25 June 2007
Every offshore jurisdiction walks a fine line between on the one hand having a prudent regulatory environment while remaining a user-friendly place to do business and, on the other, becoming moribund by overzealous regulation and an inability to react quickly to the needs of the market.
Two recent regulatory changes in Guernsey's insurance and investment fund sectors reveal how Guernsey treads that line.
There is certainly a buzz around Guernsey's funds-related business. At £140bn of funds under management (growth of 8 per cent in the last quarter and 26 per cent since the first quarter of 2006), Guernsey's success in this sector cannot be disputed.
A byproduct of this growth is increased workloads for those at the coalface of the Guernsey funds industry - the Guernsey Financial Services Commission, where staff are responsible for dealing with new fund applications. Until recently one of the most time-consuming aspects of the commission's job was to assess fund promoters that were new to Guernsey. This required the commission to conduct extensive due diligence on those new promoters. In addition, the commission was required to review and approve funds' constitutive documents. This process could take four weeks or longer.
In February a new three-day approval regime for closed-ended funds was introduced - the registered fund.
Under this new process the responsibility for conducting due diligence on the promoter of the fund has been delegated to local administration companies, which must conduct all the usual checks and then certify to the commission that they have done so. Where those checks subsequently prove to be inadequate, the commission will raise the matter with the administrator. This should not, in the ordinary course, affect the approval granted to that fund.
The registered fund is an extension of the fast-track approval process launched last year for 'qualifying investor funds'. Qualifying investor funds are funds that are marketed to professional, sophisticated or knowledgeable investors. Approval for a qualifying investor fund can also be obtained within three days upon certifications by the administrators similar to those required under the new registered fund regime. However, the new registered fund route is open to all types of closed-ended funds, regardless of the status of the proposed investors.
The commission has indicated that the process will be extended to include open-ended funds later this year.
Guernsey is the largest captive domicile in Europe and the third-largest in the world. In addition to its (predominantly general insurance) captive business, Guernsey also attracts a large number of international life insurance companies.
The last 10 years have produced very significant consolidation in the life insurance industry, with the bigger fish swallowing up many smaller players. As is often the case, rationalisation has followed swiftly upon the consolidation, with life insurers keen to absorb the new businesses into the portfolios of their existing life companies rather than operating through a number of subsidiary life insurers.
Because life insurers are subject to strict capital adequacy and solvency controls to protect their policyholders, the transfer of life insurance business between those companies must be approved by the regulators and the courts of each relevant jurisdiction. In the last few years there has been a number of schemes of transfer approved by the Financial Services Authority (FSA) and the English and Scottish courts. Those schemes have included such household names as Standard Life, Axa, Equitable Life and Resolution Life. These life insurers have policyholders throughout the world and so the schemes of transfer required regulatory and court approvals in a number of jurisdictions. Indeed, the Guernsey court was one of the courts that had to approve those transfers.
The requirement to obtain court approval in addition to regulator approval increases the time and cost of effecting the transfer and, since it is never possible to guarantee what the court may do in any particular case, there is always an element of uncertainty.
In April 2007 the commission circulated a review of the existing insurance regulatory regime in Guernsey, which included the proposed abolition of the court's involvement in the transfer process, thus removing an element of uncertainty and reducing the time and costs involved. It is widely anticipated that the proposed changes will be implemented.
The transfer of life insurance business and the establishment of closed-ended funds may appear to be unconnected. However, a number of UK life insurers have set up closed-ended funds in Guernsey to enable them to transfer part of their property portfolios into the newly established companies. This offloading of real property enables the life company to diversify its investment portfolio while maintaining a financial interest in its former property portfolio through the receipt of management fees from the fund. Very often the diversification of the life insurer's investments was necessary precisely because of the rationalisation that had taken place in the industry as described above.
A jurisdiction that is willing to listen to the needs of its business community and react in a timely and professional fashion will keep its competitive edge and reap the associated benefits.
Guernsey's proposed changes to insurance transfers have obvious appeal. Under the present regime, obtaining court approval requires two separate hearings before the court. The abolition of that requirement means effecting a transfer of long-term business in Guernsey will take less time and will cost less.
The fund changes are more radical. The three-day turnaround for obtaining fund approval is, on paper, great news for investment managers. However, the three-day period only applies to the commission approval process. Whether this will translate into a faster fund establishment process overall will depend on the efficiency of those responsible for creating the fund structures and drafting the necessary documentation. For promoters who have already set up a fund in Guernsey, the three-day commission turnaround should mean exceptionally fast overall turnaround times are now possible - particularly if they are largely replicating an existing structure.
However, economic growth in Guernsey will depend on attracting new entrants to Guernsey and it is in respect of those new promoters that the most significant delays have occurred in the past, particularly promoters from the emerging economies of Eastern Europe and the Middle East. Whether the new registered fund approval process will enable new promoters to establish themselves on the island more quickly will depend on how quickly the fund administrator can obtain the necessary due diligence on that promoter.
Accordingly, the weight of regulatory responsibility now rests firmly on the shoulders of the fund administrator (and to a lesser extent the other advisers) and not on the commission. Therefore, the choice of fund administrator becomes crucial. How the fund administrators react to the opportunities and challenges this new responsibility presents will be important in determining Guernsey's position as a global funds centre over the coming years.
Christopher Anderson is a partner at Bedell Cristin