Jersey’s long term prospects as a jurisdiction of choice for ‘High Net Worth’ clients remain very bright, but the Island must continue to develop legislation and products to address both a changing client base and a shift in the rationale behind the use of offshore structures. Here we will examine some of the reasons why the client base is shifting and give some examples of how the Island has already adapted to a number of these changes.
Jersey's political stability and its strong legal and regulatory framework have kept it at the forefront of global finance for over half a century. This stability and framework are supported by its government's determination to encourage high-quality business, while a sophisticated infrastructure of laws and regulations combine to give confidence in the industry from prospective clients.
For many years, one of the principal reasons for wealthy private clients to create offshore structures in Jersey was to mitigate tax. During the 1980s, 1990s and the early part of this century, there remained distinct advantages to certain individuals and families to hold assets offshore and a significant proportion of these clients had some UK connection, whether that was in terms of their residency or the location of their assets.
Even though Jersey has been recognised by the IMF, the G8's Financial Stability Forum and the Financial Action Task Force (FATF) for its supervision and regulation of financial services, the global financial crisis has brought the use of offshore structures into the mainstream media, often unfairly, in a negative light. This has resulted in this subject becoming a large part of the political agenda, particularly in the UK, US and mainland Europe.
Subsequently, laws have changed in the jurisdictions from which, historically, the client base arose. The changes in these laws principally address two key areas: transparency and tax avoidance.
With regard to transparency, perhaps the most significant piece of legislation was FATCA.
Jersey has been recognised as being a centre of excellence when it comes to compliance and anti- money laundering. In 2009, it was the only international finance centre to be named on the OECD's white list of well-regulated and compliant centres, underlining Jersey's status within the G20 nations. Since then, Jersey has moved into the top 20 on the Global Financial Centres Index (GFCI) for the first time, has kept its title as the GFCI's highest-rated international finance centre and remains one of only seven jurisdictions complying with 15 of the 16 FATF key recommendations – the top rating so far attained anywhere. As a result of this, achieving compliance with new legislation regarding transparency has not required a huge overhaul of the industry standards and regulatory frameworks already in place.
The changes to the tax laws in the UK, US and many European jurisdictions have, however, had a significant impact on the benefits of using international finance centres. Tax mitigation is no longer the leading driver behind clients creating offshore structures. Indeed, the recent UK budget changes have in many cases made it unattractive from a tax point of view to have assets held in Jersey.
As a result of this, there has been a noticeable drop in the number of new private clients from the traditional jurisdictions such as the UK and US forming structures with tax being the principal rationale behind them.
These ‘traditional’ clients are being replaced by individuals and families from jurisdictions such as Asia, the Middle East and Africa, and these new clients are making use of the original intended objectives of these arrangements, the most prevalent of these being asset protection and succession planning.
With a shifting client base comes a shift in the types of structures these clients are willing to utilise. The most obvious example of this is trusts.
Jersey is one of the most highly regarded trust jurisdictions in the world. Jersey’s trust law dates back to 1984 and has subsequently been copied by many other jurisdictions.
A trust is a legally binding arrangement whereby a person (known as a settlor) transfers assets to another person (known as a trustee) who is entrusted with legal title to the trust assets, not for his own benefit, but for the benefit of other persons (known as beneficiaries, who may include the settlor or for a specified purpose).
A settlor establishes a trust by appointing trustees and transferring the legal ownership of assets to those trustees. The trustees are responsible for managing the assets for the benefit of the beneficiaries. The details of this arrangement are recorded in a formal document ‘the Trust Deed’.
It has often been the case in the past that, to achieve the tax mitigation objectives desired by our ‘traditional’ clients, trusts have needed to be fully discretionary. If the trust is discretionary, the settlor cannot insist that the trustees act in a certain way, however, it is possible for a settlor to give the trustees guidance as to how he would wish them to act.
The idea that a person should effectively relinquish their assets to the trust and lose control of these assets has been accepted and practiced in the UK for centuries. For a Saudi client, however, who does not share the concept of equity, and who cannot get comfortable with the idea of relinquishing control of their family assets, the discretionary trust is not a viable solution.
As a result of this, the trust concept has had to evolve with the changing client base and their requirements.
The most obvious alternative option would be a Reserved Powers Trust. Under the terms of these arrangements, it is possible for a settlor to reserve certain powers where he or she may wish to maintain control of certain aspects of the trust. These powers might include:
Investment management decisions over the trust
Appointing and removing the trustees
Appointing and removing beneficiaries
Although the Reserved Powers Trust helps to address the issue of control, the trust assets are still legally owned by the trustees. Although they are kept completely separate from any other property owned by the trustees, and the trustees have a legal obligation to manage the trust assets in accordance with the trust deed and to ensure that the rights of the beneficiaries are protected, the formation of a trust it still a step to far for some clients.
Another option that has been developed therefore is the private trust company (PTC). A PTC is a privately owned incorporated Jersey or non-Jersey company that operates as a trust company. It does not, however, offer public trustee services but instead acts as the appointed trustee of a specific trust or a related group of trusts - usually for a particular family, for specific philanthropic objectives or for a common settlor.
Jersey law requires any person who carries on trust company business in or from within the Island, or any Jersey registered company that carries on that business anywhere in the world, to apply to the Jersey Financial Services Commission (JFSC) to be registered to do so, unless such person is able to rely upon one of the available exemptions.
Provided an intended PTC meets all the following criteria it may rely upon an exemption and will not be required to apply to the JFSC for trust company business registration:
Its purpose is solely to provide trust company business services in respect of a specific trust or trusts;
It does not solicit from or provide trust company business services to the public;
Its administration is carried out by a registered person (eg, Vistra) to carry out trust company business.
The exemption is limited since certain statutory provisions will continue to apply to the PTC and as a result the PTC continues to be subject to the overall regulation of the JFSC.
When establishing a PTC structure, particular thought must be given to the ownership arrangement, administration and board composition of the PTC. Whilst the ownership of a PTC is flexible, it is likely that it will be primarily influenced by tax considerations. Since direct personal ownership of a PTC is often not feasible, private foundations or purpose trusts (either charitable or non-charitable) are frequently preferred alternative ownership vehicles.
A PTC can be utilised to consolidate the administration of multiple trusts, each for distinct purposes, thereby conveniently managing and preserving family wealth over generations and planning effectively for the future ownership of family business interests. A PTC will ensure greater family control over the family trusts and, often most importantly, the management of the trusts’ underlying investments. In addition, PTCs can provide an ideal framework in which to introduce younger family members into the family business and to the disciplines of wealth administration.
If the concept of the trust is simply too big a leap for the clients, another alternative now available is the foundation, available due to the Foundations (Jersey) Law 2009, which came into force on 17 July 2009.
A foundation has elements of both trusts and companies and these vehicles are of great interest to clients to whom the concept of equity and therefore a trust is foreign. They combine the flexibility of a trust entity with the separate legal identity and transparency of a company. A foundation has a separate legal personality and is able to hold its own assets, contract with third parties and sue and be sued in its own name and capacity. It does not have shareholders and holds the assets for the benefit of beneficiaries.
A Jersey Foundation is created when one or more persons or legal entities (founders) formalise a Charter, which, is registered with the Jersey Financial Services Commission (JFSC).
Through the charter, the founders undertake to make donations (foundation assets) for the benefit of beneficiaries. The foundation assets will be managed by a council consisting of individuals or a body corporate and they must include a qualified person who is registered in Jersey under the Financial Services (Jersey) Law, 1998 to carry out trust company business. The key point is that, although there must be a qualified member on the board, the majority of the foundation council can be made up the client, his family and/or his trusted advisors.
The implementation of ideas and concepts such as the Reserved Powers Trust, the Private Trust Company and the Foundation are just a few examples of Jersey’s attempts to provide solutions to new clients in an ever changing market. Although Jersey has done a wonderful job of cementing its position as a leading international finance centre through high quality service and first class regulation, it must continue to adapt and evolve to meet the requirements and expectations of an ever changing client base with ever changing needs.
Steven is Head of Business Development in the Jersey office. He is responsible for all aspects of new business and takes an active role in the on-boarding of new clients, often assisting them in obtaining the correct advice to ensure that the structures put in place are appropriate for their specific circumstances. He has over 17 years' experience in all aspects of the offshore financial services industry, dealing with international corporate, institutional investors and ultra-high-net-worth individuals,