Guernsey’s fund administration industry is thriving thanks to a flexible outsourcing regime that allows much of the labour-intensive but comparatively low-value number-crunching work to be carried
Guernsey’s fund administration industry is thriving thanks to a flexible outsourcing regime that allows much of the labour-intensive but comparatively low-value number-crunching work to be carried out in other jurisdictions, where skilled accountants are more readily availably and costs are lower. Paradoxically, at the same time the ranks of the sector are being swelled by the arrival of new firms, often spin-offs from bigger groups or new ventures from existing financial industry players such as trust companies.
However, together the two developments explain why Guernsey is continuing to thrive as a domicile and service centre for alternative funds. While bigger players can use an international network of centres of expertise to carry out administration functions in the most efficient way possible, the island is also home to niche, highly specialised providers that are better able to deal with funds that don’t fit easily into a global template.
Resources, human and otherwise, have long been an issue in the Guernsey financial services marketplace, and the issue was highlighted recently by a political declaration that the island’s goal was zero population growth. Although it’s not clear to what extent this is official policy, the issue did raise the question of how easily companies would be able to tap the skills they needed if they were not available on the island – especially in the notoriously labour-intensive alternative fund administration business.
Peter Niven, chief executive of industry promotional agency GuernseyFinance, believes the population question may have attracted more attention than it really deserves. ‘We’ve got over this hurdle about over-population,’ he says. ‘The aspiration is zero population growth, but it’s very difficult to monitor and manage, because you don’t always know when people are leaving. People have calmed down, looked at their operating models, and asked how they might skin the cat in a different way.
‘Everyone does it a different way, but in the end it comes down to the outsourcing model. As long as oversight remains on the island, the majority of work can be outsourced. That might mean having a centre of excellence in India where administrators do the valuation for all their funds. The new niche players are looking at places like the UK, where in many respects it’s cheaper, and it’s certainly easier to get accountants at a reasonable remuneration. Some are setting up along the south coast where it is very easy to get back and forth, and technology helps immeasurably in taking on extra volume.’
Niven also points to the spate of trust companies entering the fund sector. ‘Trust companies see funds as a space they want to be in, and many of them are going down the administration route, like Praxis,’ he says. ‘That’s not because the fiduciary business is not buoyant – huge amounts of wealth are being created worldwide, all needing a structure and a home – but there’s quite a complementarity of skills between managing trusts and administering funds.
‘It means promoters coming to the island have a choice of providers between the big players like Northern Trust, Royal Bank of Canada and Kleinwort Benson, and smaller firms such as Heritage, Praxis and Augentius that in many cases offer a specialist focus in a particular market, like Augentius in private equity. That attracts the London-based promoters, and generally after experiencing a fund being set up in Guernsey, they will plough the same furrow again and again.’
In addition, says Mike Bane, a partner with Ernst & Young, an increasing number of large fund managers are setting up bespoke administration businesses on the island to service their own funds. ‘FRM started that a few years ago, and more firms have followed, in property and private equity as well as in the hedge fund sector,’ he says.
Robin Fuller, chairman of alternative fund manager Dominion, says: ‘We decided five or six years ago that encouraging managers to come to Guernsey and move their businesses here would be good for the economy, not just as a reaction to the recent uncertainty in the UK about non-domiciles. Most of these companies, like Dexion Capital and FRM, have a fairly light footprint in terms of resources, so they are ideal for an island. But the UK’s tax issues have strengthened our case as well.’
Adds Niven: ‘We are particularly looking at the private equity and hedge fund sectors to see if we can attract firms to put down operational offshoots that constitute a substantive presence in the island. We already have some offices set up by the big London operations, which is a very useful start. In general they are very pleased with the infrastructure we can provide. That gives us credibility, but also in the principals you have people who will pay a lot of local tax.’
Bane says the Channel Islands are also seeing a degree of consolidation among major players as firms start to figure out whether they really want to be in administration, either in Jersey and Guernsey or at all. And he adds that while outsourcing may have come to the fore particularly in the past year or two, it is a trend that has been quietly underway for some time.
‘There’s been a long-term move toward outsourcing among the biggest administrators here and in Jersey,’ he says. ‘They tend to outsource anything that’s genuinely scalable, and what remain are the elements of the business that establish the fund here, the non-executives, the intellectual capabilities, the high-level strategy that really establishes management and control in the islands.’
Bane acknowledges that vehicles such as funds of hedge funds and property fund structures may not necessarily lend themselves so well to scalability. ‘Funds of funds have their own peculiarities – they aren’t very scalable, there isn’t much volume,’ he says. ‘Property has its own distinctive features. In some ways it needs greater scale because of the whole process of rent collection, rent monitoring and so on is more intensive than for any equity or debt fund, and that process can’t be carried out effectively far from the assets, but the top-end work is not immensely scalable and requires a great amount of human intervention.’
Although he agrees that the volume of more mundane accounting work carried out in Guernsey is shrinking as administrators allocate their resources more efficiently, Bane believes that overall the amount of administration activity actually taking place on the island is increasing. This is in part in response to the wave of legislative and regulatory changes over the past three years that have enhanced the role of service providers in conducting due diligence on new funds and promoters on the regulator’s behalf.
‘The administration market in both islands is going through a period of bedding down the new regulations that have been coming through over the past two or three years, and administrators are adjusting to the changes,’ he says. ‘In Guernsey, the Harwood Report is largely implemented. A new Companies Act has come in incorporating some Harwood-inspired changes, but it’s not a seismic shift in the landscape.’
Bane also notes that the island’s available resources in the corporate governance area have also grown in recent years in response to the changing environment and requirements. ‘There’s a very strong pool of non-exec talent here,’ he says. ‘There were concerns about whether that pool was becoming overstretched, but a number of new people have joined the group, which is very valuable for the island. The ability of administration and other businesses to adapt to what’s coming has always been a real strength of the jurisdiction, which has greatly changed from three years ago and is unrecognisable from 10 years ago.’
Fuller says Guernsey has been successful in cultivating its own talent pool, pointing to the island’s training agency. ‘The agency has had a very positive impact on our ability to provide new skilled staff,’ he says. ‘But we’ve been in this industry a long time, so we have quite a pool of experience among people like executive directors, lawyers and accountants in the island, stretching right back to the retail schemes that were here in the 1970s, then the transition to institutional business and the broadening of the island’s product base.’
An example of the kind of resources the island is keen to cultivate is Andrew Howat, managing director of Capita Financial Group’s new office in Guernsey, a local man who returned to the island last year with a wealth of experience acquired in the international financial industry. Capita, which previously held a licence in Guernsey but did not carry out administration activities on the island, has perfected its outsourcing model with operations in Exeter and Dublin that handle functions channelled from the group’s network of offshore offices, which also encompass Jersey, Gibraltar and the Isle of Man.
‘Capita has spent a lot of time looking at how to develop its international business,’ Howat says. ‘Most of the jurisdictions are small and demand for labour quite high, and there has been huge growth in business over the past couple of years, prompted in part by taxation changes. We’ve come up with a very robust operating model in line with the GFSC outsourcing guidelines and using very experienced accounting staff in Exeter.
‘We’re also investing large sums of money in the SunGard InvestOne accounting platform. It means a lot of the mechanics can be done outside the island, while client services, compliance and regulatory oversight and company secretarial work is done in Guernsey. We’re using the same model throughout the offshore world to do hedge funds, funds of funds, property funds and GP/LP structures for private equity schemes.’
Stuart Mauger, the Guernsey-based head of business development for RBC Wealth Management’s corporate and institutional business in the British Isles, cautions that the regulator’s insistence that responsibility, control and supervision of outsourced operations must remain in the island is not a formality.
‘Even in the outsourced model, mind and management control must be here, the regulatory licence is here, and you are dealing with the regulator here,’ he says. ‘You have to be absolutely sure that if you are asked to quote on a derivatives fund, you have someone who actually understands it. You can’t just tell them to look at the brochure. If the unthinkable happens and you have to go to the regulator to explain what happened, you can’t say you were relying on the outsourcing partner.’
That’s why, Mauger says, RBC examines very carefully the potential business that comes through the door, and closely monitors the work it outsources to the operations of affiliate firm RBC Dexia Fund Services in Luxembourg or Toronto. ‘We’ve moved from a model where we used to do full administration in Guernsey,’ he says. ‘We can still do that for funds that want everything done in Guernsey, but for others we can piggyback of RBC Dexia’s platform.
‘This means the quality of staff we have here are no longer the nuts and bolts preparers, but people who have been in the industry for 15 years or more, are qualified accountants and review the output for quality control.’ He says that as a result, the number of lower-end jobs in Guernsey has been thinned naturally, while the office has taken on more senior people with the experience to fulfil an oversight role effectively.
Bob Brown, a director of Equity Fund Services, says the responsibilities imposed by the regulator requires an effective compliance function in Guernsey. ‘You actually need to visit these sites on a regular basis and report to the regulator,’ he says. ‘When I was doing it [for a different firm], we would have to visit the back-office providers every six months to make sure the records were kept in good order.
‘When they provided us with valuations, they also had to provide all the supporting documents so that we could cross-check the information. We would also have to verify the valuations to make sure the numbers they were using were correct, and for the first six months we had to shadow their books. It was quite onerous because the regulator was very keen to ensure it was done properly when it was outsourced to a third party.
‘In recent years a number of administrators have outsourced it to another group office, which has got round that issue. However, the regulator has now tightened up and has gone back to the old system whereby you have to shadow the books in the jurisdiction. Even when you are back-officing into an office in another jurisdiction, they now require you to treat that relationship as though it was with a third-party administrator.’
Like RBC, Equity Fund Services – which merged earlier this year with Dublin-based Custom House Administration – prides itself on turning away any business if it has any doubts that it has the right capabilities to handle it. ‘We are quite ready to tell a client that we know what they want, but we can’t do it,’ he says. ‘Far too many people would take it on. You’ve got to be big enough to walk away if you know you can’t do the job. You do yourself, the fund manager and the investors no favours if you take it on.’
Ozannes partner Gavin Farrell says the growing range of specialist administrators is an important strength for Guernsey in a market where funds are becoming more specialised, too. ‘A number of fund administrators have had the opportunity to specialise in certain types of products and therefore to develop a body of expertise over the years, which has put Guernsey in a position to be able to offer solutions for new products,’ he says. ‘The perfect example is in private equity, where over the past 10 years a number of specialised fund administrators have been set up and helped to put Guernsey on the map as a private equity offshore platform.
‘Where we’ve been quite fortunate is in having pragmatic outsourcing guidance from the regulator. What Guernsey cannot outsource is intellectual capital, and it is something it does not want to outsource because the island has sufficient expertise and experience. Very often the actual number-crunching will be outsourced either within a larger group or to third-party organisations.’
Farrell divides the fund administration industry in Guernsey into three groups. ‘You’ve got the big blue-chip international names at the top, in the second tier you’ve got the very large truly independent fund administrators. In the third tier you have much smaller fund administration players that are either start-ups or trust companies, or some of the accountancy practices that have set up a fund administration branch.’
‘What this means is that if someone brings a fund to Guernsey, if the fund does not fit the business model of the first-tier players, it gets sent down the food chain. That deals to a certain extent with the resource issue because the work is not all concentrated in the hands of a few players. It spreads the load, which means that each fund administrator has more capacity to deal with incoming work. Obviously this also gives more choice to promoters. There are more players to deal with a particular type of business by virtue of the crumbs falling down the food chain, as well as through the outsourcing policy.’
