Can Guernsey's business only get better?
Coming off a record-breaking year for the funds sector, financial services professionals in Guernsey believe the island can go on to scale new heights in the coming years,backed by a consensus between industry, regulator and government on a strategy to enhance its global competitiveness while maintaining the high standards upon which its reputation rests.
The QIF funds regime has already done much to announce to the world that Guernsey is not only open for business but is willing to innovate to meet the needs of the industry and its clients. Now, industry members say, the island is ready to take a step further with a wholesale reform of its regulatory structure, while at the same time adjusting its tax system to ensure it does not lose out to Jersey, the Isle of Man, and rivals further afield.
'Guernsey's got a very good message to tell,' says KPMG partner Neale Jehan. 'The QIF regime is now in place, promoters have taken it up, and a good number of funds have already gone through that route. On top of that, the funds industry - not just in Guernsey but everywhere - is growing hugely.
'We're very well positioned in terms of our infrastructure. We have our own stock exchange which is growing fast, and we offer a very convenient location at least for European managers, a few of which have already moved their business to Guernsey. And with the Harwood report setting out a blueprint for the future of the industry, the message now is that it's only going to get better.'
Still, Jehan cautions that so far the island has travelled only some of the road toward global competitiveness. 'Flexibility is key,' he says. 'Guernsey needs to market itself as a location where you can domicile your business, run your funds, and everything's here. But if you have specialist service providers you want to use in other jurisdictions, I don't think there should be any restriction, as long as there's proper oversight.
'We've got to recognise that the industry is growing hugely, and that on a small island there are always going to be potential capacity constraints, so we need to develop a regime that ensures capacity never becomes a problem. Flexibility to outsource would be a definite advantage.' Capacity constraints are a long-standing topic of debate in Guernsey and its competitor jurisdictions, many of which are relatively small island territories with limited populations and even more limited space for living and working. But today there appears to be a calmer appreciation of what this means for Guernsey.
'In a small jurisdiction where we have limited resources, there will always be concerns about capacity,' says GuernseyFinance chief executive Peter Niven. 'That's one of the areas the Harwood report will have looked at in terms of options for the future, perhaps providing the opportunity for outsourcing to other jurisdictions where they have greater resources, as long as there are controls back at base in Guernsey to ensure that the whole thing is kept together.
'We are looking to provide jobs for locals and people coming onto the island that provide more added value and are higher on the salary scale, which in turn helps the tax take. But at the same time we must keep those checks and balances in place regarding where the other parts of the business are outsourced.'
As chairman of the education subcommittee of the Guernsey Investment Funds Association, Butterfield Fund Services (Guernsey) managing director Patrick Firth believes that maximising the potential of the island's human resources is an important step. 'There are resource issues in all jurisdictions,' he says, 'but we're keen to ensure there is effective training here. It can
make a big contribution.'
Although the island's parliament has yet to take a final decision, Guernsey is set to follow territories including Gibraltar, the Isle of Man and Jersey in cutting the basic rate of corporate taxation to zero, with banks paying a special rate of probably 10 per cent. This far-reaching tax reform, which is due to take effect in 2008, is mainly the result of an international campaign against special tax regimes that allowed offshore companies to pay lower rates than domestic firms incorporated in the same jurisdiction.
Abolition of this type of 'ring-fencing' was expected by bodies such as the European Union and the Organisation for Economic Cooperation and Development to lead to the abolition of offshore company regimes; instead most of the jurisdictions affected responded by reducing the standard tax rate on all companies to zero, with a special 10 per cent rate levied on certain financial institutions and other businesses such as utilities. But voluntarily renouncing a large slice of a territory's corporate tax receipts leaves a gap that has to be filled. While other jurisdictions have announced plans to raise their take from personal taxation or from indirect taxes on goods and services, Guernsey seems poised to wait until the new regime is in place and the size of the shortfall is apparent before deciding on measures to bring the budget back into balance.
This attitude has prompted some alarmist and well-publicised comments - admittedly from the Tax Justice Network, an organisation not noted for its sympathy toward offshore jurisdictions - to the effect that a few years of the new tax structure will leave Guernsey bankrupt.
Niven is indignant about the reports. 'It's quite grotesque to say we'll be bankrupt within a few years, and completely wrong,' he says. 'In changing our corporate tax structure, there will inevitably be a gap in our finances in 2008, but what everybody's trying to do is to solve that problem now, when in fact its scale can't be fully appreciated until it hits.
Jersey has decided to introduce a goods and services tax to fill the gap. Guernsey appreciates that there will be a problem and can roughly calculate its scale, but a lot can happen between now and 2008. For example, last year we saw an unexpected increase in the island's personal tax take, which if extrapolated would mean that the so-called black hole would be smaller than under present calculations. 'There will also be an increase in business. We are seeking to move people to higher added value business, which means higher salaries and hence more personal
income tax. With all that going on in the background, quite sensibly the authorities have decided to use some of the resources that we've built up in the contingency fund to tide us over for the first two or three years. Once we see the scale of the problem, we'll decide whether to bring in a sales tax or how else to solve the problem. We're just giving ourselves time.'
Ernst & Young partner Peter Franks notes that the reform will have little direct impact on funds, which currently pay a tax exemption fee of just £600, However, he says: 'Talking of moving tax rates down to 10 per cent for banks and zero per cent for other companies is obviously an encouraging sign, and should attract further businesses to the island.'
Says Jehan: 'The government has taken time to consider various options, and we hope that not only whatever regime comes out of that is competitive, but that our black hole will be relatively smaller than those in other jurisdictions. Maybe we can tag on some growth that will avoid the need for additional taxes, like a general sales tax. 'There has been some uncertainty about what Guernsey will choose, and Jersey and the Isle of Man have come up with their proposals a lot earlier. But I think what we will have in place will have been well thought out and will give us a good basis for being competitive against those jurisdictions.' Robin Fuller, managing director of HSBC Securities Services (Guernsey), argues that another aspect of the planned reform - a cap on the maximum tax liability - will help. He says: 'We hope 'tax capping' will go some way toward attracting intellectual capital to the island in the form of the teams brought over to run local managers such as FRM.'
Niven says the industry and authorities were keen to get the tax reforms finalised before embarking on a sustained effort to lure further hedge fund managers to Guernsey. He says: 'The package will go to parliament in late May or June, and once that has been agreed, the time will be right to use it as a springboard marketing ourselves to fund managers and start the process of attracting them over to the island.' Apart from Financial Risk Management, local financial services professional Peter de Putron has launched De Putron Fund Management, Dexion Asset Management has also set up an operation on the island to take advantage of the attractive tax regime, and Niven says another management operation, BBFA, has just been set up. Says Franks: 'We are already seeing a lot more interest from fund managers in domiciling in Guernsey. In particular, people are concerned about the UK tax authorities' focus on whether businesses are being run out of the UK or in an offshore location, and are trying to have more substance in the offshore location.'
Attracting hedge fund managers is just one of the areas in which Guernsey and Jersey find themselves in competition, but members of the industry take pains to point out that the rivalry is far from cut-throat. Says Niven: 'Yes, we are in competition with Jersey, but we shouldn't get too worked up about it. They may be looking at the same opportunities, but there is plenty of business out there for both of us.'
Jehan argues that while the Channel Islands are relatively similar jurisdictions, Guernsey moved toward the alternative sector much earlier while Jersey remained a retail funds centre. 'Only very recently, with the Expert Funds regime, has Jersey tried to move into this market - with some success,' he says. 'In the alternatives sector, they've done very well in property funds, and hedge funds are doing reasonably well, although unlike in Guernsey the private equity industry is very small.'
Says Franks: 'It's very hard to differentiate yourselves, and these days it has to be on quality of service rather than the legal framework. We're all quick at catching up with each other when something new is introduced in another jurisdiction, so we have to differentiate ourselves on having the right people to do the job.'
Firth argues that the two centres are as much complementary as competitive. 'You have the Channel Islands Stock Exchange which serves both islands, accountancy practices that cover both Jersey and Guernsey, and a number of the administrators have Jersey operations as well.'
What both islands are trying to do is convince hedge fund promoters and managers that there are alternatives to domiciling funds in the Cayman Islands, home to probably as many as half of all the world's hedge funds and certainly the dominant jurisdiction for offshore vehicles. Says Jehan: 'Traditionally the hedge fund route has been Cayman domicile and Dublin administration, but Guernsey has started to get in on that act by servicing Cayman or BVI vehicles. It's still a relatively small piece of the market, and going forward I think we'd
still want to focus on domiciling funds locally.
'The hedge fund industry is becoming more institutionalised, with much bigger investors who have very different demands from the kind of investors who were in the industry to start with. Big US pension funds will not want to invest in something they can't do proper due diligence on. 'Corporate governance is one particular area where we have something to offer. Guernsey funds don't have any strict requirements under the regulations to follow any particular corporate governance code, but listed hedge funds tend to put in place a regime incorporating some aspects of the UK Combined Code, such as an audit committee and independent directors, but without the requirement to follow the strict UK rules to the letter.'
Jehan believes that greater marketing efforts can help Guernsey can increase its share of the funds market. 'Lawyers in London choose Cayman because it's easier and they've done it hundreds of times. But if the investors turn round and say they don't want Cayman, where do you go? Guernsey needs to develop its presence and shout a bit louder in order to be heard. I don't think it's ever going to be a Cayman, but it could be a lot bigger than it is now.'
GuernseyFinance is doing its best to achieve this through regular promotional trips abroad and events such as its annual funds conference in London. Says Niven: 'What we're trying to do, especially through the funds conference in September, is widen our net and put the idea into promoters' minds that Guernsey provides them with opportunities.
'A lot of this business comes from the personal relationships that the our fund industry has with promoters, particularly in London. We're only a stone's throw away - you can virtually do all your business in a day, visit the regulator, see accountants, lawyers and administrators, and once the fund is set up, hold a board meeting with local Guernsey non-executives. Once people try us, they'll like the way we do business, and decide to do more.'
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