James Williams, Hedgeweek

Reinforcing Guernsey’s financial services reputation


In light of global initiatives such as the Paris Accord, one area the bailiwick of Guernsey has focused on, with respect to product innovation, is green investing in the financial services industry. It has developed policies in response to expected demand for green investment products over the next two or three decades; ie verifiable, certifiable green products.

“Our strategy has been to utilise our regulatory autonomy to create the world’s first green fund product; the Guernsey Green Fund (‘GGF’),” says Dominic Wheatley, Chief Executive of Guernsey Finance. “We intend to build on this and develop more ESG products. It’s necessary to anticipate what fund managers will want, going forward, and be able to provide them with the product capabilities and wrap-around services.”

The consultation process for the GGF closed at the start of June 2018, incorporating feedback from industry players, and the Guernsey Green Fund was officially unveiled the following month. This is effectively an entirely new asset class for the jurisdiction where the underlying assets will need to conform to green credentials and will need to be verified by a third party or a licensee. 

Discussing the drivers of green finance, Wheatley points out that when one considers the amount of money one needs to attract into new investment areas, managers have got to find a way to create products that marry up investors with the assets. 

“I think the issue around green investing and other aspects of impact investing is how you provide a product that people can put their money in, knowing that the impact income they are expecting from the investment is part of the regulatory oversight,” says Wheatley. 

“Then you might start to see pension funds investing more heavily, as they know the fund is regulated and includes the assurance that it meets green investing criteria. At the moment, a lot of green and impact investments are ‘we do no bad’, but that doesn’t mean to say they are doing any good.”

The GGF is applicable to all types of fund, can be compliant with AIFMD, and it is a fully regulated fund product, subject to the rules and regulations of the island’s regulator, the Guernsey Financial Services Commission.

A rules overlay has been put in place to ensure that the fund’s “green” credentials are verified and accredited. Industry specialists worked with UK policy makers, including discussions with the London Green Finance Initiative as well as the United Nations and the OECD, when developing the framework.

Wheatley confirms that the criteria used are those laid out in the United Nations green taxonomy “so we’ve adopted an international framework”. 

“We’ve designed a third party verification process with a regulatory wrapper,” explains Wheatley. “That framework can respond to other taxonomies as they are introduced. For example, the EU is developing its own green taxonomy so if somebody wants a GGF based on that, in the future, we can build it in to our fund product. It is therefore quite a flexible fund product.” 

Anecdotally, Wheatley says he has heard from a couple of fund managers that their fund raising has been enhanced by having the accreditation; that is, they were already fund raising before, they then received the accreditation, and it triggered a number of investors to commit to the fund. 

“Clearly there is an awareness and an interest among the investor community, which we are encouraged by. I think people can also expect to see an impact fund, with its own taxonomy, introduced at some point, again with the GFSC overseeing a process of verification against a taxonomy with an international standard. 

“Some managers believe they have good enough green credentials and don’t feel they need a verification process, which some investors might find acceptable where that manager has the right reputation. But as we get more start-up managers in this space, investors will probably look for a bit more certainty than simply a manager saying, ‘Don’t worry, we are a green fund’,” adds Wheatley. 

There is no other fund like this yet in the marketplace. Paul Smith is Chairman of the Guernsey Investment Fund Association (‘GIFA’). He welcomes the introduction of the Guernsey Green Fund and views it as a good news story, in terms of the ethical principals behind the product. 

“It shows the innovation of the island and puts us in a good light,” says Smith. “We don’t want this to be a Guernsey niche product, we want to make sure it is widely acceptable and something that can fit in to global portfolios and can be understood by everyone. It’s been one of our more important product innovations recently. 

“We are looking at other innovative ideas and we will continue to introduce new products, at the right time, going forward, to maintain our reputation as a good place to come and do business.”

Moving forward on the front foot

Along with other offshore jurisdictions, there was somewhat of a ‘punch drunk’ feeling that Guernsey experienced with regards to the political discourse on offshore jurisdictions being tax havens and so on – indeed we’ve just seen Bermuda added to the EU’s blacklist. 

Smith is very clear when he states that “we’ve gone past that feeling now and things are very much on the front foot. 

“We need to continue to be a lot prouder and confident in Guernsey and what it can offer. It’s very easy when people are knocking you to retreat into the background. The fact is, this is a very tax transparent jurisdiction. We do excellent reporting. Service providers here are feeling that positivity and confidence and hopefully that will feed in to more business coming to the island,” remarks Smith.

ECOFIN decision to benefit PE managers

To illustrate how well trusted a jurisdiction Guernsey is in the eyes of the European Union, in terms of tax transparency, it was recently announced that its funds had been reopened to future investment from the European Investment Fund. This followed a decision by the European Council of Finance Ministers (ECOFIN) that it was satisfied with the island’s legal substance requirements. 

The European Investment Fund is a specialist provider of risk finance for small and medium-sized enterprises across Europe, backed by the European Investment Bank, European Union, and a range of public and private banks and finance institutions. It has just published new policy on its operations following the ECOFIN ruling.

The new policy from the EIB confirms that there should now be no impediment to private equity firms in the islands conducting “business as usual” with the EIF, which has invested into Guernsey funds previously as part of EUR147 billion invested across Europe.

“This is great news for Guernsey and a validation of all the work put in over the past couple of years to ensure that Guernsey has been recognised by the EU as a jurisdiction of real substance. It demonstrates once again that we are seen as a quality jurisdiction with robust regulation,” says Wheatley.

Indeed, Guernsey has been given a clear bill of health in relation to its tax regime, substance and so on as part of Base Erosion and Profit Sharing (BEPS) regulation. That gives the island a stable, reliable platform for fund management groups and their end investors. 

“The EU hasn’t gone through two years of assessment to simply change its mind. It is trying to provide people with certainty and clarity in relation to what it regards as an acceptable partner, and has come out and very clearly stated that Guernsey is a reliable partner,” continues Wheatley.

“We will do everything necessary to maintain that relationship with the EU as things evolve because inevitably, criteria will evolve over time. For now, people can come here and know that the relationship we have with the EU is on a stable footing and that we are in many regards in step with what the EU looks for in a third country.”

There is an overriding belief that Guernsey’s regulatory and tax regime provides stability in a way that meets the expectations of the marketplace. It has been careful to balance what the EU expects with what industry practitioners want in terms of ease of doing business. 

“I think we’ve struck that balance well, based on how busy various practitioners are at present,” says Wheatley. 

Smith does not expect economic substance requirements to necessarily lead to any drastic change to the island’s infrastructure but it may lead to change in how that infrastructure is used. 

There is, he says, potential for fund managers to locate more of their staff to the island for substance requirements, which will be good for Guernsey’s economy. The more people there are working on the island, the more of a multiplier effect it will have on the wider economy – i.e. residential real estate, restaurants, office rentals, etc. 

“Substance will be a positive factor for the island in my view, as we look to encourage more fund managers to open representative offices,” says Smith.

TISE enjoys record listings

To further underscore the strength of the jurisdiction, The International Stock Exchange (TISE) confirmed that 865 new listings were recorded during 2018, a 23 per cent year-on-year increase and the largest number of securities listed in a calendar year on TISE since the business was established in 1998. It took the total number of listed securities on TISE to 2,857 at the end of December 2018.

Fiona Le Poidevin, CEO of The International Stock Exchange Group (TISEG), was quoted as saying: “I’m delighted that in 2018 we were able to not only surpass the stellar achievements of 2017 but also, at the same time, set a new record for the largest number of securities listed in a single year.”

During 2018, TISE played a role in an innovative Insurance Linked Securities (ILS) transaction when it became home to what is believed to be the first ever listing on a regulated exchange of notes digitised on a blockchain; USD4.1 billion of bonds were listed on TISE as part of the world’s most expensive real estate transaction for a single building, The Center, which is Hong Kong’s fifth largest skyscraper; and a GBP3.5 billion debt issuance from sports betting and gaming giant GVC Group was the first listing on TISE to be sponsored by one of its Isle of Man based member firms.

A number of firms joined as Listing Members of the Exchange during 2018, including ILS specialist Solidum Re (Guernsey) ICC Limited, Isle of Man-based FIM Capital, and, in Jersey, Intertrust Securities, as well as Maples and Calder.

In the second half of the year, TISE introduced a new market segment, TISE GREEN, to enhance the visibility of those investments which make a positive impact on the environment and updated the Listing Rules, in particular to appeal to Small and Medium Sized Enterprises (SMEs).

Le Poidevin added: “There were a number of significant developments at the Exchange during 2018 of which our team should be very proud. A particular focus for us during this year will be showcasing how both UK SMEs, as well as companies from our ‘home’ jurisdictions of Guernsey, Jersey and the Isle of Man, can potentially benefit from listing on TISE. I look forward to working with all our stakeholders as we take further strides forward in 2019.”

Proven fund distribution track record 

Brexit has generated a great deal of business uncertainty over the past 12 months. This has put doubts in the minds of some UK fund managers as they weigh up whether to launch new funds or not.

Some onshore jurisdictions have focused heavily on Brexit and their ability to offer the funds passport under AIFMD. As much as Guernsey, and the Channel Islands more broadly, are used to operating outside of the EU that message has been drowned out by the PR machine in other jurisdictions, as they seek to capitalise on the Brexit uncertainty. 

There is, however, no contamination threat to Guernsey regardless of what the final Brexit outcome looks like. That it has already been approved by ESMA as a third country means that it will allow managers to fully passport their Guernsey-domiciled funds across the EU. The passport is not yet available, but in the meantime, fund managers can freely avail of National Private Placement Regimes to market their fund(s) into individual EU Member States. 

“The central message is that we have well-established routes into markets around the world, including the EU through the National Private Placement Regime,” asserts Wheatley. 

“Guernsey has a lot of experience and expertise in managing funds on behalf of investors across the globe. It is partly about market access and partly the fact we have a highly specialised industry workforce able to deal with any issues that arise from investors across the world. 

“Our relationship with the EU as a third country is completely unchanged regardless of what happens with Brexit. We were assessed by ESMA and were in the first of countries accepted as meeting its equivalence criteria under the AIFMD. That process was put on hold, because of Brexit, but if that project comes up again we see no reason why we would not qualify on an updated assessment.”

In the meantime, there’s no indication the EU will change or stop the NPPR provisions because it would cut them off from significant source of capital investment, and clearly it would not be in the EU’s best interests to do that. 

The majority of funds look to raise assets in a limited number of EU countries (France, Germany, the Nordics, Amsterdam) and as such NPPR is a very effective and reliable way to fund raise. Guernsey is at the vanguard of jurisdictions able to deliver that mechanism to fund managers who launch funds from the island. 

“We expect the excellent work that our tax authority and industry specialists have done to produce a good level of success for our funds industry going forward,” adds Wheatley.

Sam Shields is Head of Fund Marketing at Praxis Fund Services Limited, the fund administration arm of PraxisIFM, an independent group of companies providing financial administration services.

He notes that the firm has seen a significant increase in private equity activities over the past 12 months, “partly because we have focused our efforts on supporting this asset class but also because we’ve seen a good influx of enquiries from managers”. 

When it comes to marketing funds into the EU, Shields thinks Guernsey has some real advantages and a solid track record that make it appealing to fund sponsors. 

“If you look across the jurisdiction as a whole,” says Shields, “it has a solid marketing regime that allows managers access to investors across Europe and globally. 

“With Brexit, there is uncertainty as to where the UK sits and therefore coming to somewhere like Guernsey, where NPPR is a tried and tested route, is a sensible option. It is something that more UK managers are now considering.

“In this respect, we have a third party AIFM business that we own here in Guernsey as part of the PraxisIFM Group, called International Fund Management. The IFM team has seen a strong uptick in enquiries as managers consider using IFM as their third party AIFM to handle all the risk and regulatory reporting.” 

Using a third party AIFM gives fund managers the certainty to privately place their funds into the EU using the various Memoranda of Understanding that Guernsey has in place with EU Member States. In such an arrangement, IFM delegates the portfolio management function back to the manager sitting in London, or elsewhere. 

At present, IFM has approximately USD4 billion in AUM. It leverages Guernsey’s reputation in relation to distribution and has marketed to jurisdictions including Germany, Sweden, Luxembourg, Denmark, the UK and Ireland on behalf of its clients. 

Whenever a manager is preparing to structure a new fund, the investor location is one of the most important considerations, and one that the PraxisIFM team will readily discuss with new managers and their advisors. 

As Shields explains: “When we speak to clients, the first question when we discuss fund structuring is where the end investors are based. What we find with the AIFM passport is that it works well for those managers who plan to market their fund product(s) to a high number of EU jurisdictions but when you drill down and look at where they are distributing, it often tends to be a handful of jurisdictions. Guernsey provides managers with a fantastic structure and mechanism, using NPPR, to be able to access those investors in key markets like Germany, the Nordics, etc.

“Then we will typically move on to ask about the fund offering itself, what their track record is – this is extremely important in the eyes of the GFSC – and then whether they can source a cornerstone investor to support their fund. This can help give confidence to other prospective investors if they are a first-time manager. 

“We want to make sure the manager uses the right jurisdiction to domicile the fund, and that they set up the right structure. We can help them with this by sharing some of the experiences we’ve gone through with other clients, before they engage with legal counsel on the actual fund structuring process.”

The depth of experience among Guernsey’s service provider community, in addition to its fund distribution track record, is one of the island’s main draws, especially for those launching private equity funds. 

“In addition to its track record, the island promotes innovation such as we have just seen with the Guernsey Green Fund. This helps the jurisdiction to continue to grow and broaden its value proposition. We have to come up with these new structures to attract new managers and to keep us competitive,” adds Shields. 

Open to innovation

Reputationally, Guernsey has a Standard & Poor’s AA- rating. This has helped attract 805 investment funds which, together with LSE-listed trading companies, have a combined market capitalisation of USD63 billion. 

The GFSC encourages as much dialogue as possible and is always willing to engage with managers to discuss their business requirements, sharing its expertise of having watched the island’s funds industry grow for over five decades. Recently, it unveiled the Innovation SoundBox for those considering new start-ups to interact with the GFSC during the registration or licensing process. 

Guernsey is always open to innovative approaches to doing business. 

At the start of last year the island introduced the Guernsey Investment Fund, which uses public money supplemented by private sector money, to invest in technology and digital start-ups. That is indicative of a jurisdiction that wants to embrace the new and isn’t prepared to rest on its laurels.

Other innovative solutions have been introduced to make Guernsey an attractive proposition. 

From a fund manager perspective, it offers Manager Led Products, shifting the regulatory focus from the fund to the Alternative Investment Fund Manager (AIFM). This reduces the regulatory and compliance burden associated with the launch of new funds, but keeps regulatory standards high to the satisfaction of the regulator. 

From a funds perspective, one initiative that demonstrates Guernsey’s responsiveness is the Private Investment Fund (PIF), which launched in November 2016. The PIF is the perfect solution to those investment projects where the manager and investors are known to each other and all know what they want to achieve, but where the participants would draw comfort from a relatively low-cost regulatory solution which requires oversight from a regulated third-party administrator and an independent annual audit.

Originally designed for start-up managers and club deals, the PIF has also gained a following with large private equity managers who appreciate the reduced requirements for marketing documentation (no information particulars are required) and the speed to market allowed by the fast-track GFSC registration process, which takes one business day.

The PIF is limited to no more than 50 investors, but the number of potential investors it can be marketed to is not restricted. Every PIF must appoint a Guernsey licensed manager who is responsible for making certain representations with respect to the ability of investors to suffer losses. If there is no existing manager, then the licence for the manager can be dealt with by the GFSC at the same time as the PIF’s registration.

PraxisIFM is one of the few Guernsey-based administrators servicing all different types of fund structures from open- to close-ended funds, listed and private funds, through to non-Guernsey structures, funds-of-one and managed accounts. It supports all different types of asset classes and does a huge amount of London-listed funds work. 

To remain relevant to managers running closed-ended as well as open-ended fund structures, Guernsey’s fund administrators continue to evolve their operating models and look to introduce new technologies wherever possible. 

In terms of PE fund structuring, PraxisIFM has created a centre of excellence in Guernsey. It has built a strong team over the years not only to service funds domiciled in Guernsey but other jurisdictions. 

“For example, some of our Cayman Islands private equity work will be handled from here. We want to keep our substance and expertise here in Guernsey, which is important in the current environment, and to continue to help develop the island,” explains Shields.

“Technology does play a part in this. We keep our eyes open for any new technology solutions we think could benefit our clients. Technology should make us more efficient and provide the client with a better overall experience. Ultimately, though, it comes down to relationships and that’s something we at PraxisIFM pride ourselves on. Technology is important to us and something we are heavily investing in but this does not detract from having a high quality team.” 

Ultimately, the raison d’etre of a small niche jurisdiction is to do things better than anyone else. To achieve that, it needs to create a business environment where the fire of innovation can burn bright. Over the years, Guernsey has proven its capability at pulling together the right level of regulation and skill sets among industry practitioners to foster a competitive, compact business ecosystem; one where everyone works together and knows each other. 

It is possible to walk from one end of the financial district in Guernsey’s main centre, St Peter Port, to the other in approximately 15 minutes. A pleasant coastal environs, along the way you will find the likes of Ogier and other international law firms located cheek by jowl alongside the GFSC, The International Stock Exchange, Guernsey Finance and numerous accounting, administration and trust firms. 

Anyone who visits the island can easily spend a day meeting with the GFSC, or the Economic Department of the States of Guernsey, while its service provider community are more than willing to open up their diaries. 

Digital growth opportunities

Digital technology is also high on Guernsey’s agenda as it seeks to evolve and expand its value proposition. According to Smith it is crucial to the island’s future.

“As we see the industry evolving, technological developments will become vital,” remarks Smith. “I think Guernsey has already demonstrated its innovation and is a test bed, as it were, for new fintech ideas and tools.”

A good example of this is Northern Trust, who introduced a blockchain solution for one of their private equity fund managers. To construct the solution, Northern Trust selected IBM to provide the cloud infrastructure. That they regarded Guernsey as the best place to test the solution is testament to the island’s reputation. 

Since then, Northern Trust has extended the blockchain solution so that audit firms can now carry out audits of private equity lifecycle events directly from the blockchain.

“We’ve got a number of funds here looking at fintech and technology-based asset classes,” observes Smith. “I would like to see continued growth in using those digital technologies for servicing the funds business. 

“Aside from the economic substance point, which might attract more people, we are a small island and we need to make the best use of our human resources. Blockchain technologies are key to that but it takes time to design and implement these new solutions. 

“Additionally, from an infrastructure perspective, we are looking to install 5G networks, which will be a big step and help to increase broadband connectivity speeds.”

Looking ahead 

It is still early days to judge how much of a success the GGF will be, or for that matter the extent to which UK managers opt to distribute new fund products out of Guernsey in the wake of Brexit, but Guernsey has shown its resilience over the years, and there’s nothing to suggest this will change going forward. 

Low costs and speed to market make it an attractive option to fund sponsors keen to secure investor funding, while the heritage of Guernsey’s private equity industry, and its highly specialised workforce, provide a high level of confidence.

Smith confirms there is a move to grow its Class B open-ended fund universe by potentially extending it for use by more esoteric asset classes, “while with the GGF we are seeing managers putting different fund structures in place. 

“Over the last couple of years we’ve been looking to broaden the range of fund vehicles and diversify Guernsey’s investment funds sector, because like with any economy, you don’t want to have too many eggs in one basket. While we applaud and push private equity, which we have excelled at over the years, we want people to know there is a wider range of asset classes we can support as well,” concludes Smith.

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