Peter Niven examines the Island’s rebound from the financial crisis and the steps taken to supplement business flows from the traditional UK and European centres with new streams from the emerging markets.
During the last couple of years the world has been through a major financial crisis. Guernsey has not been completely immune from these pressures but the Island has to a large extent been sheltered from the most severe elements.
Our finance industry is now showing signs of bouncing back. This is not uniform across the different facets of the industry but in fact, its broad-based nature means that while some sectors continue to be more adversely impacted by the economic downturn, others have seen an upswing or identified new prospects.
For example, it has been a period of consolidating our position as the largest captive insurance domicile in Europe and number four in the world. Despite the maturity of our captive industry and the prevailing soft market conditions, we have continued to see growth in this sector. In addition, we have seen increased inquiries this year following our decision not to currently seek equivalence under the EU’s proposed regulatory regime, Solvency II.
The Guernsey banking sector has seen the value of deposits grow 0.9 per cent during the second quarter of this year to reach £114 billion at the end of June 2011. However, contraction over the second half of last year means that deposits have fallen by 2.5 per cent year on year. The latest figures show an increase in the value of Swiss fiduciary deposits, but ‘core’ deposits fell in value during the second quarter and overall there was a modest decrease in volume, which was outweighed by the foreign exchange rate effects pushing up the value of deposits when expressed in sterling terms. This is a situation we will be monitoring going forward, particularly considering the difficult conditions in the global banking environment.
On the other hand, the value of fund business in Guernsey was up two per cent in the first quarter of this year. This was the seventh consecutive quarter of growth and takes the total to a new record high of more than £263bn at the end of March – up 34 per cent year on year. The private equity and venture capital sector has seen particularly strong growth, reaching more than £70bn at the end of March 2011. The Island’s reputation for excellence in this asset class has been reaffirmed by a Private Equity News / State Street survey where more than three-fifths (61 per cent) of CFOs said that Guernsey was their preferred destination for private equity outsourcing.
Other Guernsey closed-ended funds continue to attract a lot of interest, especially from promoters in alternative and niche asset classes where there is demand to access capital markets. Guernsey vehicles can list on the local Channel Islands Stock Exchange (CISX), which has more than 4,000 securities listed, the Euronext Amsterdam or the London Stock Exchange (LSE). Data from the LSE shows that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, earlier this year, Guernsey companies were given the green light to list on the Hong Kong Stock Exchange (HKEx).
This development reflects a growing trend of seeking to supplement business flows sourced from the traditional introducer centres of the UK and Europe with new streams from the ‘emerging’ markets. This is not exclusive to the investment sector but also Guernsey’s fiduciary industry where there are more than 150 full corporate licensees who together hold in excess of £350bn worth of assets in trust and company structures. A niche but developing area for many Guernsey fiduciaries is Qualifying Recognised Overseas Pension Schemes (QROPS).
Another product coming to market is the Guernsey Foundation. Draft foundations legislation has been published for consultation and we are hopeful that our practitioners will be able to offer Guernsey foundations to their clients from early in 2012. The introduction of foundations will provide another tool for practitioners to meet the needs of clients. In particular, we expect the foundation structure will 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.
Guernsey continues to be extremely active in the UK and European centres and in particular, the City of London, which remains our principal source of new business. However, we also recognise that the ‘emerging’ markets represent new and increasingly significant pools of both corporate and private wealth.
We are keenly aware that in these emerging markets it is not simply a case of ‘jam tomorrow’ but a long term commitment. Yet, we believe that the strength of the emerging economies means that even only a small slice of the cake will provide our industry with significant returns and open the door to further flows, while at the same time diversifying our business base.
Guernsey Finance – the promotional agency for the Island’s finance industry – is working with government, industry and the regulator to maximise our returns from the potential opportunities in these regions.
The Middle East
Guernsey Finance has been active in this marketplace for several years and we continue to maintain and develop our profile in this region through the media and attendance at third-party conferences, particularly in relation to the investment funds sector. Sets of funds from promoters originating in the UAE and Jordan are administered in the Island and another suite of Shariah-compliant funds based in Guernsey was launched last year.
The Far East
It was several years ago that we identified opportunities in servicing the wealth created from China’s economic growth and Guernsey opened a representative office in Shanghai at the end of 2007. We have seen delegations of senior politicians, regulators and business leaders in both directions. Towards the end of last year, the Guernsey Government signed a Tax Information Exchange Agreement (TIEA) with the Chinese central government tax authorities and a Memorandum of Understanding (MoU) for exchange and cooperation with the Shanghai Financial Services Office.
In parallel, a growing number of Guernsey firms have established operations on the ground, with the law firm Ogier opening offices in Hong Kong and Shanghai and fund administrator, International Administration Group (IAG), launching a Hong Kong office and a China offering through a joint servicing platform with a company in Shanghai. The growing interest in not just China but the wider Far East region is reflected by the fact that Guernsey has gained approval for its companies to list on HKEx, fiduciaries Nerine and Louvre have established operations in Hong Kong and law firm Collas Crill has recently opened an office in Singapore.
We are now continuing our work to reach agreements with regulators and other stock exchanges as a way to help smooth the path for Guernsey providers to do business in the region.
Existing business already in the Island from the region includes the investment companies Raven Russia and PPF Partners, the investment fund Aurora Russia and a range of funds from Baring Vostok Capital Partners. Other examples of managers with Guernsey domiciled funds investing into Russia include Ashmore Investment Management and Prosperity Capital Management.
Speaking to these sorts of players, we hear that they are particularly attracted by the fact that we are considered a well regulated and transparent international finance centre. This message was reinforced to us when a delegation from Guernsey visited Moscow in May this year and we are now identifying further opportunities for investment and wealth management providers to increase business links with Russia.
The Island is already gaining a reputation as the new home for Indian focused listings on London’s Alternative Investment Market (AIM). This was reinforced when Kolar Gold listed on AIM earlier this year to become the first Indian gold explorer and mine developer admitted to trading in the UK. It follows from previous AIM listings including iEnergizer, Skil Ports & Logistics Ltd, Caparo Energy Ltd, Indian Energy Ltd, Indus Gas Ltd and The Indian Film Company Ltd.
A delegation of politicians, officials and business leaders from Guernsey visited Delhi and Mumbai towards the end of 2010 to enhance financial services links between the two jurisdictions. We have followed this up by attending a series of third-party conferences, Nerine has become the first independent trust company from the Channel Islands to establish a presence in India and our authorities are also progressing towards signing a TIEA with India.
Guernsey Finance has not previously actively marketed the jurisdiction to the countries in Latin America but this has now become a new focus in response to industry demand and in particular in the captive insurance and private wealth management sector. The Island has already signed Tax Information Exchange Agreements (TIEAs) with Mexico and Argentina and others are in the pipeline, including Brazil and discussions have also begun with Chile and Venezuela.
Guernsey has now signed a total of 27 TIEAs. The Island was within the first wave of territories placed on the OECD ‘white list’ and our commitment to tax transparency and exchange of information has been endorsed by the OECD’s Global Forum in a report published at the start of 2011.
Also published early in 2011 were the IMF’s evaluation reports which commended Guernsey’s high standards of financial regulation, supervision and stability along with its robust criminal justice framework. The Island scored the highest marks of any jurisdiction so far assessed.
Indeed, one of our central messages to key decision makers in these emerging markets is that Guernsey is a leading international finance centre offering a range of financial products and services at the very highest global standards.
Peter Niven is the Chief Executive of Guernsey Finance, the promotional agency for the Guernsey’s finance industry internationally. Previously Chief Executive of the Lloyds TSB Offshore Financial Services Group, he has over 35 years experience in the financial services market in both the UK and offshore. Mr Niven is also a non-executive director of several Guernsey based fund and captive insurance companies. He is also a Fellow of the Institute of Bankers and a Chartered Director.