ABOUT THE AUTHOR: Michael Betley TEP is Managing
Director of Trust Corporation in Guernsey
One way Guernsey is developing high-value new business is
through fiduciaries incubating family offices, boutique investment
firms and private equity managers that can tap into existing
expertise and infrastructure. This is of particular value to family
offices or businesses taking an initial look at Guernsey before
becoming fully established in the jurisdiction. The likes of Terra
Firma and BlueCrest are prime examples of the transitioning of a
business into Guernsey before establishing a full-blown presence on
the island. Why is this is a growing trend? What structures are
used to facilitate the arrangement? And what are the benefits to
the incoming organisation of working alongside an established
fiduciary?
Developments in managed services
While in the past, incubation or managed services were reserved
for professional firms and international corporates, the current
trend attracts privately owned businesses and family offices that
are coaxed to the island’s business environment, which provides
easy access to the London and European markets and same-day trading
with Asia and North America. For many, London has provided a
lifestyle of choice, coupled with unrivalled access to investment
markets, but recent changes to the once-sympathetic tax regime have
unsettled many UK-resident non-domiciliaries. This, together with
increased financial regulation, has prompted people to look
elsewhere to provide a home for both business and family and, as a
consequence, Guernsey has become a preferred jurisdiction for those
looking to establish a tax and business-efficient hub on Europe’s
doorstep.
Historically, Guernsey attracted many financial and banking
institutions that did not necessarily wish to tie up significant
capital in investing in the full cost of a standalone operation; as
an alternative they entered incubation or managed contracts with
established local institutions. The managed bank had its heyday in
the 1980s and 1990s, well before the significant increase in
capital adequacy rules. This enabled the local regulated business,
or host, to provide all of the infrastructure and regulatory
compliance needed. Fiduciaries then followed, with a proliferation
of foreign-owned managed trust companies in Guernsey. With the
advent of the protected cell company in Guernsey, the insurance
market was then also able to offer its own managed services through
the new ‘rent a cell’ being offered principally to captive
insurance companies. Next followed the investment firms and, more
recently, the private equity houses. The latest development of
managed services has been the arrival of niche investment firms and
family offices, which are easily able to plug into the island’s
financial infrastructure.
Why Guernsey?
Internationally, there have been dramatic changes in Western
economies, turbulence in the financial sectors and political unrest
in many parts of the world, in particular the Middle East and North
Africa, against a background of a slow but continued shift of
economic power from West to East and North to South. The Eurozone
debt crisis may be less headline-grabbing, but the underlying
themes are still there. The speed of change has never been so fast,
nor has our need to react been so acute. Private family wealth and
the discreet wealth-management houses are looking to position
themselves in quieter, more secure locations, and Guernsey is seen
as such a safe haven.
The qualities that have historically attracted business to
Guernsey (such as integrity, stability, tax neutrality, robust
regulation and a common-law framework) are to be found elsewhere
too, but what sets Guernsey apart from its Caribbean and Asian
competitors are the administrative skills that have developed,
which work hand in hand with the often complex fiduciary
decision-making ability and sound corporate governance principles.
It is the experience in operating businesses, as well as the
investment and fiduciary skillset, that is key to the longer-term
aims of the new and more entrepreneurial wealth of today.
With greater scrutiny being placed on international finance
centres (IFCs) and those that use them and operate from them, it
has become increasingly important to demonstrate the substance of
those operations and show that real decision-making is taking place
in the chosen jurisdiction. Those running investment and fiduciary
structures will need to demonstrate more clearly that they have the
expertise and the ability to make informed decisions rather than
simply rubber-stamp them. Having a real presence (managed or
actual) in the chosen jurisdiction is becoming more critical.
“Guernsey’s court system and rule of law are robust and
well-tested”
New wealth
The concentration and size of personal wealth has never been as
great, and the affairs of the wealthy have never been more complex.
The historic structured wealth of the entrepreneur and landed
estates of UK and continental Europe are already generally settled.
It is the wealth principally coming from the new European economies
and the Middle East that is dominating the establishment of private
family and investment offices, either for the first time or
separating out functions and locating each in the preferred
location. With more aggressive tax and regulatory impositions in
mainland UK and Europe, many active private investment offices are
shifting their activities to jurisdictions with easy access, benign
tax systems and regulation. This is also true for more
sophisticated private equity houses. While many known names have
established their own offices locally, typically the process is
gradual. Usually the first step is to establish a ‘managed’
presence with a local service provider, which offers all the usual
office infrastructure, staff and regulatory resources needed.
Ultimately, many firms and private offices wish to establish a
greater presence by having dedicated allocated offices, meeting
rooms, servers and staff, and so require a jurisdiction that offers
them the ability to easily shift from a managed presence to a
physical one.
Creating opportunities
This opportunity has not been created by any one particular
factor. On the investment side, Britain is home to 70 per cent of
Europe’s hedge funds and is a major centre for family offices and
their investment teams. The cost and bureaucracy of greater
regulation, such as the Alternative Investment Fund Managers
Directive, is driving these businesses to look elsewhere.
Individual and corporate taxes are also increasing and as a
consequence many are considering strategic options, in particular
how to gain access to Europe without actually being there. Guernsey
offers such a facility and can give businesses a passport into
other markets. Many wealthy families have historically used private
banks to assist them in managing their wider investments,
structuring and management of day-to-day affairs. There has,
however, been an increasing trend to uncouple the single
relationship with one institution, in particular for families that
self-invest or have more sophisticated investment needs. These
families are looking for solutions that are more specific to their
needs, which often lead to the propagation of their own private
offices. Guernsey is host to an increasing number of single-family
offices, either managed within existing fiduciary service providers
or those that have fully incubated and now manage themselves.
Regulation
While the traditional qualities that Guernsey offers still hold
true, there are some more subtle changes that are influencing both
IFCs and investors. Professional businesses and wealthy families
generally accept that appropriate regulation is needed. However, it
should not be overly restrictive, which is increasingly becoming
the case in the main markets and in most onshore jurisdictions.
Guernsey’s regulatory system is highly regarded and the island has
received exemplary independent evaluations from the IMF.
Taxation
Then there is the question of taxation. More than ever before,
governments are looking at ways to increase tax revenues, and they
are becoming more intrusive in the process. Guernsey’s zero/ten tax
regime (zero tax for all foreign corporates, 10 per cent tax for
domestic corporates of a particular category) offers an attractive
tax environment in which investors and families alike can base
their worldwide asset-base, without the added drag of domestic
tax.
Reputation
In addition to the need to find the right business and tax
environment, there has been a shift in attitudes towards secrecy
and reputation. Confidentiality is vital to all private and
business matters, and is a cornerstone of Guernsey’s financial
services industry. Transparency in financial markets and
cross-border transactions is today’s reality. Guernsey’s court
system and rule of law are robust and well-tested, and offer
significant comfort to those who seek legitimate privacy.
Reputation is increasingly important for families with
international interests, and being associated with a reputable
jurisdiction comes with a certain cachet.
Welcome change
Guernsey’s fiduciary market is changing. No longer is it just
the destination of choice for international trustee companies, but
wealthy families and entrepreneurs are also looking to create a
more substantial presence on the island. This in itself should
create opportunities for the future and sustain the needs of the
new breed of the super-wealthy.