Guernsey: Bright Prospects For The Future?

The Regulatory Framework

This article focuses on the various sectors that make up the economic structure of the island.  Most of the finance sector comprises the provision of trust services including the formation of companies, captive insurance, funds, and banking. Before examining each of these sectors, it is necessary to say something about regulatory infrastructure. The sectors identified above are regulated by the Guernsey Financial Services Commission (GFSC). Since the inception of this body in the late 1980s, the powers of the body have expanded to reflect the growth in financial services in these sectors. The GFSC has wide ranging powers given to it under The Regulation of Fiduciaries, Administration Businesses and Company Directors etc (Bailiwick of Guernsey) Law 2000, the Protection of Investors Law 2001, and the Insurance Law (Bailiwick of Guernsey) Law 2002, which also covers Insurance Intermediaries and the Banking Supervision (Bailiwick of Guernsey) Law 1994.

These provisions are supplemented by a comprehensive Anti-Money Laundering Law, the Proceeds of Crime 1999 (as amended).  In order to operate within the international taxation framework, there is specific legislation covering substance and information disclosure including the provisions relating to Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA).  As a result Guernsey is a well-regulated jurisdiction which operates within the standards laid down by international bodies such as OECD, the EU, and the US.

In terms of its relationship with the UK, this is recognised by the British government as a Crown Dependency although recently, as a result of Brexit, there has been some friction about fishing rights, given the proximity to France.

Captive Insurance

Traditionally Guernsey has been well known for captive insurance and can trace its lineage to the 1920s.  During 2020, this sector has been busy, a trend this writer feels will continue. This is attributable to rates hardening in the insurance market both generally and specifically in relation to disruption insurance, the extent of which in terms of liability remains unknown at the moment, professional indemnity insurance, shipping insurance, and general insurance. In these circumstances, finance directors are looking at rates quoted by traditional insurance companies which in many case are prohibitive as compared to setting up a captive. This hardening of rates is also reflected in the rates prevailing in the reinsurance sector.

Given that we are in the second wave of the pandemic, in the short term, and for the next two to five years, the prospects for this sector are good.  The economic downtown means that firms will be looking at insurance costs which are likely to harden given sickness rates, an increase in claims generally, and the rise in economic activity once the pandemic is over.  Guernsey is a mature and safe jurisdiction with a historic development of captive insurance in new and evolving areas.  It is therefore expected that this sector will grow and be able to mature as the demand for insurance will expand together with the growth of the digital economy. The sector should be in a good position to attract work from Europe, (as it is tax neutral), the Middle East, Asia, and the UK but I suspect there will be fierce competition from our rivals, such as Bermuda, Cayman, Isle of Man, Bahamas and states in the US where insurance is given preferential treatment.

Trusts Including Foundations

Perhaps the most important area for work is the trust sector. The island has had a trust law for many years and has a dedicated foundation law although not much use has been made of it, given that the concept is more associated with European law. The Trusts (Guernsey) Law has its genealogy in an earlier Law of 1989 and has a number of sections which resemble the English Trustee Act 1925. The law is very flexible and its flexibility is also reflected in the way the trust documents have evolved over the years. The main form of trust in practice, particularly since the changes in England and Wales in 2006, is the familiar discretionary Trust.  Unlike Jersey, Guernsey has not legislated to deal with Hastings-Bass arguments but its courts have been sympathetic to such claims.  It is thought that the Guernsey courts are likely to follow the formulation of this doctrine which was set out in Pitt v Holt [2013] UK5C26. 

In relation to tax where a mistake is made in a document in respect of a legitimate tax arrangement, there is no reason why this should not be rectified: see Gamble (Re estate of 6^th February 2003) (Judgment 30.2003) Guernsey Royal Court. In the same case it was also held that public policy did not require the courts to protect a foreign revenue in the same way as a domestic one. Subsequently, a new double taxation agreement has been signed by Guernsey and the UK which requires each tax authority to assist the other in the collection of revenue claims. However, Article 27 (assistance in collection) is not yet in force although this OECD provision will eventually come into operation, given this Article is becoming increasingly common in new tax treaties.

The other difficult area in the trust legislation is the case of non-recognition of foreign judgments.  This is a complex and controversial subject on which experts are not totally as one.  The Guernsey law is largely based on the Cayman legislation. Under Guernsey law, both recognition and enforcement of foreign judgments are prohibited, so it has been submitted that a foreign judgment will have no legal effect, even where the party in question has submitted to a foreign jurisdiction; see HSBC International Trustee Limited v Poon Lok To (Otto) and others (2001) JRC 167.  In practice, the most difficult areas have been in connection with foreign divorce orders and this is something a trustee cannot afford to ignore.

What is clear is that legislatures throughout the world are becoming increasingly hostile to trusts, given the opportunities they provide to avoid taxes. This is reflected in the English legislation which has made it increasingly difficult for residents to form tax-effective overseas trust structures. This will continue in the future and reflect itself in the use of widely drawn anti-avoidance legislation. One possibility is where a person is not resident in one jurisdiction and settles a trust for a resident in another jurisdiction. 

Funds

Typically, Guernsey, being in close proximity to England, focuses on UK investments in contrast to Cayman which focuses on US investments. As stated earlier, the funds industry is well supervised by the GFSC and comprises open ended and closed ended funds, together with hedge funds. Most funds fall into the closed category and typically involve a small number of investors.  At the end of the second quarter of 2020, the total net asset value of all Guernsey funds had decreased by £64 billion (minus 2.7 per cent) to £226.8 billion and over the past year, total net asset values have decreased by £0.9 billion (minus 0.4 per cent). Within these totals, Guernsey domiciled Open Ended funds increased over the quarter by £3.1 billion to £47.8 billion by contrast to the less public Closed Ended funds which decreased by £9.4 billion to £141.9 billion in the past year.  Finally, Non-Guernsey Open Ended schemes, which for this purpose means that some aspect of management, administration or custody carried out in the Bailiwick of Guernsey, had a net asset value of £39.1 billion at the end of the quarter.

One question I am frequently asked is whether and what changes will arise after Brexit in respect of investors in the EU and non-EU states. The answer, in short, is none; it will be a case of ‘business as usual’ although in recent months some commentators have speculated otherwise. As a third country Guernsey has, in certain circumstances, elected to comply with EU Directives e.g. the Alternative Investment Fund Managers Directive (AIFMD). To facilitate this, Guernsey has passed equivalent legislation to facilitate access to EU markets. Under the AIFMD, the National Private Placement Regime (NPPR) permits the marketing of non-European Area (EEA) alternative investment funds in the EEA subject to national law and the regulations in force in the relevant country. Guernsey has managed to secure cooperation agreements with regulations in 27 out of 31 EEA counties. As a result, it is thought Brexit will have little impact on Guernsey fund managers and Guernsey funds.

There is, however, one possible ‘fly in the ointment’.  Managers typically get rewarded by reference to what is known as a ‘carried interest’ which is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership (the typical investment medium). At the moment, this is taxed as a capital gain but it is thought there are proposals in the UK that this capital gain should be taxed at income tax rates. Undoubtedly this would have a significant negative impact on this sector and the representative bodies are thought to be fighting a rear guarded action on this point.

Conclusions

Undoubtedly the island has been affected by the world pandemic but probably less than most jurisdictions. However, given the hostility to offshore centres by the outside world, it is expected to face challenging economic conditions over the next few years. This will be compounded by the hostile tax environment which will affect Guernsey and many other jurisdictions. In broad terms, whilst it is likely that the trust sector will be affected most and be subject to a marked decline, the funds sector should recover and grow once the pandemic is over which is expected to be after Easter 2021. The trust side should focus on the use of trusts for other purposes than tax, such as for financial instruments and the like which are tax neutral. This may offset some of the expected decline in the sector. The other area where growth is expected is the insurance sector given the ‘hardening’ of rates as a result of earlier claims in the pandemic. 

It follows that the future is reasonably bright for Guernsey, particularly in the funds and insurance sectors. 

Dr Raymond K Ashton
Raymond specialises in trusts, money laundering, company law and white collar crime, with over 40 years of experience in these areas.