Financial services: Holding its own against bigger rivals

It has been another successful year for Guernsey’s financial services industry, with deposits and funds under management reaching £335bn($597bn) at the end of June – up 27 per cent on the previous year.

The credit squeeze is slowing the growth, says Peter Niven, chief executive of Guernsey Finance, the industry body, as the malaise in global markets undermines the confidence of investors.

But he believes Guernsey is well-placed to weather any storm, having continued over the past few years to improve the legislative and regulatory framework which makes the island so attractive as a financial centre.

“Guernsey is the jurisdiction of choice, which can hold its own against competition from larger centres in sectors such as private equity, where we’ve carved out a great niche,” says Mr Niven.

Along with other well-regulated offshore financial centres (OFCs), Guernsey has been particularly heartened this year by the decision of the International Monetary Fund to treat all financial centres equally in its scrutiny procedures. The distinction between onshore and offshore had become blurred, the IMF said, and almost all the OFCs had now improved their compliance with international standards and their co-operation with international agencies.

A handful still needed to raise their game and there was room for further improvement in some elements of regulatory frameworks, the Fund said, but the same was true with onshore financial centres. In future, all financial centres would be reviewed under the IMF’s financial sector assessment programme.

Peter Neville, director general of the Guernsey Financial Services Commission, regards this as a vindication of years of work by the island’s independent regulator to demolish the prejudices of detractors in international groups such as the IMF.

“We now look forward to the IMF assessment in January of our financial regulations and Guernsey’s anti-money laundering and combating of the financing of terrorism (AML/CFT) network,” he adds. “We expect the findings to be very positive.”

Guernsey prides itself on the fact that it introduced tough AML/CFT measures before many larger countries. So it is niggled at the refusal of the European Union to put Guernsey and the other Crown dependencies on the list of equivalent third countries for the EU’s third money-laundering directive – even though the UK Treasury recently said Britain does regard them as meeting the required standards.

“The EU wouldn’t put us on the list because of prejudice, but did include jurisdictions such as Russia and Canada that are much less compliant,” says Mr Niven. “When big financial organisations see that we are not on the list, they might decide to go for somewhere that is.”

Despite the setback, however, there is no evidence that Guernsey is losing its allure for the financial services businesses that have flocked to the island for its combination of high regulatory standards and a flexible approach to innovative new products.

This year, for example, has seen the passing of an updated company law and the creation of a new registry using the latest digital technology. The paper-based system of company formation in operation since 1883 has been replaced with a 21st-century computer system with internet access. This has reduced the time taken to form a company from 10 days to 15 minutes, and the cost from around £1,500 to £100 for a 24-hour registration.

“It will be quicker and less expensive to incorporate a Guernsey company than in any competitor jurisdiction,” says Mark Whiteley, the registrar.

Unlike many public sector information technology projects, it is being brought in under budget and on target for completing the transition by the end of October. And the new company law updates the old legislation to cope with today’s demands with new solvency provisions and strengthened corporate governance.

Another part of the financial infrastructure that is evolving fast is the Channel Islands Stock Exchange, which celebrates its 10th birthday next month. The Guernsey-based CISX is a rare institution that serves both Jersey and Guernsey, with around 3,000 entities listed and a market capitalisation of more than $50bn at the end of June.

In its early days, it provided a market primarily for investment funds and secondary listings for funds with a primary listing elsewhere, according to Tamara Menteshvili, chief executive. “It is now 50:50 funds and debt products, and 90 per cent of the listings are on a primary basis.”

The CISX’s infrastructure and listing rules – and the calibre of its board – have won it formal recognition as a designated exchange from the US Securities and Exchange Commission and the UK’s Financial Services Authority. Along with other Guernsey institutions, it focuses on innovation, such as listing limited partnership interests, trading in partly-paid shares and the traded open-ended investment fund.

Developments such as these have also fed the growth of the island’s fund administration sector, which grew up with the arrival of UK unit trusts in the 1960s and 1970s. The retail business drifted away to other centres, to be replaced by much larger and more esoteric funds, such as real estate, infrastructure, private equity and funds of funds.

Horace Camp, executive director of Anson, a locally owned specialist administration company, says the sector no longer does volume processing, but high value, innovative asset classes.

“Guernsey is the fund promoter’s flexible friend,” he says. “We always do the next thing here – but we always remember that in three years time it will become plain vanilla.”

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