Michael Betley, managing director of Trust Corporation in Guernsey, considers the reasons for the growth of incubation of managed services in Guernsey.
ONE WAYGuernsey 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 finnancial 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.
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.
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.
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.
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.
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.
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.
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.
Originally published in STEP Journal, April 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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