In search of a safe haven

Richard Newell finds that competition is hotting up among banks and building societies for the offshore deposits market

The market for offshore deposits has become much more competitive in the past two years.

There is a reasonable amount of choice of gross-paying deposit accounts and as a recent survey showed, for those depositing u100,000 or more, the variation in interest rates can make u1,000 worth of difference every year. So you need to keep abreast of the market when advising clients.

The major UK banks have offices offshore (the big four are all in Jersey) as do the major UK building societies. The banks provide deposit account facilities, or more usefully, an interest earning cheque account or HICA (high interest cheque account), although the banks' idea of high interest might not accord with your own. A minimum balance has to be maintained to earn interest, typically around u10,000.

These accounts have standing order/direct debit and normal cheque writing facilities, although if you want to use the account as you would a normal high street current account, the bank is likely to charge additional fees.

But those who simply want the best rate for deposits should look elsewhere. The UK building societies are all competing for your cash offshore and their rates tend to be higher than bank term deposit rates.

John Duffy, managing director of Halifax International in Jersey says most of the society's offshore depositors are either working or retired expatriates. "We do have around 30 per cent of depositors who hold a UK address, but we don't see them as our prime market," he says.

The Halifax also reports an increasing amount of investment coming from local Channel Islands based investors. The other major growth area is the establishment of offshore trusts and holding companies.

With tight competition on rates, investors are ever-watchful for news of changes in base rates. More than anything though, the typical offshore depositor wants security. Duffy says: "With increasing uncertainty in the world, depositors are more inclined to seek out the safe haven."

Competition for offshore deposits has increased significantly since interest rates began their downward trend in late 1992. During 1993, societies became aware of greater activity; suddenly, a half per cent differential was important.

Service has also become a factor in view of the fierce competition between the three main centres: Jersey, Guernsey and the Isle of Man. Many of the banks and building societies have introduced direct dealing services for deposits and transfers. In addition, they offer credit and charge cards and other one-stop service links.

More sophisticated depositors are likely to be attracted by the returns available from money funds. Money funds use the currency markets as an ordinary investor would use the equity or bond markets, providing access to wholesale deposit and foreign exchange rates.

For expatriate and international clients, it is the various offshore currency funds which provide the best cash management facilities. The funds come as either distributor funds (where interest is paid out) or accumulator funds where the interest is rolled up into the fund as capital growth.

Peter Rees of Rothschild Asset Management says the appeal of money funds stems from the fact that investors are now being forced to think more internationally and to diversify their portfolios to include an element of cash management.

Rothschild's Guernsey-based funds fit into two categories: a deposit service offering wholesale rates of interest in 18 currencies, and a managed service were the base currencies are US dollar, deutschmark and yen.

As this particular market has developed, with groups like Fidelity attempting to widen the appeal of money funds, new services are being included. The choice, for offshore depositors, is greater than ever and is likely to provide stiff competition for high street banks.

If your clients are relying on your offshore deposit to give them a regular income, check the frequency with which income distributions are made.

The key figure to bear in mind when comparing offshore deposit accounts is the CAR, or compound annual rate. This is the amount of interest earned on a yearly basis, including reinvestment of interest payments.

Lesser known banks may offer higher interest rates, but they have been known to go bust, so choose a well known name based in an offshore centre that offers depositor protection and strict solvency regulations, such as Jersey, Guernsey or the IoM.

Richard Newell is European editor of International Money Marketing.