Playing to a captive audience

The new Guernsey director general of financial services, Peter Crook, is keen to see the island's financial sector develop.

“We have a committee that monitors proposals put forward and I think that, in a way, the captives industry is a good example,” he says. “It has been a very strong growth area for us in recent times. Before that, we have done very well in developing the banking side. This has become an area of some change recently, as banks review their bases and costs.

“With captives, we have tended to attract UK companies because they are more familiar with the concept. Trust business has again tended to be concentrated among UK clients, although as Europeans gain a better understanding of trusts, we are getting more interest from the Continent.”

Guernsey's Financial Services Commission has introduced protected cell legislation which allows 'rent-a-captive' operations to set up on the island.

'Rent-a-captives' allow companies which are not big enough to set up their own captive company to use the capital and facilities of risk managers.

As a result, alternative risk manager Mutual Risk Management (MRM) has teamed up with Guernsey-based Wilde & Co to boost the island's alternative insurance market.

Insurance superintendent Steve Butterworth says the concept of rent-a-captives is relatively unknown. But he expects a number of European companies to explore the concept in Guernsey as the protected cell legislation provides a framework to separate different cells in terms of liability.

The joint venture between MRM and Wilde & Co gives Bermuda-based Mutual Indemnity (MIL) a Guernsey branch and a new captive management operation which will be known as MRM Guernsey. MIL has been granted registration under Guernsey's insurance business law and will offer facilities to clients of brokers, agents and corporate risk managers. Its programmes are designed to return underwriting profits and investment income to its clients who are also insured.

New York-listed MRM provides risk management services for clients looking for an alternative to traditional commercial insurance. The alternative market includes both self-insurance and captive insurance and is one of the fastest-growing segments of the insurance industry, the company says.

As superintendent of banking, Crook has overseen the development of a first class offshore banking industry in Guernsey, attracting some top international senior executives and building a solid base of high net worth clients.

Crook says: “The banking sector is becoming more international. When I came here in 1989, we were more than dependent on the UK. With 75 per cent in a variety of currency deposits, we are less dependent on sterling. Of the deposit base, over half is controlled by the Swiss banks.”

The recent fall-off in deposits does not necessarily mean a decline in banking business. Last year, deposits were down 7.5 per cent on 1995, but that was due largely to the £3bn taken out of the system when Chase Manhattan moved to Jersey.

The banking business in Guernsey is based increasingly on fee earning and less on interest margins – reflecting a more sophisticated clientele.

The much-talked about glut of money fleeing the UK after a change in government has been overblown, says Crook. “Obviously clients are influenced by stock market movements and other factors,” he says. “But in terms of the UK political scene, I believe that has been exaggerated.

“The uncertainty is possibly to our advantage, but the actual benefits are fairly marginal.”

The Guernsey States has just introduced changes to occupational pension schemes and retirement annuities, which include revisions to the maximum tax-free lump sum.

According to Guernsey actuary Bacon & Woodrow, the changes should be “generally welcomed” as they will introduce a number of new opportunities for pensions planning. But the firm is concerned that the restrictions on the maximum tax-free lump sum may be viewed with concern.

The new legislation caps the maximum tax-free lump sum at one-and-a-half times the salary of a civil servant graded S09+ – about £93,996. Any lump sum above the cap will be subject to income tax. Tax relief on maximum contributions to retirement annuities will be raised from the current 15 per cent of relevant earnings. In terms of the new law, the maximum contributions for those aged over 40 and not in an occupational schemes will be increased to 25 per cent of relevant earnings to qualify for tax relief, with the monetary limit increased to £18,000.

A similar proposal for retirement annuities has been passed in Jersey. The changes are expected to take more than a year to implement but no date has been set. Certain parts of the new package require a change in primary legislation and the Income Tax Authority says it intends to introduce all aspects of the new law at the same time.