posted 10 Aug 2007 in Volume 10 Issue 3

Country report: Guernsey: The forefront of international finance centres

By Peter Niven, chief executive, GuernseyFinance

Over the past four decades Guernsey has established itself as a leading international finance centre with the highest reputation and standards, providing an extensive range of financial services to a global market. The island’s mature, innovative and service-oriented financial-services sector is based on a balanced range of providers broadly comprising:

Banking;
Investment funds;
Insurance;
Fiduciary services (trust and company administration);
An independent stock exchange – the Channel Islands Stock Exchange (CISX);
A bespoke training facility – the Guernsey Training Agency (GTA).

There is positive collaboration and a team spirit among these key businesses who work with an independent regulator, the Guernsey Financial Services Commission (GFSC), to international standards.

A business-friendly environment

Guernsey has a population of 60,000. The island is a British Crown Dependency, with over 800 years of self-government. It is legislatively and fiscally independent of the UK and has its own democratically-elected parliament, the States of Guernsey.

Guernsey also enjoys a special relationship with the European Union. Terms negotiated on the UK’s accession to the EEC mean that the Bailiwick is within the Common Customs Area and the Common External Tariff; essentially it enjoys access to EU countries for physical exports without tariff barriers. Other rules and directives do not apply though, unless voluntarily accepted.

The island is English speaking, the currency is the British pound, it is in the same time zone as London and in close proximity and with regular air and sea links to both the UK and continental Europe.

Guernsey’s Gross Domestic Product (GDP) was £1,433m in 2004 (£24,538 per head of population at 2005 values) and is estimated to have been £1,508m in 2005. Finance is the mainstay of the economy. In 2006, of the 31,156 people employed in Guernsey, 7,164 (23 per cent) were employed in the finance sector, which also constitutes around 70 per cent of the island’s export economy.

Banking

The first merchant bank was established in 1963 and today there are 50 licensed banks in the island.

International banking groups with head offices in Switzerland, Europe, USA, the UK and a number of other international locations have established subsidiaries on the island. Some of the most highly-respected names in international finance have chosen to place their operations in Guernsey - alongside independent boutique providers.

The sector provides products ranging from retail banking and savings through international wealth management to institutional business and specialist lending. Importantly it services the other financial-services sectors on the island (investment funds, insurance and fiduciary services). Flows from these sectors have helped propel the value of deposits held by Guernsey banks to record levels. They rose 14 per cent in the first three months of 2007 and 23 per cent year-on-year to reach a new high of £105bn. at the end of March 2007.

Investment funds

At the same time, the value of funds under management and administration in Guernsey also reached a new record high of £140bn – up eight per cent during the quarter and 26 per cent in 12 months.

The island plays host to an extensive array of investment businesses, including investment advisers, stockbrokers, and a significant number of fund managers, custodians and administrators, who in combination offer a range of products and services for both retail and institutional investors from the general to the more specialised.

The international marketplace for Guernsey open and closed-ended funds is illustrated by the fact that funds are promoted or sponsored by leading institutions in 45 countries. The island is also growing a reputation as a centre of excellence for alternative investments like fund of hedge funds, private equity and property, as well as more esoteric asset classes such as fine wine, fine art and timber.

Qualifying Investor Funds (QIFs) were introduced in 2005 to significantly reduce authorisation times for funds targeting experienced investors and they have proved particularly popular with the regulator, having approved 95 by the end of March 2007.

There has also been significant interest from fund promoters and sponsors in the island’s new registered closed-ended funds regime. Indeed, in the period between its introduction on 1 February 2007 and the end of June, 32 such funds have been given consent by the GFSC. This streamlined process has its origins in the root-and-branch review of investment-sector legislation that was conducted by a working party headed by leading Guernsey advocate Peter Harwood. It made a series of recommendations, including the categorisation of funds into ‘regulated’ and ‘registered’ funds, and the remainder of which will come onstream later in 2007 and into early 2008.

Insurance

Guernsey has an international insurance industry that provides a range of risk-management solutions but is particularly renowned for its captive expertise.

Since the first captive-insurance company was formed in Guernsey in 1922 the island has become the leading captive-insurance domicile in Europe (more than 624 captive entities) and is in the top four in the world in terms of premiums written (£3.2bn). Indeed, approximately 40 per cent of the FTSE 100 companies have captives in Guernsey and half of the captives established by UK companies are based in the island, although a number of firms from across the globe have established captives in Guernsey.

Ten years ago the island pioneered the protected cell company (PCC) concept in response to the needs of its pre-eminent captive-insurance industry. The PCC has become an increasingly popular tool for a range of financial-services businesses, and last year Guernsey also introduced the innovative incorporated cell company (ICC) concept.

Fiduciary services

Guernsey is a leading international fiduciary centre with 50 years’ experience of supplying trust and corporate services.

The island plays host to some 140 licensed trust companies, ranging from large organisations to independent, boutique operations, holding some £200bn of assets and employing around 2,500 members of staff. In addition, there are many licensed individuals who can act as directors, co-trustees or trust protectors. There is substantial expertise in using the innovative modern structures that are available on the island for the preservation of both institutional and individual/family wealth and assets.

A working party, led by advocate Rupert Evans, has been reviewing the Trust Law and how it can be updated to benefit the fiduciary sector. The final report recommends extensive changes to the Trust Law and proposes the introduction of Foundations and Purpose Trusts, all of which will come onstream during the remainder of 2007 and in 2008.

Well supported

Guernsey’s finance industry is supported by a comprehensive network of complementary services, including legal, accounting, audit and tax advisers. There is also a large pool of experienced and qualified non-executive directors. Alongside stands the CISX – proud of its speed, consistency and cost-effectiveness – and which has just celebrated its 2,000th security listing and the bespoke educational establishment that has university status, the GTA. In addition, the island can boast of the GFSC, which has grown a reputation for its robust yet pragmatic regulation.

Ongoing enhancements

Work is ongoing to improve the island’s already business-friendly environment. For example, on top of the developments that have already been mentioned, in 2007 the final proposals from a review of Company Law should also go before the States, while complimentary work continues on the modernisation, including automation, of the Company Registry. Similarly, Guernsey’s Intellectual Property (IP) environment is in the midst of being overhauled. A dedicated office, solely responsible for its administration and regulation, opened in spring 2006 and a suite of IP-related legislation will continue to be introduced to the market. In addition, at its June 2006 sitting the States of Guernsey agreed to a set of economic and taxation changes - the main strands of which will come into effect from 1 January 2008 – and which includes as standard a zero rate of corporate tax.

Guernsey’s finance industry is thriving and the indications are that these upward trends will be sustained throughout 2007. I believe these figures illustrate the way in which increasing numbers of key decision makers in the global financial-services industry are recognising the strength of Guernsey’s offering. However, we are not resting on our laurels and are continuing to promote the island as a leading international finance industry while also enhancing the environment for conducting business.

Peter Niven is the chief executive of GuernseyFinance. He can be contacted at: info@guernseyfinance.com web: www.guernseyfinance.com