Guernsey - Thriving in the ‘Goldilocks Zone’

Keeping ahead of the torrent of international financial regulation flooding the globe in recent years while maintaining a successful financial centre is undoubtedly a complex task. For Guernsey’s Regulator, William Mason, this has entailed creating good quality regulation without overegging it or, in his words, finding the Goldilocks zone of regulation – a regime that is neither too hot, nor too cold but just right.

The financial services sector has been fundamental to Guernsey’s economic growth over the last few decades; the driving force behind this success has been the jurisdiction’s competitive edge, Guernsey’s unwillingness to stand still and let another IFC take its leading global position.

For Mr Mason, who has been Director General of the Guernsey Financial Services Commission (GFSC) since 2013, there is no question about the need for a high standard of regulation - as he explains, from a regulatory perspective, it will always be more cost effective and less damaging to stop bad businesses starting up on the island in the first place than to manage or close them down. The incentive to attract high quality business is already there. And the competition that exists between international finance centres helps to ensure the high standards of regulation are met.

Guernsey’s reputation as a well-regulated financial centre has been established for many years but what gives the GFSC that competitive edge is its ability to combine top tier regulation with an approachable and reassuring style. Being smaller than the onshore centres, Guernsey is able to hold on to traditional methods of dealing with the individual business to create a bespoke approach to maintaining the existing high standards on the island. The motto the regulator takes is ‘bring a coffee, not a lawyer’, let’s sit down and work this out together.

Uniquely positioned in Europe but outside the Union, Guernsey is able to independently grow and adapt to developments in the global financial industry. It can also take a more flexible position when considering regulatory options. Take Solvency II, as Mr Mason explains:

“Guernsey not being part of the EU would have meant we had to ask for equivalency to Solvency II and we decided not to go through that quite intensive equivalency process. The decision was based on proportionality. I sit on the IAIS ExCo (International Association of Insurance Supervisors), where I represent small jurisdictions. We are putting our energies into producing insurance capital standards for global use rather than a merely European use.

“So what have we done in Guernsey instead? We have the risk based solvency capital standard that we introduced in the last 12 months and we will carry on updating that if needs be to match the IAIS’ international capital standards”

As Mr Mason explained, Guernsey’s insurance sector is focused on the international arena, not exclusively on the Eurozone economy, which made Solvency II an unnecessary excess of regulatory pressure for the jurisdiction.

The flip side of this is the EU’s Alternative Investment Fund Managers Directive (AIFMD) where Guernsey made the decision to seek equivalence. Being a leading fund domicile, it made sense for the jurisdiction to seek full equivalence to the EU AIFMD, the decision was made based on the needs of the sector as opposed to being swept along in the tidal wave of indiscriminate regulatory demands.

In September Guernsey was recommended by the European Securities and Markets Authority (ESMA) for the AIFMD third country passport. The figures that came out of the ESMA recommendation revealed that Guernsey is the third largest non-EU fund domicile behind only the US and Cayman for the number of non-EU AIFs and non-EU AIFMs marketing in the EU member states as of March 2015.

Guernsey’s response to the AIFMD had been to introduce a dual regulatory regime through which it is possible to continue to distribute Guernsey funds into both EU and non-EU countries. Guernsey’s opt-in equivalent regime, which has been in place since January 2014, is appropriate for funds requiring full AIFMD compliance, allowing use of the EU’s National Private Placement regimes..

As Mr Mason stressed: “We put a lot of effort and energy into that as a Commission and we were delighted that ESMA recommended us for a third country passport and it is good recognition of our regulatory strength.”

The question arises, however, is there a danger of the compliance burden becoming too much, becoming ‘unfair’ for smaller financial centres, like Guernsey, institutions or individuals?

Mr Mason feels ‘unfair’ may be over stating it, however, the administrative burden, he says, is much higher than it used to be, which makes some clients less economically viable than they once were. Take, for example, a US citizen of modest means who once was able to get banking quite cheaply but who now has become an expensive proposition because of the compliance burden the US is prepared to pass on to foreign regulators and service providers alike in the shape of FATCA.

The waves of regulation that were generated by the financial crisis obviously raised concerns as to the debilitating effect of too much regulation. Mr Mason refers to the “sand in the machine” with regard to the stymieing effect of too much regulation. He feels strongly about not putting impediments in the way of international trade - freeing up international trade will, he says, enable the world’s increasing population to sustain itself. And we thus arrive at the importance of international standard setters keeping international regulatory standards in the ‘Goldilocks zone’ – with the porridge of regulation being neither too hot nor too cold but being just right for the situation it is dealing with.

But are there difficulties in making the so called ‘regulatory porridge’ just right for all? Can regulation work as effectively in Guernsey or Cayman as it does in London or New York? Mr Mason acknowledges that yes, some issues, specifically technical issues, may arise as to the interpretation of regulation for smaller jurisdictions but does he buy into the notion that one size of regulation cannot fit all? Not entirely.

“I think you need proportionate implementation. If you are not trading billions or trillions of dollars of FX you perhaps need a slightly lower key implementation of the market’s regime than you do if you are the City of London – where you have a different set of issues to worry about. If you are going to have international trade it is quite helpful to have standards that everyone knows about - everybody’s bank is capitalised to Basel III and therefore should be equally resistant to failing. And I am certainly a supporter of the international capital standards, which the IAIS is developing for the insurance sector.

“The challenge is, of course, to make sure that regulation is proportionate – you don’t want to damage economic growth by setting standards that are too austere.”

And what about those vocal critics of the business being conducted in IFCs? Mr Mason quotes Matthew 7.3 to me:

“Why do you see the speck that is in your brother’s eye and not notice the log that is in your own eye?”

Maybe it is time the critics checked that their own houses are in order before jumping on the bandwagon that offshore bashing has become.

As Mr Mason sees it – politicians or commentators in struggling economies find it difficult to implement reforms that will encourage economic growth in their own jurisdictions and it is often much easier for them to “throw bricks” at other economies that are doing better than their own than deal with the problems they have.  

The facts lend themselves to this statement - the IMF, on their last visit to Guernsey, acknowledged the very high standards of anti-money laundering regulation in place and HMRC raised very little through their tax disclosure agreement with Guernsey indicating that the notion that there are billions of pounds sheltering in Guernsey is an exaggeration.

Mr Mason believes overriding the traditional negative stance towards IFCs will be difficult because many people simply do not understand what it is they do, where they fit into the “machine of global trade”.

“But we have to ask them to be empirical and evidence-based because the evidence is that we [in Guernsey] have a very tight, tough regulatory regime, we cooperate with international law enforcement and we take tough action on those who do not play by the rules.

“The mantle that is sometimes put on us of non-cooperation is palpably false and the notion that we are allowing people to do something they should not be doing is also false. But you have some politicians, academics from economies that are very wedded to high taxes, which are suffering from very low growth and high levels of unemployment who don’t really feel intellectually inclined to revisit their own country’s economic model. It is much easier to throw stones at more successful models such as our own relatively free market, relatively low tax model.”

Meanwhile, developments continue apace in Guernsey. PRISM is in use across all regulated sectors, a platform also used by the ECB and Central Bank of Ireland which provides risk based supervision. The GFSC is also working on developing online returns that will integrate seamlessly with the PRISM system to allow straight-through processing for the checking of data, all with the aim of freeing up the regulator to do the important stuff – oversee and maintain an efficient, successful and well-regulated financial centre.

Guernsey continues to adopt international protocols on money laundering and conclude tax treaties in order to maintain its reputation as a compliant jurisdiction, while the jurisdiction’s regulatory flexibility allows it to remain steadfastly in the ‘Goldilocks zone’, much to the satisfaction of its regulator who feels this is key to the island staying ahead of the competition.

“We are politically stable; we have low levels of national debt – which makes Guernsey, honestly, quite unusual and quite a good place to invest. There are still relatively few jurisdictions around the world that have that combination of things going for it.”

“Yes… you could say we are pretty positive about the future.”