Hedge Funds and Alternative Investments

Q&A with…Fiona Le Poidevin, Chief Executive of Guernsey Finance


By (01/06/2013)

IFC Review: Guernsey has a long history as a finance centre – why do you think it has proved successful and resilient to global attacks on IFCs?

Fiona Le Poidevin: Guernsey has been regarded as a leading international finance centre (IFC) for some time, but what the Island has strived to do is to not rest on our laurels. We have continued to be an adaptable and innovative place to do business. We pioneered the cell company concept back in 1997 with the introduction of the Protected Cell Company (PCC) for use in our captive insurance sector and demonstrated our dynamism with the launch of our own regional stock exchange, the Channel Islands Stock Exchange (CISX), based in Guernsey, a number of years later. We again demonstrated our innovative streak at the end of last year when the Island became the first jurisdiction globally to recognise Image Rights in law and provide them with a register. This is part of the continued evolution of our financial services industry which includes high regulatory and tax standards. Guernsey has always adopted leading international standards and this continues to be reinforced by external agencies such as the IMF, OECD and the Financial Stability Board, who all continue to place Guernsey within the very top tier of leading IFCs globally.

IFC: What are the main strengths of Guernsey’s financial services sector?

FLP: Guernsey offers a full financial services offering with a broad selection of firms to choose from, ranging from independent, boutique providers to large, multinational organisations. However, our main strengths lie in the areas of captive insurance, funds and private equity, our fiduciary and private client offerings and our ability to innovate. The recent introduction of our own Foundations law and the world’s first Image Rights legislation is testament to that.

In terms of funds, we continue to demonstrate our popularity as a leading destination for promoters, managers and investors. We were home to the London Stock Exchange’s (LSE) first Initial Public Offering of 2013 when ICG-Longbow listed its new UK property debt investments fund, a closed-ended collective investment scheme focused on raising, investing and managing funds in UK commercial real estate debt.

Of course our close link with the LSE is another strength of our funds sector, with figures from the LSE to the end of December 2012 showing there are more non-UK incorporated entities listed on its markets from Guernsey than any other jurisdiction globally. Similarly our expertise in the private equity space was confirmed by a Private Equity News and State Street survey, in which 61 per cent of chief financial officers who responded said the Island was their preferred destination for private equity outsourcing.

IFC: How has the economic crisis in Europe impacted on Guernsey?

FLP: Like most jurisdictions the economic crisis has had some knock-on effect, but Guernsey has remained resilient as demonstrated by the total value of our funds business growing by more than £25 billion in the 12 months up to March 2013 to reach £296.5 billion. Our banking sector had experienced a slight decline over the past couple of years, but encouragingly we saw the total value of deposits held by banks in Guernsey grow by £3.8 billion during the first quarter of this year to reach £90.5bn at the end of March 2013. Our captive insurance sector also experienced substantial growth over the same period with figures to the end of 2012 showing that we had 737 international insurers licensed in the Island, a rise of 50 since the end of 2011. Latest figures, to the end of May, show this figure now stands at 761.

IFC: How important are new and emerging markets, such as Asia and Latin America?

FLP: We recognise that the emerging markets offer exciting opportunities as they represent new and increasingly significant pools of both corporate and private wealth. Guernsey Finance has had a representative office in Shanghai since 2007 and the strength of the relationships we have built in this time is highlighted by the fact that Guernsey Government signed a Tax Information Exchange Agreement (TIEA) with the Chinese central government tax authorities in October 2010, as well as a Memorandum of Understanding with the Shanghai Municipal Financial Services Office in November of the same year, while the Guernsey Financial Services Commission (GFSC) signed a Statement of Cooperation with the China Banking Regulatory Commission in November 2011.

We have taken tentative steps towards looking at the opportunities available in Latin America, but have focused more of our attention towards the likes of India and Russia to date. We have hosted delegations to both countries in recent years and know that Guernsey is already providing products and services to meet the demands of both institutions and individuals/families in these jurisdictions.

IFC: How significant has it been to the industry that Guernsey opted out of Solvency II?

FLP: Our early announcement that we would not be seeking equivalence under Solvency II gave current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey. We felt, and still do, that Solvency II as it is currently constructed would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic. I think this certainty and clarity has certainly played a part in the continued growth of our captive insurance sector over the past couple of years and is why we remain Europe’s leading captive insurance domicile and number four in the world.

IFC: How will Guernsey respond to the Prime Minister’s recent request for IFCs to ‘get their house in order’ with regard to international tax treaties and tax avoidance?

FLP:  We back the declarations made recently by the Prime Minister. Guernsey’s own Chief Minister, Deputy Peter Harwood, even wrote to the Prime Minister at the start of May welcoming the announcement by the UK, along with France, Germany, Italy and Spain, that they were to pilot multilateral automatic information exchange. In June, Deputy Harwood attended a pre-G8 'Open for Growth' meeting at Lancaster House, hosted by the Prime Minister, where he set out Guernsey’s support for the Multilateral Convention on Mutual Assistance in Tax Matters. Deputy Harwood also welcomed the developing commitment of G8 members to greater transparency on beneficial ownership.

The reason we’re happy to give our backing to these moves is because we want to see a level playing field among IFCs so that we are all working to the same standards. Guernsey has consistently been ahead of the game in terms of its openness and transparency, as demonstrated by our signing of 43 Tax Information Exchange Agreements (TIEAs) and 19 Double Taxation Arrangements (DTAs), and we want to see other IFCs follow suit.

IFC: Do you think the portrayal of IFCs as tax havens in the media is detrimental to the business being done in centres such as Guernsey?

FLP: It’s a constant battle that we are up against, but those doing business in Guernsey know the standards we work to and that what we offer clients is confidentiality, not secrecy. These are attributes which have gained added significance in the wake of the global financial crisis and provide extra comfort to both clients and their advisers. As I explained earlier, the IMF, OECD and the Financial Stability Board all continue to place Guernsey within the very top tier of leading IFCs globally as a well regulated, cooperative and transparent jurisdiction.

Unfortunately in difficult economic times, the spotlight has been very much focussed on IFCs, mostly unjustly, and we hope that going forward, politicians and the general public will recognise Guernsey for its high standards and, in particular, the significant positive contribution that the Island makes to the UK economy and the wider global financial services industry.

IFC: What more can IFCs such as Guernsey do to enhance their reputation in the media and amongst the general public?

FLP: We need to regularly reinforce our message that we are an open and transparent jurisdiction. We also need to show that we are consistently working with government to meet new international standards. The difficulty comes when the media and public put pressure on politicians to take further action when we are already working together on a wide range of issues.

Another issue is when the media bracket us with jurisdictions who have been less proactive and cooperative in meeting new global standards, such as automatic exchange of information. However, this also presents an opportunity as we can use the increased attention to explain to a wider audience about the higher standards we already adhere to. Remember, in 2011 the IMF reported Guernsey as being compliant or largely compliant with 47 out of 49 of the Financial Action Task Force (FATF) recommendations on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). This is the highest standard of any jurisdiction so far assessed, including the UK and the US as well as our competitor territories, so we’re happy to be given a platform to point this out. Even before this we were among the first set of jurisdictions to be placed on the OECD ‘whitelist’ in 2009 and subsequent Global Forum reports have continued to recognise the Island as within the top tier of jurisdictions meeting international standards and thereby helping to protect global stability.

IFC: Do you think the automatic exchange of information is the way forward with regard to responding to the recent tax avoidance issues?

FLP: There is often a muddying of the waters between tax avoidance and evasion. Evasion is illegal, avoidance is not. Automatic exchange of information is certainly a tool that can be used to address evasion practices. In fact, Guernsey has been exchanging information under the EU Savings Tax Directive since 2005 and automatically since 2011. We’ve also signalled our intention to enter into an intergovernmental agreement (IGA) with the US to enable Guernsey-based financial institutions to comply with the US Foreign Account Tax Compliance Act (FATCA) and plan to finalise a separate IGA with the UK to implement FATCA-style reporting of tax information. Similarly, we have welcomed international moves toward multilateral automatic information exchange for tax purposes as the next step in creating common global tax standards. We have done all this because we want jurisdictions to be operating on a level playing field.

It’s important to point out that tax avoidance is where individuals and companies minimise the tax due and that is an issue for individual countries to deal with in terms of ensuring the robustness of their own tax regimes, which have become ever more complex. However, more recently, in a time of austerity, there has been a renewed focus on both avoidance and evasion as governments look to reduce their deficits by increasing their tax take.

Therefore, it was interesting to read within the Prime Minister’s recent letter to the Crown Dependencies and Overseas Territories that he said: “I respect your right to be lower tax jurisdictions. I believe passionately in lower taxes as a vital driver of growth and prosperity for all.” He then went on to say that this was only sustainable if what is owed is actually paid and therefore there should be a global effort to eradicate tax evasion, which we wholeheartedly agree with.

What is interesting is that the Prime Minister did not mention tax avoidance. This is perhaps not surprising given the fact that within the latest guidance on the General Anti-Abuse Rule (GAAR), HMRC notes that much of what could be termed tax avoidance takes place legitimately under the terms of DTAs and as such, does not amount to abuse and so the GAAR cannot be applied.

IFC: In an article in the IFC Economic Report, Professor Morris proposes the creation of an Organisation of IFCs – do you think such an organisation that would act/speak on behalf of IFCs could help individual centres?

FLP: On the face of it this would make sense but in reality it would be very difficult to administer. Whilst critical mass can be powerful, in terms of strength in numbers, IFCs have not always had a consensus view on a particular issue and while some IFCs, such as Guernsey, have made it clear where we stand on a certain subject that is not always the case with other IFCs. The Prime Minister’s recent letter and subsequent media coverage shows that despite our continued efforts and meeting the highest international standards, we are often directly compared to some IFCs which perhaps do not always apply the same standards, openness or transparency as Guernsey. There are times when we need to stand together, but also times when it is necessary to set ourselves apart.

IFC: Following the clampdown on ‘aggressive’ tax avoidance schemes, where does the future of tax planning lie – do you feel that it is inevitable that any kind of tax minimisation scheme shall be considered ‘aggressive’ and if not illegal, immoral?

FLP: Guernsey does not condone what might be termed ‘aggressive’ tax avoidance, although it is difficult to pin point what that means in the current environment, but we do believe that it can be appropriate to minimise taxation. Indeed, within his recent letter to the Crown Dependencies and Overseas Territories, the Prime Minister stated the benefits of low taxes and he is supported by economic theory in the form of the Laffer Curve. This shows that increasing taxes beyond a certain tipping point leads to reduced Government revenues as individuals or companies take measures to reduce a more severe burden.

Guernsey provides a tax neutral environment and in doing so, encourages investment into the UK economy and elsewhere. For example, Guernsey is particularly renowned as a centre for domiciling investment funds. These include private equity funds investing into struggling UK companies or infrastructure funds helping to provide finance for new roads, schools and hospitals in the UK. In this way, Guernsey is acting as a hub for a wider pool of capital to flow into the UK economy.

In addition, the ultimate investors/beneficiaries of these funds are often members of the UK public as private investors or through the investments made by their pension funds and insurance companies. Guernsey’s tax neutral regime means that, in effect, they are not taxed twice on the same income from these funds. In doing so, this encourages investment into the UK economy, which might otherwise not occur.

Guernsey’s contribution has also been recognised by UK Deputy Prime Minister, Nick Clegg, when he said last year that we were “an important gateway for the wider financial sector and indeed the economy in the United Kingdom.”

IFC: What does the future hold for Guernsey as an international finance centre?

FLP: Guernsey’s future as an IFC looks bright. We will continue to develop our expertise and build on the exciting new legislation we have recently introduced such as Foundations and Image Rights, as well as spread our message as a place to do business to even more markets, particularly those emerging economies.

We are also undertaking a specific initiative to attract business in niche sectors, such as cleantech, where we can provide financial services through the lifecycle of these environmentally friendly projects. These developments illustrate the way in which Guernsey is expanding its service offering so it can best serve clients going forward. In combination with the adoption of high regulatory and tax standards, this means that the Island is well positioned to remain a top tier IFC both now and into the future.

Of course, it is likely there will continue to be increased regulatory pressures, particularly for IFCs, but we’ve consistently shown in the past our ability to adapt to evolving market landscapes. Our response to the Alternative Investment Fund Managers Directive (AIFMD) is testament to that. The introduction of our dual regulatory regime will ensure that it is possible to continue distributing Guernsey funds into both EU and non-EU countries.  At the end of May, the central supervisory body for the financial markets of the European Union (EU), the European Securities and Markets Authority (ESMA), approved the content of cooperation agreements, which create a formal framework of cooperation on matters of mutual interest, to be signed between the GFSC and equivalent bodies in EU Member States (along with Croatia and the wider EEA). We’ve also now issued our own domestic AIFMD marketing rules, together with a notification form, and confirmed that the GFSC is able to accept application prior to 22 July. This highlights a ‘business as usual’ approach from the GFSC, upheld by the wider Guernsey investment funds industry.