The changing nature of international financial centres

The global financial crisis brought to an end a period of unprecedented prosperity. Now we have the debt-laden developed economies experiencing depressed rates of growth (and/or in recession) and the emerging markets feeling the knock-on effects of reduced demand for their goods and services. While initially it might have seemed that this situation was just a temporary aberration now it is clear that this is the ‘new normal’.

The changed economic environment has also resulted in greater scrutiny of the role of international finance centres (IFCs). As a leading IFC, Guernsey has been once again demonstrating its long held ability to adapt to changing circumstances. The Island has been at the forefront of adopting new regulatory and tax standards, while at the same time expanding the range of services we can offer.

This means that we are extremely well placed to meet the new expectations of not just our clients and their advisers but also the wider international community. Therefore, it is no surprise that rankings in September 2012 by both The Banker and the Global Financial Centres Index (GFCI) place Guernsey within the very highest echelons of IFCs.

Changing standards
The crisis exposed weak links within the global financial system and as a result, there has been a concerted effort to improve standards, especially within IFCs. Guernsey has always prided itself on being within the leading tier of IFCs and this status has been reaffirmed by both scrutiny from external agencies but also the latest developments in respect of tax transparency and exchange of information.

Regulation
In the wake of the financial crisis, HM Treasury commissioned Michael Foot to conduct a review of the opportunities and challenges facing the British offshore financial centres. In October 2009, he reported that the Crown Dependencies of Guernsey, Jersey and the Isle of Man were within the very top tier of IFCs.

This assessment was reaffirmed when, in January 2011, the IMF published a series of evaluation reports which commended Guernsey’s high standards of financial regulation, supervision and stability along with our robust criminal justice framework. Indeed, Guernsey was judged to have the highest levels of compliance with Financial Action Task Force (FATF) standards of any of the jurisdictions assessed, including the world’s major economic powers.

The financial crisis also resulted in a sharper focus on the regulation of specific services. For example, the EU is in the process of introducing the Alternative Investment Fund Managers Directive (AIFMD). Guernsey is not part of the EU and therefore considered a ‘third country’ for the purposes of the Directive. As such, Guernsey is now planning to introduce a dual regime from July 2013: retaining our existing regulatory regime for those or do not require or demand an AIFMD compliant product; and introducing a new regime which is AIFMD compliant.

This will not only ensure that we can continue to access the EU market but in addition, we will also be able to offer our existing regime where business does not touch the EU at all and there is no demand for an AIFMD compliant product. This is particularly important as the Island continues to shift its business base from the traditional introducer centres of the UK and the wider EU more towards the emerging markets and especially the Brics – Brazil, Russia, India and China – where we have been active in promoting Guernsey’s financial services offering.

Tax
Guernsey has also made significant progress in developing its framework in respect of tax transparency and exchange of information. Guernsey agreed to enact measures equivalent to the EU Savings Tax Directive from July 2005, and in 2011 we moved to automatic exchange of information. We have also made significant progress in signing tax information exchange agreements (TIEAs) and it was these steps which led to the Island being within the very first set of jurisdictions placed on the OECD ‘white list’ at the conclusion of the G20 summit in London, April 2010.

Today, the Island has signed 40 TIEAs, including with 16 members of the G20 as well as 15 Double Tax Arrangements (DTAs), comprising 10 ‘partial’ DTAs and five ‘full’ DTAs, including the UK, Malta and Singapore. Our proactive position in respect of tax transparency and exchange of information has been consistently commended by international agencies such as the OECD, its Global Forum on Transparency and Exchange of Information for Tax Purposes and the Financial Stability Board.

The Guernsey Government is also closing in on concluding a deal with the US authorities regarding an Intergovernmental agreement (IGA) for the implementation of the Foreign Account Tax Compliance Act (FATCA). In addition, the Guernsey Government has also announced the Island’s intention to finalise a draft agreement on a proposed tax package with the UK. The proposed package comprises: agreement in principle to enhanced reporting of tax information along FATCA principles through an IGA with the UK, including alternative reporting arrangements for non-domiciled UK tax residents (non-doms); agreement to negotiate a revised DTA; and agreement on a disclosure facility.

Taken together, these developments demonstrate that Guernsey is proactive in ensuring it is adopting the very latest global standards for tax transparency and exchange of information as well as the regulation of financial services activity.

New client services
Guernsey’s continued development of its framework in respect of regulation and tax is a response to both the international community and also the new expectations of clients and their advisers. The Island is also showing its adaptability to meet new client demands by expanding its service offering.

Foundations
In January this year the Island introduced the Guernsey Foundation, which provides local practitioners with another option for meeting client needs, in particular asset protection, succession planning, philanthropic activities and wealth planning through a third country for globally mobile individuals.

The Guernsey Foundation is expected to be particularly attractive to clients in civil law jurisdictions not just in continental Europe but also further afield in Asia, Russia and Latin America, where the common law concept of the trust is less well understood. However, the specific provisions of the new law and the Island’s heritage in providing trust and company administration mean that the Guernsey Foundation will also be attractive to clients in common law countries, such as the UK.

Image Rights
This expertise in wealth management means that Guernsey is also very well placed to administer new business under what is world-first image rights legislation. At the end of last year, Guernsey became the first jurisdiction globally to recognise image rights in law and provide them with a register. The register went live on 3 December 2012 and later that day, the world’s first image right application was approved. This has since been supplemented by two international DJs receiving approval for their personalities and associated image rights to be added to the register. More applications are in the pipeline.

The image rights offering can also be utilised by corporate entities but it will be particularly attractive to high-profile individuals. Placing image rights on a statutory footing provides definition around the person as the individual and the brand and can assist with valuation. In doing so, this creates both certainty for tax matters and also a commodity which can be both protected and exploited.

Guernsey is also undertaking a specific initiative to attract business in niche sectors, such as cleantech, where we can provide financial services through the lifecycle of these environmentally friendly projects. These developments illustrate the way in which Guernsey is expanding its service offering so it can best serve clients going forward. In combination with the adoption of high regulatory and tax standards, this means that the Island is well positioned to remain a top tier IFC both now and into the future.

Fiona Le Poidevin is the Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry

For more information:
Address: PO Box 655, North Plantation, St Peter Port, Guernsey, GY1 3PN
Phone: +44 (0) 1481 720071
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