for long.
In the funds sector there are regulatory differences in the treatment of different types of fund. Recently Jersey has sought to reduce the regulatory burden on funds that will only be promoted to sophisticated or institutional investors with its expert and unregulated fund regimes. It is often possible to have a Jersey-based ’managed’ investment manager even where the promoter is new to the market. Guernsey, like many other jurisdictions, treats closed-ended funds very differently and for non-listed closed-ended funds probably has an advantage.
Jersey has had the larger share of structured finance work than Guernsey and throughout the financial crisis has continued to see a large number of cashbox vehicles used for rights issues, convertible bonds and private placements in relation to listed UK plcs. Jersey special purpose vehicles continue to be a popular choice for securitisation and tax-based structured finance vehicles. Guernsey, however, has focused on main London-listed property investment fund listings and has a larger market share in this sector.
Both islands have also seen a number of high-profile private equity and hedge funds decamp there in recent months, with examples including Terra Firma and Blue Crest in Guernsey, and Auriel and Global Advisors in Jersey. Here, when the migrations involve moving staff, the choice of jurisdiction may be driven by less tangible factors such as location.
So, what does the future hold? It is clear that both islands have been focused on servicing business emanating from London. However, diversification is becoming increasingly important and both have sought to attract business from further afield.
Jersey companies are now eligible for primary listings on the Hong Kong Stock Exchange and Guernsey is expected to obtain the appropriate recognition during the next quarter.
The islands’ diversification has contributed to the recent growth figures and new fund launches are up.
The Alternative Investment Fund Managers Directive could provide significant opportunities for the islands and we will be keeping a close eye on whether or not any adjustments are required to regulation in either island as a result.
There is an argument that the islands should join forces where there are obvious synergies in the international arena to raise the profile of the use of Channel Islands’ vehicles. The similarities between the two islands probably outweigh the differences and it would seem sensible to share resources to convey the message further afield. n
Robin Smith and Ben Morgan are partners at Carey Olsen