Trust management, particularly for wealthy UK individuals, was the island's traditional business. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but Guernsey's trust business has continued to grow based on a more international clientele. Many Collective Investment Funds are also of course based on trusts.
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As of February 2008, the Island hosted more than 140 licensed fiduciaries, ranging from large organisations to independent, boutique operations. Together, they held between GBP200 and GBP300bn worth of assets in trust. The island has a very well-developed legal and financial infrastructure for trust management; the highly sophisticated professional services which support the trust sector include lawyers, accountants, investment managers and stockbrokers.
The Trusts Law 1989 (updated in 2007) provides a modern statutory basis for trust management activity. The Edwards Report acknowledged that Guernsey ranks highly among IOFCs for the quality of its regulation. Unlike the banking sector, however, the Guernsey trusts industry had not been subject to any formal system of supervision. Partly as a result of the Edwards Report, a law was prepared by the States' Advisory and Finance Committee under the name of The Regulation of Fiduciaries and Administration Businesses (Bailiwick of Guernsey) Bill 2000. The law - known as the Fiduciary Law - came into effect on April 1, 2001.
Individuals and businesses involved in the provision of fiduciary services had to submit a licence application to the Commission by May 31, 2001. The Commission received a total of 179 applications for a full fiduciary licence and 70 applications for a personal fiduciary licence.
The law contains a 'four eyes' rule, standards for capital adequacy and compulsory indemnity insurance. The offer or provision of fiduciary services without a licence will incur criminal sanctions. A full licence is required by any company, wherever registered, providing fiduciary services in the Bailiwick and by Guernsey-registered companies providing fiduciary services anywhere in the world and individuals, acting as directors or trustees by way of business, need a personal licence. Prudential rules have also been imposed; clients' funds need to be segregated from other trust assets; and new accounting safeguards have been installed.
The annual fee for a full fiduciary licence is dependent upon the annual turnover from regulated fiduciary activities.
The law provides extensive powers to the GFSC in the granting, refusal, revocation, and application of conditions to fiduciary licences. It will also have authority to control the names of, and advertising by, fiduciary businesses, rights to obtain information and documents, and powers to conduct investigations. The Commission states that the Bailiwick of Guernsey is one of the first jurisdictions to establish a statutory system of fiduciary regulation.
New trust legislation (the Trusts (Guernsey) Law, 2007), which was approved in July 2007, came into force on March 17th, 2008. The changes overall are designed to create a more flexible framework for the local trust industry, and to ensure that Guernsey, as a jurisdiction for the establishment and administration of fiduciary structures, remains well placed and competitive.
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Guernsey Banking
Banks in Guernsey are regulated and licensed by the Guernsey Financial Services Commission (GFSC) under the Banking Supervision (Guernsey) Law 1994 as amended. The Commission is extremely careful to exclude doubtful operations.
Originally, banks coming to Guernsey set up fully-staffed local branch offices or subsidiaries, but in recent years, as in many other IOFCs, in response to shortage of resources, the administered unit has become more popular. Under this scheme, an established Guernsey bank provides services for an incoming bank, which therefore does not need to open its own office or recruit staff. However, the Financial Services Commission applies the same standards of supervision to an administered bank as to an established bank. About one third of the banks in Guernsey are 'administered'.
The banking sector, in common with other financial services businesses, is subject to stiff money laundering controls under the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002.
Financial services businesses which suspect that a customer or transaction are associated with money laundering, terrorism, or the financing of terrorism, must report this to the Guernsey Financial Intelligence Service.
There are 42 licensed banking institutions in Guernsey (2010).
Guernsey’s banking sector is in a more positive position than the continuing decline in deposit levels might suggest, according the head of the promotional agency for the Island’s finance industry.
Figures from the Guernsey Financial Services Commission (GFSC) show that the value of Guernsey bank deposits fell by 2.3% during the final quarter of 2009. This took the total value of deposits to GBP177.4bn at the end of December 2009 – a 25.2% decrease from twelve months previously.
However, Peter Niven of Guernsey Finance, believes that the sector is better placed than the top-level analysis initially seems to indicate:
“What we can see is that a year ago the global financial downturn and an associated flight to quality were pushing deposit figures to a peak. Since then, there has been a decline in the deposit base as a result of returning confidence within the investor markets coupled with a very low interest rate environment.”
“Indeed, it is within this context that we have seen a consistent fall of Swiss fiduciary deposits in particular. The performance of this one product, especially more recently, has been driving the decline in overall deposits and in fact, has to some extent been masking wider improvements in the sector. For example, within this last quarter of 2009, other deposits – excluding Swiss fiduciary deposits – actually increased in value albeit only slightly.”
“Therefore, the picture is more positive than it might first appear and in fact what we have seen during the last two quarters is increased stability of deposit levels which now sit at more sustainable levels.”
Analysis of the figures from the final quarter of 2009 shows that the main reason for the fall in deposits was the continued contraction of Swiss fiduciary deposits, down from GBP44.8bn at the end of September 2009 to GBP41.8bn at the end of December 2009.
In addition, other deposits – excluding Swiss fiduciary deposits – increased slightly from GBP75.3bn at the end of September 2009 to GBP75.6bn at the end of December 2009.
The reported total deposit figures were impacted to some extent by the strengthening of sterling against the major currencies. This exchange rate effect also led to some differences in the overall currency mix with sterling deposits increasing to 23.9%, Swiss Franc deposits up to 3.8%, US Dollars stable at 46.3% and Euros decreasing to 23.3%.
Speculation that the EU Savings Tax Directive would impact on balances held offshore has so far proved unfounded.
In November 200, Guernsey’s Commerce and Employment Department welcomed the publication of a strategic review of the island’s banking sector, commissioned in March 2009, which provides proposals to ensure the sector’s sustainability, as well as drawing on lessons from the economic crisis.
Investigations and interviews were undertaken by a team headed by Lord Hunt of Wirral, Chairman of the Financial Services Division of Beachcroft LLP.
Lord Hunt stated that he found much to encourage him in thinking that Guernsey could expect a major contribution to its economy from banking in years to come; a message that he reiterated when presenting the report:
“The banking sector has made a significant net contribution to the economy of Guernsey. The report shows that the sector directly employs nearly 2,750 people and contributes 17% of all tax revenues and an estimated GBP200m a year to the Guernsey economy,” he revealed.
The independent study highlighted that there were definitely opportunities to be researched and potentially exploited by the Guernsey banking sector, but it warned that the Island could not afford to be complacent.
The report highlighted threats and risks to be mitigated as well as opportunities, both of which must be addressed by the public and private sector in order to remain competitive.
Carla McNulty Bauer, Minister for Commerce and Employment, observed that:
“Hunt’s report shows that Guernsey has a strong and diverse banking sector which is crucial to Guernsey’s whole population."
"Many of the proposals are already being addressed and I look forward to continuing to focus our collective attention on the areas highlighted in the report so that Guernsey continues to have a banking sector with an enviable reputation.”
She continued: “The announcement that Guernsey must once again review its corporate tax structure only reinforces the points raised by Hunt. Opportunities and threats will continue and Guernsey has to continue to be dynamic and work hard to maintain competitive advantages in an international arena. This will be a collaborative effort by the public and private sector.”
The report highlights the fact that Guernsey’s success as an attractive place for people to live and do business is inextricably linked with the banking industry.
Lord Hunt suggested in this regard that “the disproportionate contribution from banking makes its success and closely related activities a key driver of Guernsey’s prosperity”.
In addition to providing traditional banking services to the local domestic and business community, it was identified that most Guernsey banks offer core products to all other parts of the finance sector, and that this also adds to Guernsey’s infrastructure and general offering.
Steve Watts, Chairman of the Association of Guernsey Banks (AGB), observed that: “The Hunt Report has again emphasized that banks are a vital part of the whole Guernsey economy. AGB notes the recommendations contained therein, acknowledges that the banking industry is undergoing change on a global scale and that it is vital for the island to continue to maintain its well established reputation for probity, effective regulation and transparency.”
The deposit-taking sector was scrutinized, and the report concluded that although the risk presented by retail deposits is less than a year ago, risk remained which needed to be considered and managed.
Philip Marr, Director of Banking at the Guernsey Financial services Commission (GFSC), commented: “Hunt’s Report on the current shape of the banking industry in Guernsey and his analysis of the principal business models operating here and the risks inherent in those models will be helpful to all stakeholders involved in the industry. We think it is wholly appropriate to consider whether those are reasonable risks for the island to be taking in the current environment. We have already been addressing those risks, principally about upstreaming, for some time and will continue to do so in the future.”
“Hunt also addresses the challenges facing the sector as a result of regulatory changes brought on by the banking crisis. As always we stand ready to respond to those challenges which impact on banking business in Guernsey.”
The Hunt review is the culmination of significant work both on and off-Island, including a three month consultation period with stakeholders and interviews from Guernsey’s banking sector; formal information and data gathering exercises; and comprehensive canvassing of views of international banking experts.
