There was a time when law firms were… well… just law firms. Maybe there was a service company to own the building or employ the staff, but as group structures went, that was pretty much it. All the services they provided were provided by the lawyers themselves. In the offshore world in particular, that included serving as directors and corporate secretaries and personally accepting appointments as trustees or protectors of trusts.
Instead of continuing with that approach, most offshore law firms have for some time now had their own corporate management arms providing incorporation, corporate secretarial and registered office services. On the trusts side, however, the changes have taken a different route.
Initially, as personal trusteeships fell out of favour – mainly because of concerns over personal liability – the tendency was to appoint as trustee a trust company, often connected with one of the leading private or retail banks, many of which had established presences in the main offshore jurisdictions from relatively early days.
More recently, many of the leading offshore law firms have established their own trust or fiduciary services companies. In making moves into new markets, firms invariably claim that their initiatives are client-driven. Is this trend really client-driven? And if so, why? Or is it all really just an exercise in diversification?
Law firm trusteesCorporate trustees have certainly become the norm in offshore trusts. This is the result, in large part, of liability concerns on the part of individuals, but it also owes much to the administrative convenience of a single, enduring trustee who remains located permanently in one jurisdiction, rather than one who may retire, move between jurisdictions or pass on, necessitating the appointment of a replacement trustee. Furthermore, the trust legislation – particularly in relation to purpose trusts – of several offshore jurisdictions specifically mandates the use of a licensed trust company in certain situations. This explains the growth of trust companies, but not why law firms are setting up their own.
One part of the answer lies in the opportunities that exist for cross-selling related services. The trusts lawyer advises on the establishment of the trust and can then conveniently offer the services of the firm’s affiliated trust company to act as trustee. Where the trustee is to hold the shares of a company, registered office and administrative services can also be offered. The aim is to create a comprehensive in-house service.
Such an arrangement also provides the law firm the commercial benefit of maintaining an ongoing connection with the affairs of the trust after establishment, so that the law firm is likely to be instructed whenever related legal issues arise. This is the same motivation that earlier led to the establishment by law firms of corporate services companies, whose services as corporate secretary or registered office could be offered by the corporate lawyer incorporating the entity.
However, the main driving force has nothing at all to do with the conventional use of trusts in the context of wealth management and estate planning for private clients. It has everything to do with the growth of structured finance work in the leading offshore centres such as Bermuda, the Cayman Islands and the British Virgin Islands (BVI) and the corresponding need for trusts to hold shares of the corporate special purpose vehicles (SPVs) that form the hub of these structures. Since their inception in the early 1980s, securitisations and other forms of structured finance have gained popularity as alternatives to more traditional methods of secured financing.
Structured financeStructured finance transactions can have a variety of objectives, including credit enhancement, asset conversion and the isolation of a transaction from unrelated insolvency risks. In a typical securitisation, for example, the aim is to convert the future income stream from an income-producing asset (such as a portfolio of mortgage loans) held by a particular entity (known for the purpose as the originator) into presently available capital that can then be put to immediate productive use in expanding the existing business.
In a typical securitisation, the income-producing assets are transferred to an SPV whose ownership structure is unrelated to the originator. In this way the SPV is said to be ‘orphaned’ and does not have to be consolidated on the originator’s balance sheet. To achieve this orphaned ownership, the shares of the SPV are held by a corporate trustee on trusts for charity set out in a trust deed. By severing the ties to the originator, the SPV stands alone, which ensures that the income-producing assets it holds are insulated from the risks associated with the originator’s separate operations, in particular the possibility of the originator’s future insolvency. The benefit to charity lies in the residual value of the SPV when it is wound up at the end of the life of the structure. Until then the income from the underlying assets is passed through the SPV to the trustee and distributed in accordance with obligations under the original trust deed.
In recent years, ‘purpose trusts’, such as those existing under the Special Trusts (Alternative Regime) (Star) Law provisions of the Cayman Islands trusts law, have been employed as an alternative to charitable trusts. Such a trust can exist for the benefit of a purpose rather than identified beneficiaries and, contrary to the traditional position in English law, do not have to be exclusively for charitable purposes. Their use, therefore, resolves a potential concern that a trust that only results in a small distribution to charity at the very end of the life of the structure might not actually be charitable, and in the absence of ascertainable beneficiaries might therefore be void. A Star trust, or a special purpose trust under similar legislation in other offshore jurisdictions, can be established specifically “for the purpose of” the transaction itself.
Whichever type of trust is employed, a trustee is required, and that invariably means engaging a trust company. While it is perfectly possible for a law firm to draw up the documentation for the transaction and obtain the services of one of the many highly respected trust companies available locally, the larger firms, which are routinely engaged in structured finance transactions, have found that their clients prefer to deal with a single service provider and that they like to feel that their lawyer can secure the necessary responsiveness from the trustee when it comes to processing the relevant documents and administering the trust. Although the fee income from acting as trustee on each single deal is quite modest, a substantial flow of transactions can make an affiliated trust company into a profit centre in its own right, contributing to the bottom line of the parent law firm.
With the offshore legal market being as adaptable as it is, we can safely assume that we have not seen the last of law firms branching out into related services. Some have already ventured into mutual fund administration, insurance company management and pension fund administration; others have branched out into services allied to immigration advice, such as recruitment and relocation. However, it is not just an offshore phenomenon – onshore, firms have long since set up in competition with estate agencies and more recently even political consultancies (DLA Upstream) and PR agencies (Bircham Dyson Bell).
The one-stop shop concept is clearly much more than just a passing trend.
Stephen James is a partner in the corporate and commercial practice group of Appleby Spurling Hunter in the Cayman Islands
Robin Garnham is manager of trust services for Appleby Trust, Cayman Islands