Change is the law of life

  • Author : Peter Niven
  • Date : September 2011
ABOUT THE AUTHOR: Peter Niven is the Chief Executive of Guernsey Finance

‘Change is the law of life. And those who look only to the past or present are certain to miss the future,’ said John F Kennedy. Those words may have been uttered by the 35th US President, but they are appropriate in the context of the Guernsey fiduciary industry. Not only is the profession of trust and estate planning rooted in making arrangements for future changes in circumstance, but Guernsey’s fiduciary sector has been continually at the forefront of developments in the industry.

Sector trends

Guernsey’s fiduciary sector has been a mainstay of the island’s finance industry during the past 50 years. Looking back over the past decade we can see that, superficially, the sector hasn’t really changed.

Today, there are 150 full corporate licensees (as well as more than 50 licensed individuals who can act as directors, co-trustees or trust protectors) employing nearly 2,300 members of staff. These figures are not particularly dissimilar to those from ten years ago.

However, technological developments assisting the administrative functions for maintaining and enhancing this wealth have allowed an increase in assets held in trusts and companies in Guernsey, so that the total value now stands at more than GBP350 billion.

During the past ten years, the ratio of the number of independent trust companies to those owned by corporate entities from other sectors – notably banks – has remained fluid. Yet, regardless of formal ownership status, there has been, without question, increasing integration and cooperation between sectors.

For example, the close links with the banking sector remain, and notably these providers benefit from the assets coming into the fiduciaries. At the end of March 2011, deposits with the 38 licensed banks in Guernsey reached GBP113 billion.

These figures have also been swelled by the island’s investment funds industry, where the value of funds under administration and management reached a new record high of more than GBP263 billion at the end of March 2011. On the back of such success, fiduciaries have increasingly looked to develop a funds presence in terms of providing administration and company secretarial services.

Guernsey’s asset management and stockbroking sector now has more than GBP78 billion under management, including increasing amounts from fiduciaries, especially those providing trust structures for international pensions – as well as Qualifying Recognised Overseas Pension Schemes and life insurance products.

The cell company was pioneered in Guernsey for the captive insurance industry, but both the protected cell company and now the incorporated cell company are increasingly being used in the fiduciary sphere.

Additionally, the partnership structure has been a familiar concept in the investment world for many years, yet more recently it has been adopted by the wealth management sector to offer the family limited partnership (FLP). The FLP provides similar levels of asset protection and flexibility in management to a trust, but allows lifetime gifts without the charges to inheritance tax.

Companies and trusts

This growing use of innovative wealth management solutions adds a further dimension to a jurisdiction with tried and tested company and trust law.

Guernsey’s reputation for case law of seminal importance has been given further weight by the landmark Privy Council ruling in favour of an appeal by Spread Trust Company Ltd against Hutcheson (see page 33 for a detailed look at this case). The Privy Council Judicial Committee ruled that trustees could be exonerated from their own gross negligence without breaking their duties en bon père de famille (literally, ‘as a good father’).

There has also been more sophistication in the use of companies and trusts. An example is the development of the private trust company (PTC). Instead of employing a professional trustee, some settlors are choosing to establish their own trust companies to act as trustees of their family trusts.

A PTC does not provide fiduciary services to the public and can be established by private individuals or commercial enterprises. With the focus on just one family, often with the involvement of its members, the PTC’s greater understanding and its dynamics gives increased assurance that decisions will be made quickly and with sensitivity to the specific interests of the family.

Guernsey introduced a new Trusts Law in 2008 and this included abolishing the personal liability of directors, particularly as a way to encourage greater use of PTCs. Some of the other most significant changes included the introduction of purpose trusts and the removal of limits on the length of a trust’s duration – allowing perpetual trusts.

That year also saw the introduction of a new Guernsey Companies Law and in parallel a new Guernsey Registry, where the use of the latest online technology allows a more streamlined process, enabling incorporations to be processed in as little as 15 minutes.

The Registry also includes the office of the Intellectual Property (IP) Registrar. Guernsey is now fully TRIPS (Trade-Related aspects of Intellectual Property Rights) compliant, and IP has become a key driver of new business, as the island continues to introduce IP legislation, including image rights.

Guernsey has also recently published draft foundations legislation. The introduction of foundations will provide another tool for practitioners to meet the needs of clients. In particular, the foundation structure should be attractive to clients based in civil-law jurisdictions in Europe and also further afield in the ‘emerging’ markets, such as China, Russia and Latin America, where the trust concept is less familiar than in common-law countries such as the US, Canada and the UK.

The international stage

Guernsey’s reputation was enhanced earlier this year when the IMF published six evaluation reports that commended Guernsey’s high standards of financial regulation, supervision and stability, along with its robust criminal justice framework.

‘The IMF commended guernsey’s high standards of financial regulation’

Ten years ago, Guernsey became one of the first jurisdictions to introduce an effective licensing and supervision system in relation to trust administration services, company management and ancillary services. The law, brought into effect in early 2001, means it is the businesses that manage and provide fiduciary services that are regulated, rather than the trusts themselves.

This was introduced just before the 9/11 attacks in the US, which precipitated a greater focus on anti-money laundering and countering the financing of terrorism. Even today, some of the larger economies globally do not regulate trustees, yet this was a move made by Guernsey more than a decade ago.

Guernsey’s position is reinforced by the fact that the IMF judged the island to have high levels of compliance with international standards, including the Financial Action Task Force 40 recommendations on money laundering and nine special recommendations on terrorist financing.

The 9/11 attacks also ushered in a new focus on tax transparency, and Guernsey signed its first tax-information exchange agreement (TIEA) with the US in 2002. The other major global event of the past decade was the financial crisis of 2007/2008, and this also proved to be the catalyst for further scrutiny of such arrangements.

Guernsey’s proactive stance meant that it was within the first wave of jurisdictions placed on the Organisation for Economic Cooperation and Development (OECD) ‘whitelist’ at the conclusion of the G20 summit in London, April 2009. The island has continued with this approach, and earlier this year the OECD endorsed its continued commitment to tax transparency and exchange of information.

Guernsey has now signed TIEAs with 26 jurisdictions globally, including recently Argentina, Guernsey’s second with a Latin American country, following Mexico earlier this year. The local authorities are also pursuing the island’s removal from (mainly outdated but still operational) ‘blacklists’ and the potential for double taxation agreements.

In addition, financial institutions in Guernsey were given a window from 1 January 2011 to 1 July 2011 for moving to automatic exchange of information as part of equivalent measures the island adopts in relation to the EU Savings Directive.

The right conclusion

This continuing work to maintain and enhance Guernsey’s reputation internationally places the island in a strong position. However, Guernsey is currently facing challenges in a variety of guises. For example, the corporate tax regimes of the Crown Dependencies have come under scrutiny from the EU.

Having said that, Guernsey has been challenged many times in the past and the island has always proved more than capable of adapting to survive and, in the case of corporate tax, it is committed to maintaining a regime that is both internationally compliant and competitive.

It is in recognition of such developments that the island has stepped up its representation within the corridors of power in both the UK and the EU, and has joined forces with Jersey to establish a Channel Islands Brussels office. In short, Guernsey is continuing to take steps to ensure that it remains an attractive domicile for trust and estate clients in the future.


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