Managing in challenging times

By Jane Kerins, Investec Trust, Guernsey (12/01/2009)

The past year has been one of challenges and change for the global trust industry. We now find ourselves in an increasingly complex world. Aggressive attitudes of tax authorities to offshore and ever-changing tax rules have created an environment where expertise and specialist knowledge are now more important than ever. Trusts cannot simply be administered; they have to be understood and managed if the intended benefits are to be realised.  

Raising the Bar

With these challenges have come improvements in the fiduciary sector and especially the trust industry, which has changed beyond recognition. A good slice of the credit for the improvement has to go to the Society of Trust and Estate Practitioners (STEP), which has given the industry a combined voice, and is both facilitating and encouraging education to the highest standards. Whilst collectively standards have risen, they need to continue to rise. To survive, both individual businesses and individual jurisdictions need a reputation for probity. At the individual business level that probity means doing what it says on the tin for every trustee, understanding the trust framework, acting independently and putting the beneficiary first. This has to be done with knowledge and information and, frequently, with the courage and ability to make difficult decisions. 

More than ever before, trusts must be managed with a clear understanding of the rationale for the structure and the rules in the home jurisdiction that might apply, in order to realise the benefits. To do that well requires qualified and experienced people, excellent systems and taking the time to build meaningful relationships with the settlor, beneficiaries and their advisers. In the long term the trustees who do this well give better value for money than their contemporaries who do not. 


Regulation remains a factor in determining where to provide trustee services, both in terms of whether or not a jurisdiction is regulated at all, and the weight of regulation in that jurisdiction. It is when regulation reflects best practice that everyone, from the client to the industry, wins.  

It has been interesting to note, in particular, the direction the industry in Switzerland is taking, following the ratification of the Hague Convention in July 2007. Benefiting from more certainty in relation to trusts than ever before, but suffering from a lack of regulation in the area of trust services, Switzerland has huge potential to become a modern day centre of excellence for trusts rather than a jurisdiction which might live in the past. In the absence of trust regulation, the establishment of the Swiss Association of Trust Companies (SATC), which aims, among other things, to ensure professionalism and integrity, to advance technical knowledge of, and to strengthen the standing of, the trust business in Switzerland, is a positive step in the right direction. Elsewhere, increased regulation continues to reinforce client confidence and improve reputation – for example, in Cyprus where, under new legislation, there is now a requirement for a licence from the Central Bank for trust service providers.  

The Trust World Continues to Evolve

The shape of the trust industry continues to change, just as it continues to grow and define itself. The new centres of Dubai and Singapore (which is now the second largest private banking centre) continue to develop and innovate.  

In the old world, as Switzerland makes itself more attractive to trust professionals at a time of uncertainty, it is interesting to note that fundamental changes to the bases of taxation in Jersey and Guernsey are now being implemented in response to issues identified by the Organisation for Economic Co-operation and Development (OECD) and the EU Code of Conduct Group as harmful tax practices. Growth is still there too with, for example, bank deposits in Jersey (much of this being trust-related) surpassing £200 billion for the first time in 2008 and Channel Islands’ funds industry and investment management figures up significantly. Indeed, funds in Guernsey have also passed the seminal £200 billion mark. Statistics released by the Guernsey Financial Services Commission (GFSC) show that the total value of funds under management and administration in Guernsey reached a new record high of £203.8 billion at the end of March 2008. The figure represents growth of £25.6 billion (14.4 per cent) from the £178.2 billion recorded at the end of December 2007 – the previous high – and an increase of £63.4 billion (45.2 per cent) year on year. The value of funds under administration in Jersey reached a new high of £246.1 billion in 2007, a 37 per cent increase in value during the year. 

Trust and associated laws continue to evolve as jurisdictions seek to provide ever more useful tools for estate planners. Guernsey introduced a new trust law in March 2008, consolidating the existing law and introducing new features including hybrid trusts for beneficiaries and non-charitable purposes, perpetual or ‘dynasty’ trusts, purpose trusts and reserved power trusts. Guernsey law can now assist as regards asset protection, by excluding the application of foreign law when considering issues of capacity, validity and the functions of the trust. The brakes have also been taken off for private trust companies, which are increasingly popular for wealthy international families, with the abolition of the provision that made Guernsey directors, of both Guernsey and foreign trust companies, personal guarantors in the event of a breach of trust by a corporate trustee. Trusts can now also be drafted to exclude beneficiaries’ rights to trust information – subject to court overview if beneficiaries apply.  

The focus in Jersey, which updated its trust law in 2006 and has further changes planned for 2008, has been on increasing flexibility in relation to companies incorporated in the island. Recent changes include introducing treasury shares, abolishing the financial assistance provisions, simplifying procedures on distributions to shareholders and allowing financial services businesses to act as corporate directors of other Jersey companies.  

An interesting, and some may say challenging, development for trustees is the growing global popularity of the foundation as an estate planning tool. With the numbers of jurisdictions offering foundations increasing, and with more on the way, it is regarded as an attractive vehicle for prospective clients especially from the Middle East, Asia and Latin America who are unfamiliar with the concept of the Anglo Saxon trust. Traditional and established jurisdictions have accepted this challenge. Jersey is due to have a Foundations Law during the first half of 2009 and likely will be closely followed by its sister island, Guernsey. 

Taxing Times

In the UK, the changes to the tests for tax residence of trustees have been implemented in a move that does little to help the UK’s international trust business and has also introduced new uncertainties for non-UK resident trustees that are members of groups with a UK presence. Equally, the introduction of supervision by HM Revenue and Customs, under the Money Laundering Regulations 2007, raises new questions about the UK as a jurisdiction for international business, given the potential conflicts. 

Under pressure from the OECD, Guernsey, Jersey and the Isle of Man have entered into a number of Tax Information Exchange Agreements (TIEAs) with countries such as the US, the Netherlands and Germany. Meanwhile Liechtenstein, the only civil law country with detailed legislation in relation to trusts, appears set on absolute secrecy. In Jersey, requests for information exchange, which must be specific in relation to existing investigations rather than automatic, have trickled in, with just three requests over the last 12 months. In Liechtenstein the flood gates were breached with the sale by a former LGT Bank employee of confidential client data to the German and British Revenue authorities, among others. The language being used in Jersey is cautious – welcoming international co-operation under the TIEA process and being prepared to take a limited lead, but looking too for active participation from leading OECD nations and finance centres, with echoes of the much debated level playing field argument. 

Looking forward, change continues and the challenges grow. There is, however, perhaps a gradually increasing awareness that the quality low tax jurisdictions are setting the standard rather than causing the problem and the degree of self-interest being brought to some of the debates begins to be seen for what it is. Why is it, for example, that jurisdictions that have entered into TIEAs with the US appear on Senator Levin’s list in the Stop Tax Haven Abuse Act? How can the EU White List of equivalent jurisdictions omit the Crown Dependencies when the International Monetary Fund (IMF) has praised achievements in meeting international standards on anti-money laundering and success in complying with Financial Action Task Force (FATF) recommendations? 

At least the IMF has said that it has ended discriminatory stigmatisation of offshore financial centres (OFCs) announcing that “the distinction between OFCs and other financially active jurisdictions has been blurred by globalisation”. As a result, the IMF has combined its assessment programmes for OFCs into a broader Finance Sector Assessment Program (FSAP).  

Delivering Quality Service

Specialism and expertise are necessary and quality is critical if the trust industry is to move forward with a professional, qualified, ’thinking’ service. The recruitment, training and retention of quality trust practitioners who understand and can provide the level of expertise needed is more important than ever. In a relatively mobile international environment, where the best employees choose to invest their talents will be critical. 

As the world of opportunities for tax mitigation shrinks, offshore international finance centres must ensure that they gain and maintain a reputation for excellent service and offer value for money. This will assist in the quest for increased market share and attracting and retaining clients both from existing markets and the newly wealthy regions of Asia, Latin America, Eastern Europe, as well as the oil rich countries of the Middle East.