Wealth Management and Asset Protection - Guernsey Profile
By Lowtax Editorial
19 March, 2014
Guernsey is one of three Crown Dependencies of the United Kingdom and is located in the English Channel approximately 30 miles off the French coast. Although the UK Government is responsible for the conduct of external relations and defence, the Bailiwick of Guernsey is self-governing and has its own legislative assembly (the States), legal system and courts (although the ultimate court of appeal is the English Privy Council).
The virtual absence of party politics encourages a high degree of consensus and contributes to political and economic stability. In combination with low or non-existent taxes on company income and a lack of other taxes (including capital gains tax, estate and inheritance taxes) the island has enjoyed a sustained period of growth and prosperity and an offshore financial services industry has been allowed to flourish; financial services now account for over half of the island's total income. Offshore banking, trusts and fiduciary services and investment funds are the main sectors of interest for individuals seeking offshore wealth management and asset protection solutions, although foundations, an image rights register and an aircraft registry have been added in the past few years. These are outlined in more detail later in this feature. Corporate financial services have also become an important component of Guernseys finance industry and the island is home to more entities listed on the London Stock Exchange than any other jurisdiction, excluding the UK.
Guernseys financial services industry is regulated by an independent regulator, the Guernsey Financial Services Commission (GFSC). The GFSC is responsible for regulating the banking, investment fund, insurance and fiduciary sectors and has wide-ranging powers of enforcement, although it is not a prosecuting authority and must refer criminal matters to the appropriate law enforcement bodies.
In June 2013, the GFSC increased its capacity to undertake professional and efficient enforcement action with the creation of the post of Director of Enforcement, and the establishment of a dedicated Enforcement Division. This is designed to further enhance the Commissions ability to undertake proportionate and efficient enforcement action.
The Commission does not seek to be an enforcement-led regulator but, in the same way that the police require powers of arrest and a capability to make arrests, the Commission requires an effective enforcement capability if it is to be able to deter wrongdoing and poor practice thereby keeping Guernseys financial sector safe, said William Mason, the Commissions Acting Director General.
Traditionally, Guernseys banks and trusts have been used by residents of the United Kingdom due to a combination of geographic proximity and familiarity; despite its closeness to France, the Channel Islands are, to all intents and purposes, British.
In recent times, successive tightenings of anti-tax avoidance legislation in the UK have reduced the opportunities for Britons to manage their wealth from an offshore base. However, Guernsey has benefited enormously from rising levels of wealth in emerging markets, and Asia in particular has become one of the worlds largest wealth management markets.
China especially has become an important territory for Guernsey, and the Government, in tandem with the islands finance industry promotional agency Guernsey Finance, has worked hard to cultivate good relations with the Chinese authorities. For example, in April 2013, the Chinese ambassador to the UK, Liu Xiaoming pledged to work with Guernsey towards a number of initiatives to boost Guernsey's access to the Chinese market, in particular in the financial services sphere.
"One of the areas where the ambassador recognized the potential mutual benefit of working together is financial services, explained Fiona Le Poidevin, Chief Executive of Guernsey Finance, the promotional agency for the islands financial services industry. For example, we are looking to consolidate the number of banking institutions based in the island. Chinese banks would benefit from basing themselves here by being able to continue to service their clients when they become globally mobile and especially those who establish business operations in Europe.
"In addition, Guernsey can provide a gateway through which structures, including funds, can be established for investing out of and into China, Le Poidevin added. Chinese clients might use a Guernsey vehicle for accessing European capital markets or alternatively, managers and investors globally might use funds domiciled in Guernsey for investing into China. There is still much work to do but as long as we play our part then the ambassador has agreed to assist us in our work."
Guernsey Finance established a representative office in Shanghai in 2007 and since then a number of senior-level visits have been hosted by both territories.
The first bank to be established on the Island was the Guernsey Savings Bank, which was founded in 1822, and until the 1960s, when merchant banks began to establish operations on the island, banking in Guernsey was purely domestic and largely conducted by the major British high street clearing banks. Today however, Guernseys banking sector is a major pillar of its offshore financial services industry, and the island is home to subsidiaries of international banking groups with head offices in Switzerland, Europe, the United States and the United Kingdom, among other places.
The sector provides products ranging from retail banking and savings, international wealth management through to institutional business and specialist lending. It also services the other financial sectors on the island, such as trusts, insurance and investment funds.
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 GFSC applies the same standards of supervision to an administered bank as to an established bank.
At the time of writing, 31 banks were licensed in Guernsey. These are listed in the table below.
ABN AMRO (Guernsey) Limited
EFG Private Bank (Channel Islands) Limited
Ahli United Bank (UK) Plc
HSBC Bank plc, Guernsey Branch
Bank J. Safra Sarasin Limited, Guernsey Branch
HSBC Private Bank (C.I.) Limited
Bank Julius Baer & Co. Ltd, Guernsey Branch
HSBC Private Bank (Suisse) S.A., Guernsey Branch
Bank of Cyprus (Channel Islands) Limited
Investec Bank (Channel Islands) Limited
Banque Cantonale Vaudoise Guernsey Branch
Kleinwort Benson (Channel Islands) Limited
Barclays Bank PLC, Guernsey Branch
Lloyds Bank International Limited - Guernsey Branch
Barclays Private Clients International Limited, Guernsey Branch
Northern Trust (Guernsey) Limited
BNP Paribas (Suisse) SA, Guernsey Branch
Rothschild Bank (CI) Limited
BNP Paribas Securities Services S.C.A. Guernsey Branch
Rothschild Bank International Limited
Butterfield Bank (Guernsey) Limited
Royal Bank of Canada (Channel Islands) Limited
Clydesdale Bank PLC - Guernsey Branch
Royal Bank of Scotland International Limited - Guernsey Branch
The Co-operative Bank Plc. Guernsey Branch
Schroders (C.I.) Limited
Credit Suisse (Channel Islands) Limited
SG Hambros Bank (Channel Islands) Limited - Guernsey Branch
Credit Suisse AG, Guernsey Branch
Skipton International Limited
Deutsche Bank International Limited - Guernsey Branch
As of the end of December 2013 deposits in Guernsey banks stood at GBP83.7bn.
Trusts and Foundations
As mentioned above, trust management, particularly for wealthy UK individuals, was the mainstay of island's finance industry. However, even though the UK market for trust services has shrunk, Guernseys trust sector has continued to grow as a result of a more international client base.
The Trusts Law 1989 (updated in 2007) provides a modern statutory basis for trust management activity in Guernsey, and 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.
Until quite recently, Guernseys trusts industry had not been subject to any formal system of supervision. This all changed on April 1, 2001, when the Regulation of Fiduciaries and Administration Businesses (Bailiwick of Guernsey) Bill 2000, otherwise known as the Fiduciaries Law, came into effect. The law contains a 'four eyes' rule, standards for capital adequacy and compulsory indemnity insurance, and the unlicensed offer or provision of fiduciary services is a criminal offence. 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, and clients' funds need to be segregated from other trust assets. New accounting safeguards were also installed by the legislation.
At the time of writing, 802 persons were listed by the GFSC as holding a fiduciary licence under the Fiduciaries Law. Together, they held between GBP200 and GBP300bn worth of assets in trust.
The Guernsey Registry began accepting applications for the formation of foundations on January 9, 2013, following approval of the legislation by the UK Privy Council.
A foundation is an incorporated, self-owning, legal entity which, although having much in common with a trust, has a distinct legal personality, something that is more commonly associated with companies. A foundation has similar features to a trust in that it has a founder who is similar to a settlor, beneficiaries who have similar rights to those of a discretionary trust, and a foundation instrument and rules which are similar to a trust deed.
Foundations are commonly used for wealth management, and residents of jurisdictions in the Middle and Far East are more familiar with foundations than with trusts, which tend not to exist in their legal systems. The Foundations Law therefore allows Guernseys fiduciary professionals to consider the use of a foundation as well as a trust when adopting wealth structures for their clients. As Le Poidevin observes: Foundations may be particularly attractive to those based in civil law jurisdictions in Europe and further afield in the emerging markets of China, Russia and Latin America where the foundation concept is more familiar."
Foundations business in Guernsey is starting to grow, according to Guernsey Finance. Since the introduction of the Guernsey Foundations Law at the beginning of 2013, 16 foundations have been registered in the Island.
Collas Crill specialist fiduciary lawyer Angela Calnan told an audience at an Institute of Chartered Secretaries and Administrators presentation in January 2014 that her firm had been responsible for a quarter of those registered.
"By being able to offer foundations, Guernsey now has an innovative tool in the Island's wealth and succession planning offering and this has attracted a wider client base to Guernsey," said Calnan. "We are now seeing a significant increase in interest in Guernsey from clients in civil law jurisdictions, who are uncomfortable with the idea of a trust and the perceived loss of control associated with it, and who seek a greater degree of influence over the administration of their wealth or require more bespoke wealth-planning solutions."
Calnan said Collas Crill was seeing significant interest from its client base in the Middle East and Far East, who were attracted by the idea of foundations to hold their family businesses, particularly as the foundation's council can mirror the board of the family operation and ensure that control is retained of the 'golden egg.'
Guernsey plays host to an extensive array of businesses involved with investment funds. These include investment advisers, stockbrokers and more than fifty fund managers, custodians and administrators, who combine to offer a range of products and services for both retail and institutional investors. The international nature of Guernseys market place for investment funds is illustrated by the fact that Guernsey funds are now promoted in more than 55 financial centres.
Guernsey is particularly adept when it comes to alternative investment funds, and the islands fund professionals have come to specialise in areas such as funds of hedge funds, private equity and property funds. Increasingly, the more obscure types of alternative investment fund are basing themselves in Guernsey, including those investing in fines wines, fine art and timber.
A thriving investment services industry has also grown up around the investment funds sector, including subsidiaries of large multinational houses as well as independent boutiques. In combination these firms deliver a wide range of asset management and stockbroking services to both private and corporate clients.
Guernsey legislation permits the formation of both open-ended and closed-ended funds, and there are various sub-classes of funds aimed at different segments of the investment funds market.
Open ended funds may be established as Class A, B or Q funds and are constituted as companies, protected cell companies or unit trusts.
Class A schemes are those which meet the GFSCs Collective Investment Schemes Rules 2002 and are therefore eligible for recognition by the UK financial services regulator as eligible for sale to the public in the UK.
Class B schemes incorporate a measure of flexibility and 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 industry in 2004. Under a streamlined application process, the Commission undertakes to grant fund approval within three 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.
The GFSC approved 30 new investment funds during the fourth quarter of 2013. Throughout the whole year a total of 103 new funds were approved.
The net asset value of funds under management and administration has seen five-year growth of 33% and stood at GBP266bn at the end of December 2013, although this was just under GBP11bn lower than at the same point in 2012.
Le Poidevin said of the year-end figures that exchange rate factors were largely to blame for the decline in 2013. We've also seen an increase of GBP3.8bn in the value of our closed-ended sector which has been one of the engines for growth in Guernsey's funds industry over the last few years.
She added: "During 2013 we saw a notable increase in the number of new funds being approved for domiciling or servicing in Guernsey. Indeed, it is something of a vote of confidence in Guernsey's approach to the Alternative Investment Fund Managers Directive (AIFMD) that a significant number were approved after the start of its implementation in Europe."
Guernsey's own opt-in AIFMD equivalent regime came into effect from January 2, 2014. This is the second strand of a "dual regime" where the other parallel regime is the existing regulatory framework for managers and investors not requiring an AIFMD fund, including those using EU national private placement regimes, and those marketing to non-EU investors.
In July 2013, the GFSC signed bilateral cooperation agreements with 27 securities regulators from the EU and the wider European Economic Area (EEA), including the United Kingdom, France and Germany. The cooperation agreements provide a set of arrangements for the on-going supervision of alternative investment funds, including hedge funds, private equity and real estate funds. They are applicable from July 22, 2013, which is the deadline for EU countries to transpose the provisions of the AIFMD into national law.
Guernseys dual regime is expected to appeal to fund managers all over the world, particularly in China, the Middle East and the United States, three areas where Guernsey Finance has been concentrating its marketing efforts in recent years.
Knowledge in the US about AIFMD is variable but it is important for managers to know how it may impact them and what options they have at their disposal, noted Le Poidevin ahead of a 2013 promotional trip to the US designed to showcase Guernseys wealth management and fund management expertise to US fund managers. She added: We will be highlighting that Guernsey's position of being close to Europe but not in the EU and our intention to introduce a dual regime, which will allow us to continue to distribute our funds to both EU and non-EU countries, means that we will be uniquely positioned as an international funds center."
Image Rights Register
The world's first image rights legislation, The Image Rights (Bailiwick of Guernsey) Ordinance, 2012, entered into force on December 3, 2012, following approval by the States, on November 28, 2012.
The legislation positions Guernsey as the first jurisdiction to have a legislative framework to register an image, enabling effective management and control of the commercial use of a person's identity, images associated with that person, including distinctive characteristics, such as signature, voice, mannerisms and gestures.
The legislation not only establishes image rights as a new and separate branch of intellectual property law, it will also provide clearly defined safeguards for celebrities and sports personalities looking to further protect and capitalize on their image.
The ground-breaking law will create an image rights register enabling legal recognition of a "registered personality" (i.e. the exclusive rights to the images associated with or registered against the personality). Once registered, the image right, as an identifiable asset, can be placed within a Guernsey structure, adding flexibility to allow image rights income to be channeled into a wealth management structure such as a trust, or for instance, a partnership structure to overcome complex asset ownership arrangements.
By establishing a legal structure to house one's image offshore, significant tax advantages can be unlocked. The new legislation will enhance the argument that income derived from image rights should be taxable in the jurisdiction in which they are registered. The development of Guernsey's legislation comes after years of uncertainty surrounding the tax treatment of endorsements and sponsorship deals received by sporting personalities, musicians and media personalities. For example, the UK tax authority, HMRC, has sought to receive a share of sports personalities' image rights income when they appear on UK soil, regardless of where their image rights are said to be structured.
In 2013, Guernsey launched an aircraft registry, a development that Guernsey Finance described as adding yet another service to the menu of options which we can offer our global client base."
"Guernsey has many fiduciary services providers with high net worth clients who own aircraft and now they can take advantage of the modern legislation offered by our aircraft registry, Le Poidevin explained. Indeed, it is expected to be particularly attractive to clients from emerging markets such as the Middle East, Russia, and Asia where personal luxury aircraft ownership is very popular, and it may encourage them to consider using Guernsey for their wider wealth management needs."
Earlier it had been proposed that fellow Channel Island Jersey join forces with Guernsey to establish a combined registry. However, negotiators agreed that the project would not have been mutually beneficial, partially due to differences in the islands' tax regimes.
The registry is open to aircraft not currently used for commercial air transport, aimed mainly at owners, operators and asset managers of business aircraft, as well as aircraft lessors. Guernsey's nationality mark has been confirmed as "2" followed by four letters.
Guernsey is among the top-tier of jurisdictions when it comes to regulation, tax transparency and administrative cooperation, and is easily one of the cleanest financial centres out there, offshore or otherwise, having signed up, or committed to, several information exchange initiatives in recent times.
In December 2013, Guernsey and Jersey signed Foreign Account Tax Compliance Act (FATCA) agreements with the United States on December 13, 2013. This followed the signing of an inter-governmental agreement with the UK to improve the automatic exchange of tax information between the jurisdictions in a FACTA-style agreement in October 2013.
At the 6th Global Forum on Transparency and Exchange of Information for Tax Purposes held in Jakarta in November 2013, Guernsey was among a group of jurisdictions which committed to the early adoption of the newly-developed OECD Common Reporting Standard (CRS). Fiona Le Poidevin said that Guernseys commitment to the CRS was yet further evidence that the Island is clearly one of the jurisdictions that is leading the global fight against tax evasion.
In November 2013, the OECD singled out Guernsey for praise after it signed its 50th tax information exchange agreement. Commenting on this achievement, Pascal Saint-Amans, the OECD's Head of Global Tax Policy, observed that: "Guernsey has been one of the most active jurisdictions promoting transparency in practice. Guernsey started negotiation of agreements prior to 2009, paving the way for many other jurisdictions. The number of TIEAs signed so far seriously enhances Guernsey's reputation as a responsible and transparent financial center, as recognized by the Global Forum peer review."
Additionally, Guernsey has signed up to measures equivalent to the EU Savings Tax Directive, and in 2011, Guernsey adopted automatic exchange of information under these measures.
Guernsey has also committed to joining the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
The Guernsey authorities, including the GFSC are committed to meeting established international standards on anti-money laundering and combating the financing of terrorism (AML/CFT), and the jurisdiction has received praise from international bodies on the strength of its AML/CFT regime; both the October 2003 and the January 2011 International Monetary Fund evaluations of the AML/CFT framework of Guernsey concluded that the Bailiwick has a high level of compliance with the standards set by the Financial Action Task Force (FATF).
Under Guernsey's AML/CFT framework there are three broad types of registered businesses:
Non-Regulated Financial Services Businesses: The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008 came into force on 30 July 2008 requiring registration with the Commission and compliance with the Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Baiiwick of Guernsey) Regulations, 2007 and the Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing.
Prescribed Businesses (including Legal Professionals, Accountants and Estate Agents): The Criminal Justice (Proceeds of Crime) (Legal Professionals, Accountants and Estate Agents) (Bailiwick of Guernsey) Regulations, 2008 came into force on 8 September 2008 requiring registration with the Commission and compliance with the regulations and the Handbook for Legal Professionals, Accountants and Estate Agents on Countering Financial Crime and Terrorist Financing.
Money Services Provides: The Criminal Justice (Proceeds of Crime) (Financial Services Business) (Bailiwick of Guernsey) (Amendment) Regulations, 2008 came into force on 8 September 2008 requiring registration with the Commission.
According to the GFSC, the framework, including the registration, has no effect on the conduct of business of a registered business except for the carrying out of AML/CFT measures.
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