GUERNSEY: OFFSHORE BUSINESS SECTORS

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The UK's three IOFCs, Jersey, Guernsey and the Isle of Man have each developed some specialisations; Guernsey stands out as a captive insurance centre, but also has substantial banking and trust management sectors. Like the other two 'British' IOFCs, Guernsey has extremely strong professional services and pays great attention to regulatory standards. As a rather broad generalisation, the business environment in Guernsey has shown a marked tendency to become more international, partly because of the usefulness of the island to multinationals setting up in the EU, and partly because of increasingly tough anti-avoidance rules that have made it difficult for UK citizens to make productive use of trusts.

This section of the site describes the most important types of offshore business activity carried out from the island.

Guernsey Trade Marketing and Distribution

Even more than Jersey, its competitor and companion, Guernsey is prevented by its small size and limited resources from acting as a base for physical warehousing, processing or distribution into the vast EU market that lies so temptingly close by. Financial services have understandably tended to dominate the island's business development in the last 30 years. Given the level of sophistication of Guernsey's business infrastructure, this could be seen as wasteful, and it may be that the Internet is about to make it possible for the island to develop a new life as a commercial entrepot.

Along with other offshore jurisdictions, Guernsey is a suitable place in which to base e-commerce services for retail or wholesale distribution of material or non-material goods: see Offshore-e-com.com for extended descriptions of how such businesses can take advantage of the combination of offshore and e-commerce.

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Class A schemes are those which meet the Commission's Collective Investment Schemes Rules 2002 and are therefore eligible for recognition by the UK Financial Services Authority for sale to the public in the United Kingdom under section 270 of the Financial Services and Markets Act 2000.

The rules for Class B schemes incorporate a measure of flexibility. This policy recognises that Class B schemes range from the retail fund aimed at the "general public" via institutional funds to the strictly private fund established solely as a vehicle for investment by a single institution. Their investment objectives and risk profiles are similarly wide-ranging.

The Class Q Rules seek to provide a clear and concise set of requirements for the operation of professional investor funds and have been designed to encourage innovation.

A Qualifying Investor Fund (QIF) regime was Introduced following consultation with the financial services industry in the latter half of 2004, and was welcomed by the island's fund industry. Under a streamlined application process, the Commission undertakes to grant fund approval within 3 working days provided that an appropriately licensed Guernsey applicant has certified that: the fund will be restricted to professional, experienced and knowledgeable investors; the applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; and the applicant is satisfied as to the fund's economic rationale and the disclosure of any risks associated with the investment vehicle.

New criteria for Qualifying Investor Funds released by the Guernsey Financial Services Commission in 2006 met with support from the island’s finance industry.

Chief executive of GuernseyFinance, Peter Niven, suggested that the move "will serve to bring more business to the island", whilst Chairman of the Guernsey Investment Fund Association, Mike de Haaff, announced that:

"GIFA welcomes the change in criteria as it brings Guernsey in line with other offshore jurisdictions. The change in definition of a professional investor will encourage more take up of QIFs and can only be seen a positive move for the island’s fund industry."

Under the new rules, the definition of Professional Investor has been widened to include an individual investor who invests a minimum of USD100,000 in such a fund.

The revised guidance note issued by the FSC also re-emphasised the due diligence obligations which Guernsey Licensees undertake when submitting applications for Guernsey Qualifying Investor Funds.

Guernsey Finance has announced that funds managed in the bailiwick of Guernsey fell by 0.5% in the final quarter of last year to GBP200.4bn; overall funds under management increased 12.5% (GBP22.2bn) during 2008.

Peter Niven, Chief Executive of Guernsey Finance – the promotional agency for the island’s finance industry, said: “Global market conditions meant it was inevitable that we would see an overall reduction in the value of our business during the fourth quarter. We were fortunate that it was only a decrease of 0.5% and this demonstrates the resilience of our funds sector but clearly there will be further falls until market confidence returns, which is unlikely to be before the end of 2009.”

Guernsey open-ended funds fell in value by GBP2.1bn (3.2%) over the quarter to reach GBP63.6bn at the end of the year – a decrease of GBP5.6bn (8.1%) since the end of December 2007.

The Guernsey closed-end fund sector grew by GBP5.6bn (6.5%) over the quarter to reach GBP91.5bn at the end of December 2008 – up GBP15.1bn (19.8%) from 12 months previously.

Non-Guernsey schemes, for which some aspect of management and administration is carried out in the island, decreased by GBP4.5bn (9%) over the quarter to leave their value at GBP45.3bn at the turn of the year. This figure is an increase of GBP12.7bn (39%) since 31 December 2007.

Mr Niven added: “We may have seen an overall decrease in asset values but in fact looking more closely you can see that there is continued growth in the closed-ended sector. This is where the principal strength of our business is now and the area that we are most heavily marketing and promoting Guernsey as a funds jurisdiction.”

In the year to 30 September 2007, a total of 65 Qualifying Investor Funds were approved. Since inception of the QIF regime in February 2005, a total of 130 QIF vehicles received consent or approval. On February 1, 2007, a Registered Closed-ended Fund regime was introduced. By September 30, a total of 55 Registered Closed-ended Investment Funds had received consent since the launch of the regime. Since September 30, a further 12 Registered Closed-ended Investment Funds received consent under this regime.

Peter Moffatt, Director of Investment Business at the Guernsey Financial Services Commission, observed that:

“These figures are evidence, despite recent market turbulence and the impact of movements in currency exchange rates on net asset values, of continuing confidence in the Guernsey investment fund sector.

As the figures show, the Qualifying Investor Fund and Registered Closed-ended Investment Fund Regimes are being extensively used by local firms to service the needs of their fund promoter clients”.

The growing use of Guernsey structures as vehicles for hedge funds has highlighted a number of areas where the investment fund framework can create problems, leading the GFSC to issue a consultation document: ‘The regulatory framework for Hedge Funds in Guernsey’ in November 2003. This culminated in a report issued in the latter half of 2004 which advocated more flexibility in certain aspects of the legal regime governing funds, including: dispensing with the need for a Guernsey-domiciled and licensed custodian to fill the role of a suitably qualified prime broker; waiving complex segregation requirements for prime brokers holding fund assets; waivers for funds which can demonstrate a need to use estimates of net asset value in advance of final NAV determination; and where estimation is permitted, a possible waiver of client money rules requiring segregation of subscription and redemption monies.

The GFSC has also recently issued guidance on the disclosure regime for closed-end investment funds. That guidance re-emphasised the flexible nature of the Commission’s approach. Guernsey domiciled closed-end funds are subject to Guernsey company law and the Control of Borrowing regime, and it is clear, from the closed-end hedge funds already established under those arrangements, that few structural problems arise. In the open-ended sector, the position is more complex. Open-ended funds are subject to the Protection of Investors (Bailiwick ofGuernsey) Law 1987, as amended, (“POI”) and to rules and regulations made under that law. POI provides, inter alia, that all Guernsey open-ended funds must be authorised by the Commission - there is no provision for “unauthorised” funds – and that each fund must have a designated manager and a designated trustee or custodian.

Plans were announced in mid-2006 to dramatically change the legislation and regulation relating to investment and fund business in Guernsey.

The proposed changes include:

Peter Niven, the chief executive of GuernseyFinance, observed at the time that:

“Guernsey’s fund business is at an all time high, with year-on-year growth in funds under management and administration of 47.4% to the end of March 2006. The timing of these recommendations could not be better to capitalise on this result and pave the way for further success.”

He continued: “Guernsey’s growth in investment business had been partly down to an increasing appetite for alternatives, in particular fund of hedge funds, property funds and private equity funds. Guernsey had also attracted a number of alternative fund managers to relocate to the island in recent years. In addition, traditional sources of new business are continuing to come through very positively."

In 2008 the island made several legislative amendments related to funds business and introduced a new set of fund rules. The main result is that now both Guernsey open and closed-ended funds can be established as authorised or registered funds. Authorised funds are regulated by the Guernsey Financial Services Commission and subject to closer supervision than registered schemes, which are not authorised by the GFSC.

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Guernsey Banking

Banks in Guernsey are regulated and licensed by the Guernsey Financial Services Commission (GFSC) under the Banking Supervision (Guernsey) Law 1994 as amended. The Commission is extremely careful to exclude doubtful operations.

Originally, banks coming to Guernsey set up fully-staffed local branch offices or subsidiaries, but in recent years, as in many other IOFCs, in response to shortage of resources, the administered unit has become more popular. Under this scheme, an established Guernsey bank provides services for an incoming bank, which therefore does not need to open its own office or recruit staff. However, the Financial Services Commission applies the same standards of supervision to an administered bank as to an established bank. About one third of the banks in Guernsey are 'administered'.

The banking sector, in common with other financial services businesses, is subject to stiff money laundering controls under the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002.

Financial services businesses which suspect that a customer or transaction are associated with money laundering, terrorism, or the financing of terrorism, must report this to the Guernsey Financial Intelligence Service.

As of June 2005, there were 50 licensed banking institutions in Guernsey. Figures released by the Guernsey Financial Services Commission in November, 2007, showed that the total value of deposits held with Guernsey banks reached a record record high of GBP112.7bn as at September 30, 2007 – up GBP23.3bn (26%) year on year. That represents an increase during the quarter of GBP4.6bn (4.2%).

“The fact that the banking sector has been able to deliver such results in what has been a difficult quarter is testament to the robust nature of what is a mature segment of the Island’s finance industry," announced Peter Niven.

“It also illustrates the benefits of having a diverse spread of banking business on the books, which includes strong flows of corporate deposits relative to retail business and this is a feature we encourage for the future. In particular there is substantial business coming from the other parts of the Island’s finance industry, in particular investment funds and especially private equity, demonstrating the continued buoyancy of these sectors," he added.

The figures showed that new deposit business came principally from financial institutions in Guernsey, banks elsewhere, corporate customers and particularly from Swiss fiduciary deposits (up 8.9%). Therefore, although Sterling business fell during the period, the overall currency mix saw growth in Swiss Franc, US Dollar and Euro business.

Speculation that the EU Savings Tax Directive would impact on balances held offshore has so far proved unfounded.

Total deposits held with Guernsey banks at the end of December 2008 increased in sterling terms by GBP20.8bn from the end of September 2008 level of GBP136.3bn to reach a new highest figure of GBP157.1bn, representing a 15.3% increase over the quarter and 31.9% over the year. Total assets and liabilities increased by GBP27bn over the quarter representing a 17.8% increase to reach the highest level yet at GBP179.2bn. This represents a 35.9% increase over the year.

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Guernsey Trust Management

Trust management, particularly for wealthy UK individuals, was the island's traditional business. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but Guernsey's trust business has continued to grow based on a more international clientele. Many Collective Investment Funds are also of course based on trusts.

As of February 2008, the Island hosted more than 140 licensed fiduciaries, ranging from large organisations to independent, boutique operations. Together, they held between GBP200 and GBP300bn worth of assets in trust. The island has a very well-developed legal and financial infrastructure for trust management; the highly sophisticated professional services which support the trust sector include lawyers, accountants, investment managers and stockbrokers.

The Trusts Law 1989 (updated in 2007) provides a modern statutory basis for trust management activity. The Edwards Report acknowledged that Guernsey ranks highly among IOFCs for the quality of its regulation. Unlike the banking sector, however, the Guernsey trusts industry had not been subject to any formal system of supervision. Partly as a result of the Edwards Report, a law was prepared by the States' Advisory and Finance Committee under the name of The Regulation of Fiduciaries and Administration Businesses (Bailiwick of Guernsey) Bill 2000. The law - known as the Fiduciary Law - came into effect on April 1, 2001.

Individuals and businesses involved in the provision of fiduciary services had to submit a licence application to the Commission by May 31, 2001. The Commission received a total of 179 applications for a full fiduciary licence and 70 applications for a personal fiduciary licence.

The law contains a 'four eyes' rule, standards for capital adequacy and compulsory indemnity insurance. The offer or provision of fiduciary services without a licence will incur criminal sanctions. A full licence is required by any company, wherever registered, providing fiduciary services in the Bailiwick and by Guernsey-registered companies providing fiduciary services anywhere in the world and individuals, acting as directors or trustees by way of business, need a personal licence. Prudential rules have also been imposed; clients' funds need to be segregated from other trust assets; and new accounting safeguards have been installed.

The annual fee for a full fiduciary licence is dependent upon the annual turnover from regulated fiduciary activities. See Offshore Legal and Taxation Regime for full details.

The law provides extensive powers to the GFSC in the granting, refusal, revocation, and application of conditions to fiduciary licences. It will also have authority to control the names of, and advertising by, fiduciary businesses, rights to obtain information and documents, and powers to conduct investigations. The Commission states that the Bailiwick of Guernsey is one of the first jurisdictions to establish a statutory system of fiduciary regulation.

New trust legislation (the Trusts (Guernsey) Law, 2007), which was approved in July 2007, came into force on March 17th, 2008. The changes overall are designed to create a more flexible framework for the local trust industry, and to ensure that Guernsey, as a jurisdiction for the establishment and administration of fiduciary structures, remains well placed and competitive. See Law of Offshore for a fuller description of the 2007 legislation.

Click on Formation of Trusts or Taxation of Trusts for further information.

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Guernsey Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

The Guernsey insurance sector can be broadly divided into two main areas: domestic insurance - comprising local insurers, overseas insurers, recognised insurers and intermediaries who advise on or arrange contracts of insurance in or from within Guernsey; and international insurance - embracing captive insurers, protected cell companies and life assurance companies who arrange contracts of insurance from within Guernsey, covering international risks.

Access to protected cell status was enlarged in 2001 under The Protected Cell Companies (Special Purpose Vehicle) Regulations 2001, under which two further classes of company were permitted to be incorporated as, or converted into, a protected cell company. The first additional class of company is one that is 'established principally for the purpose of issuing bonds or other debt securities where the repayment is to be funded from the proceeds of the company's investments.' The second type of company is one that performs the 'carrying on of finance business' with the exception of those supervised under specific laws such as the Protection of Investors Law, the Insurance Business Law, the Banking Supervision Law and the Regulation of Fiduciaries. The new law took full effect from 6 February 2001.

Both categories of insurers in Guernsey are required to be licensed under The Insurance Business (Bailiwick of Guernsey) Law, 2002.

The minimum capital requirement of a licensed insurance manager or
a licensed insurance intermediary is GBP25,000 or 125% of the
licensee’s professional indemnity insurance deductible or excess, if higher; a fee of GBP3,630 is payable on registration and GBP3,450 annually thereafter (for a 'Pure' insurance manager. Commercial insurance managers pay an annual fee of GBP5,770.

At October 31, 2007, there were in total 638 international insurance companies registered in Guernsey, comprising 303 captives, 71 PCCs and 262 PCC cells. Total assets in 2006 stood at GBP18.8 billion. Additionally, in the areas of PCCs, there is rising interest in special purpose vehicles (SPVs), although these are usually only arranged by well capitalised companies.

A survey conducted by Reactions Magazine in June, 2006, saw Guernsey voted the best domicile in Europe for PCC (Protected Cell Company) legislation, highly commended for its tailored legislation, and commended for its cost efficiency.

According to GuernseyFinance, the survey comes at a time when the growth in numbers of Captive Insurance companies slowed globally in 2005.

Peter Niven Chief Executive of GuernseyFinance commented:

“These accolades show the insurance industry recognizes Guernsey as a leading domicile for Captive Insurance and particularly for PCCs. This is set to continue with our pragmatic approach to legislation and our continuing drive to ensure that Guernsey is a good place to do business.”

Captives in Guernsey can choose between various tax regimes; see Offshore Legal and Tax Regimes: Taxation of Offshore Entities and Domestic Corporate Taxation for details.

In the domestic market, there were 24 domestic insurers as at October 31, 2007, and 48 registered intermediaries. In addition, a number of 'Recognised Insurers' write business in Guernsey without having a physical presence. A recognised insurer cannot write business in the Bailiwick without being licensed in their home jurisdiction.

Registered insurance companies may take advantage of the Protected Cell (Guernsey) Ordinance 1997, under which multiple cells may exist within one company; the taxation basis of protected cell companies will probably be equivalent to that of exempt companies. Protected cell company status under the 1997 Ordinance is generally reserved for authorised collective investment schemes, insurance companies and closed-ended investment companies.

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