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24 February 2014
Business is booming in Jersey and Guernsey. So says Bailhache Labesse partner Mark Lewis, echoing the sentiments of dozens of lawyers on the islands. And this is despite somewhat gloomy predictions 18 months ago that the Channel Islands would have trouble maintaining their position in light of the burgeoning euro and pressure to conform to international regulations.
This renewed buoyancy, though, is in part due to developments in legislature, new regulations, local law firm alliances and mergers, trust company buyouts and the growth in securitisation work.
There has been much international interest in recent years over the regulation of offshore investments and the prevention of money laundering in so-called tax havens. Recent investigations into Jersey and Guernsey have produced mixed results. While the 1998 Edwards report and the two investigations initiated by the G7 (the seven largest industrialised countries) - the 'Financial Stability Forum' and the 'Financial Action Task Force' - gave both jurisdictions a glowing report, their inclusion on the Organisation for Economic Cooperation and Development's (OECD) provisional list of "harmful tax regimes" still remains a mystery to many on the islands (see 'Channel Islands Stay Level Headed', page 35).
Ian Moore, chairman of the Jersey Fund Managers' Association, says: "It is a cloud hanging over the island. Nobody can say how it's going to come out, although I'd be very surprised if we made it to the final list."
There has been much criticism from the islands about the way in which the OECD report was compiled. Some point to the array of new legislation aimed at preventing any misuse of their offshore tax status, as proof of the islands' continuing determination to stamp out any illegal business activity in the jurisdictions. However, some believe that the islands' unwillingness to provide the investigation with an open commitment letter is to blame for their inclusion.
The Financial Services Extension Jersey Law was passed unanimously in May and governs the running of trust companies, which according to Philip Sinel & Co partner Michael Goulborn, brings Jersey into line with UK legislation. "Since almost every law firm has an associated trust company, these new regulations are keeping everybody busy over here," he says.
The new law has led to a number of high-profile mergers and acquisitions in the trust fund industry. Accountancy firm KPMG sold its trust company Orbis to German investment bank Dresdner Kleinwort Benson in September, a move which created overall capital and reserves in excess of euro100m (£59.9m) and deposits in excess of euro2.4bn (£1.44bn). In February, Ernst & Young sold its Jersey-based trust arm to the Royal Bank of Canada, a £50m deal that it had attempted to secure with Dresdner just months before.
"There's been an amalgamation of smaller trust companies, really because of the Financial Service Extension Law coming in. This will bring changes to the codes of practice next year," says Bailhache Labesse's Lewis.
Guernsey is also making moves in this direction: new legislation will be introduced in January to regulate trust companies. John Greenfield, managing partner at Guernsey law firm Carey Langlois, believes this will have a similar effect to the Jersey legislation. "It will be interesting to watch the impact this new legislation might have," he says. "We're well placed as a law firm to comply with any regulations for our trust company, but there'll be a shakedown of smaller trust companies. By the end of next year there'll be fewer independent trusts, but that will make those of us left bigger and stronger for it."
New money laundering legislation introduced in Jersey last year, the Proceeds of Crime Law, has already had an effect. Moore at the Jersey Fund Managers' Association sees developments in legislation as "essentially positive", although he goes on to say: "There are also negatives involved for many businesses and firms, in terms of consulting time and infrastructure change. But these changes are necessary with the growth in global financial services. In these modern times of respectability, you need to show that you're a developed country with proper legislation and regulations."
The move towards increased regulation has affected more than just the islands' reputations. Partner Beverley Lacey of Jersey firm Mourant du Feu & Jeune points to the amount of work created by the new legislation and the commission which was subsequently set up. "A lot of work is derived from the Jersey Financial Services Commission, whose investigations have led to prosecutions and civil actions, which in turn results in work for the firms on the island," she says.
An increase in work has certainly been felt, particularly in international finance work. Ogier & Le Masurier partner Michael Lombardi says: "Ten years ago there was a lot of private trust work and retail funds, but since then the finance industry on the islands has moved upmarket to institutional work such as securitisation and structured finance. In many ways, we've become the location of choice for this work coming from mainland Europe."
There has also been a new market in Jersey with the growing popularity of e-commerce work. "They're attracted to the Channel Islands because of our tax status. We've dealt directly with the setting up of four different internet companies this year and it seems like an area that will just continue to grow," says Lewis at Bailhache Labesse. This year has also seen an upturn in commercial property, with firms such as Mourant du Feu & Jeune achieving a noticeable increase in property unit trusts and UK limited partnerships. Partner Nicola Davies has also noticed a "blurring of the lines in some aspects of the work. There's been a distinct overlap between venture capital and markets work and private equity fund work."
There have also been moves to blur the lines between Guernsey and Jersey, with a noticeable shift among most of the main firms to build up inter-island associations. The alliance between Guernsey firm Babbe Le Pelley & Tostevin with Jersey's Bedell Cristin, in particular, has built on last year's alliances between Olsen Backhurst & Dorey and Guernsey's Ferbrache Morgan. Babbe Le Pelley partner Jeremy Wessels highlights the positive aspects of such an alliance. "Clients can be better off by being dealt with either in Jersey or Guernsey. We're trying to provide a sort of one-stop approach for our clients with the ability to transfer work from one office to the other, depending on where it can be best dealt with."
Ogier & Le Masurier took things a step further, however, by opening an office in Guernsey two years ago. And those already based on the island are also looking to new horizons, with Carey Langlois recently hiring senior tax partner David Greenhalgh from Linklaters to work as a London representative to promote the Guernsey firm there.
But it is not simply a case of new alliances and new offices. One of the main developments in the Guernsey legal market this year was the merger of Babbe Le Poidevin Allez with fellow Guernsey firm Le Pelley & Tostevin. According to Wessels, the merger was not a pooling of resources, but rather a means of developing as a single improved force on the Guernsey legal market. "Babbe Le Poidevin Allez was a three-partner firm, and we had four partners. When we went live with the merger in June this year, we timed it to coincide with the arrival of Andrew Ayers as a partner, who came from leading local firm Collas Day. We now have 17 lawyers and have moved beyond even our combined strength." Wessels believes that "in general, the firms are getting bigger, and with such a volume of work around they're struggling to find enough lawyers to get it all done".
The explosion of work coming into the jurisdictions has led to a wave of recruitment, whether from fellow Channel Island firms or from City law firms. Guernsey firm Carey Langlois has just received authorisation from the Law Society to become a training establishment, and both of its new trainees will be working at the firm by January. Greenfield says: "There's no let-up in the amount of business coming into the island, and the overall trend for us is growth. Our position as a training environment allows us to have people coming through, which helps with our growing personnel requirement."
Not only are lawyers being recruited from all over, but work too is coming in from all parts of the world. Lombardi highlights the wide range of origins of the referrals sent through to the Channel Islands. "A large percentage of our instructions come through London, but also Frankfurt, Paris and New York. We have a good relationship with all the top City law firms, particularly Freshfields, Clifford Chance, Allen & Overy and, of course, with the US firms." This is a situation reflected in all the firms inhabiting the Channel Islands. In such a confined legal market there is a constant stream of conflict of interest issues, thus the firms find themselves dealing with a large number of their counterparts. But as highlighted by Lacey, referral will always be a feature of Jersey and Guernsey's legal work. "In any major litigation, even one with a Jersey company or trust, you'll most often find that the shareholders will not be residents here. This is a situation which leads to instruction coming from firms abroad, with people contacting their local firms, who in turn pass the work on to us," she says.
All the firms have noticed a marked increase in the amount of work coming through, whether from referrals or otherwise. It appears that the offshore islands are struggling not to attract work, but just to keep pace with the work being offered. The next few months should see another surge of recruitment as the legal market for Jersey and Guernsey firms continues to increase. Ozannes corporate Partner Peter Harwood looks to the future. "The pace of growth has been strong, and in the next few months I expect investment fund work, mutual fund work and private equity to increase," he says. "There really is potential for growth in most fields."