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Guernsey: Law of Offshore

Trust Law

The Trusts Law 1989 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 has 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.

Anyone who, by way of business, carries on regulated fiduciary activities in or from within the Bailiwick of Guernsey requires a fiduciary licence granted by the Commission under the Fiduciary Law. Section 2 of the Fiduciary Law sets out the activities which are regulated, and section 3 provides for exemption in some circumstances. A 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.

There are two categories of fiduciary licence:

  • A full fiduciary licence can only be granted to a company or a partnership, and authorises all regulated fiduciary activities. A full fiduciary licence authorises the licensee and its directors or partners, managers and employees to carry on regulated fiduciary activities (where the directors, etc. do so in the course of their duties to the licensee).
  • A personal fiduciary licence can only be granted to an individual and authorises the holder to carry on a restricted range of fiduciary activities. Those include acting as a company director, as trustee (but not as a sole trustee), and as executor of a will or administrator of an estate. The holder of a personal fiduciary licence is prohibited from advertising by The Regulation of Fiduciaries (Fiduciary Advertisements and Annual Returns) Regulations, 2001.

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 incurs criminal sanctions. Prudential rules are also imposed; clients' funds need to be segregated from other trust assets; and new accounting safeguards have been installed.

The law provides extensive powers to the Guernsey Financial Services Committee in the granting, refusal, revocation, and application of conditions to fiduciary licences. It also has authority to control the names of, and advertising by, fiduciary businesses, rights to obtain information and documents, and powers to conduct investigations.

The Guernsey law of trusts was codified in 1989 along broadly Anglo-Saxon lines in the Trusts (Guernsey) Law 1989. This law does not apply directly in Alderney or Sark, but has a substantial influence on trusts in those jurisdictions.

Trust documents are in English. There are no registration requirements for trusts, no fees are payable on formation, and there are no annual reporting requirements other than for resident trusts (ie those with resident beneficiaries). Trust accounts must be kept but there is no audit requirement.

The maximum perpetuity for Guernsey trusts is 100 years. The law provides for non-recognition of foreign judgements, and forced heirship provisions in foreign law can be over-ridden. The Hague Convention has been incorporated into Manx Law.

In September 2005, the Guernsey FSC launched a consultation with trust professionals, lawyers, accountants and regulators to: investigate the requirement for changes to enable new trust products and services to be available to the Fiduciary Sector in Guernsey; to consider the availability of competitor trust products and services from other jurisdictions; to consider marketing requirement for the Fiduciary Sector; and to make recommendations for the desired changes.

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.

Some of the most significant changes to the Island’s trust legislation include:

  • The introduction of (non-charitable) Purpose Trusts;
  • Removal of limits on the length of a trust’s duration – allowing perpetual trusts;
  • Clarification of the position of retiring trustees, making the transfer process more streamlined;
  • Clarification of the circumstances under which information has to be given to beneficiaries;
  • Abolition of the liability of directors of corporate trustees based in Guernsey or acting as trustees of Guernsey law trusts, particularly as a way to encourage greater use of Private Trust Companies (PTCs); and
  • Revision of arrangements regarding limitation periods and Alternative Dispute Resolution (ADR).

The new law has its roots in a series of proposals made in the ‘Evans Report’, which was published following a root and branch review of the Island’s trust legislation by a working party under the chairmanship of Guernsey advocate Rupert Evans.

“This is yet another example of how the Guernsey government, the Island’s financial regulator and its industry practitioners, continually work together to maintain an environment that maximises business flows,” stated Peter Niven, Chief Executive of Guernsey Finance.

Guernsey has more than 50 years experience in providing trust and corporate services. 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.

Mr Niven added that: “Guernsey’s fiduciary industry has built a reputation for professionalism and expertise in using the modern structures that are available on the Island for the preservation of both institutional and individual/family wealth and assets. The amendments to Guernsey’s trust legislation include several significant changes like the introduction of Purpose Trusts that will particularly enhance the Island’s fiduciary environment."

He concluded: “However, we are far from resting on our laurels and work continues to introduce legislation that will allow the establishment of Foundations. The addition of this innovative tool will ensure that the Island’s practitioners are able to offer their internationally mobile clients the widest spectrum of products and services.”

In July 2009, Guernsey's Financial Services Commission announced proposals to overhaul regulation to enhance protection and oversight of Retirement Annuity Trust Schemes.

Retirement Annuity Trust Schemes (RATS) have been available as a form of personal pension provision in Guernsey for many years. Recently, with other options such as retirement annuity contracts becoming less widely available, RATS have been formed in larger numbers.

Their flexibility in relation to how assets may be invested, and benefits drawn on retirement, makes them useful in many circumstances. However, the same flexibility gives rise to the risk of RATS being used in circumstances where they are not the best solution or are not fully understood by the member.

The Commission fears that due to the cross-sectoral involvement in the schemes, regulatory framework, which applies to the firms which operate in different sectors but provide services in relation to the same structure or product, needs revision to set broader, more effective, guidelines.

In late 2008 the Commission circulated a discussion paper on RATS, highlighting some concerns about the present position. This arose from discussions with a group of practitioners across the relevant sectors of finance business. The problems identified by the group included:

  • The quality of initial advice: there are concerns that not all firms involved in RATS understand the specific factors and requirements which apply to them. There has sometimes been insufficient analysis of existing pension arrangements and the merits of transferring out of those into a Retirement and Annuity Trust Scheme.
  • There has sometimes been inadequate disclosure of fees and charges. Those have a particular significance with RATS because they are comparatively expensive to administer and clients need to be able to factor that into their decisions. There have also been problems with the disclosure of commission and investment performance.
  • There have been issues with the expertise of some firms to advise on suitable assets to ensure that Income Tax requirements for RATS are met, and that the investments are suitable to allow benefits to be drawn down on retirement.
  • A particular problem relating to investment policies pursued within RATS has been the use of heavy gearing (borrowing) by trustees of RATS, with the serious risks involved not always being clear to the RATS’ members.

The Commission reportedly received some very helpful responses to the discussion paper. It was clear to the Commission, both from the number, and the content of those, that there is widespread concern about the above areas within firms across all sectors of the finance industry.

As a result, the Commission produced a consultation paper summarizing its proposals for improving the regulatory framework under which firms provide services relating to RATS.

The Commission’s proposed rules include:

  • Training for those advising and acting as trustee of or administering RATS;
  • At set up stage, a trustee accepting trusteeship must be certain that the RATS and the proposed investment and investment strategy is a suitable form of retirement provision for the member;
  • Before transferring funds from a defined benefit pension scheme to a RATS, the trustee must produce an impartially verified report showing that the RATS would be more financially beneficial over the existing set-up;
  • Trustees must make the member aware of the risks of using gearing to enhance investment, and the trustee must get the member to sign a copy of the statement, stipulated within the Commission’s guidance note, underlining that they understand the risks;
  • Trustees must report full financial reports of the RATS financial standing to the member at least annually;
  • The trustee must ensure that, once income starts to be drawn down and paid to the member in the form of an annuity, the trustee can demonstrate that the level of payment is appropriate to secure a satisfactory provision for the retirement of the member, but also that reviews are carried out to ensure that the amount annuitized remains appropriate with respect the amount remaining in the RATS, and the life expectancy of the member;
  • A trustee must make fully transparent what its fees and commissions are, with regards assets at any level, including the trustee’s own fees and fees or commissions payable from the assets to the trustee, any independent financial advisor, other intermediary, investment or fund manager or adviser.
  • No financial services business licensed by the Commission shall inaccurately or misleadingly advertise or promote RATS, investments or investment strategies (including gearing) for use as part of a retirement provision involving RATS.

The rules came into operation on January 1, 2011.

For the taxation of trusts in Guernsey see Offshore Legal and Tax Regimes.

 

 

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