Guernsey has long been a popular destination for financial services companies to domicile funds, attract clients and conduct operations — something that looks set to continue
“The domicile decision can be a challenging one,” Guernsey Finance affirms in its ‘Fund Domicile Selection: Enabling Global Alternative Asset Growth’ research report.
“It has meaningful implications for distribution potential, speed to market, set-up and ongoing costs” — and this is by no means an extensive list.
Guernsey Finance’s research goes on to outline the priorities that firms hold when choosing a jurisdiction. Where the existing business is based and operates is, of course, a primary factor. Following this are tax considerations, regulatory and structural environments and the preferences of investors.
With this in mind, why is Guernsey such a popular jurisdiction to choose? What is it offering the industry that other domiciles can’t?
On the regulatory side, Guernsey Finance chief executive Rupert Pleasant states that “time and again people who have used Guernsey as a domicile for financial services have reported that the accessibility and flexibility of the Guernsey Financial Services Commission has been an important element of doing business in Guernsey.”
In relation to the global stage and worldwide economic turbulence, the region “continues to successfully endure and adapt to new challenges,” Pleasant continues. In a recent study from the company, more than 80 per cent of local professionals reported healthy business development and profitability — the island has remained stable through adverse conditions.
In the middle
Reputation plays a key role in the island’s success. Guernsey’s financial services ecosystem “has built up over decades as the funds industry has evolved and matured” says Chris Hickling, country head for Guernsey at Apex Group. Currently, 80 per cent of global wealth is accessible through a Guernsey-domiciled fund, a figure even more startling when the jurisdiction’s size and location are considered.
Guernsey is not a part of the UK, but it is a part of the British Isles. It has never been a part of the European Union, but it maintains a relationship with it through the Trade and Cooperation Agreement. Guernsey is a country that hovers between definitives, yet this is something that often works in its favour as a hub for financial services.
Guernsey’s non-EU third country status bestows greater flexibility onto its regulatory framework, facilitating a more “business-friendly environment” and allowing for “closer relationships with other non-EU jurisdictions, which can open up new business opportunities,” Hickling adds.
It also provides a “proven, faster smarter route” into EU and UK markets, Guernsey Finance says, along with “unrivalled global market access”. Remaining outside the UK and EU, while maintaining strong relationships with both, leaves Guernsey somewhat “shielded from political, legal and fiscal volatility on either side of the Channel,” Pleasant explained in a 2021 article.
This strength was hammered home by Brexit, which has “only enhanced Guernsey’s attractiveness” to both investors and fund managers alike, Pleasant argues. With its regulatory approval scheme and National Private Placement Regime outpacing the AIFMD passport, Guernsey’s appeal is only getting stronger as time goes by.
Although he acknowledges that Brexit “has provided a catalyst to establish new relationships and negotiate trade agreements,” Hickling is not so sure of Brexit’s positive impact. He cites uncertainty around the future of Guernsey’s relationship with the UK and Europe, and the danger that the UK’s crash out of the union could have on Guernsey’s trade and financial services.
One such danger is the potential loss of passporting rights, which Guernsey had previously accessed through the UK’s EU membership. If the ability to service institutions across the EU without the added burden of each member state’s regulatory approval is removed, then it could be harder for Guernsey to compete with EU financial centres, Hickling says.
Getting the job done
A small space with a big industry, “access to talent is a perennial challenge,” Hickling asserts. It’s a long-standing problem, but recent events have exacerbated the issue.
In the long run, Brexit “could limit the pool of talent available to Guernsey-based financial firms and make it harder for them to innovate and grow,” Hickling explains. Already, “as a non-EU country, Guernsey may find it harder to attract highly skilled workers from the EU.” An even more limited talent pool would doubtless be detrimental to the jurisdiction.
Following swiftly on the heels of this political rockiness, the COVID-19 pandemic and associated travel restrictions prevented new workers from moving to Guernsey. The island is still feeling the consequences of this pause, and is experiencing inflated housing and living costs along with the ongoing difficulties brought by housing restrictions and population management on the island. Guernsey may be one of the strongest financial services centres in the world, but no matter how much it expands its business proposition, it cannot expand its landmass in tandem.
Guernsey has several initiatives in place to further expand its global reach. One area that the jurisdiction wants to target is South Africa, which has been, and will continue to be, “a key focus of Guernsey Finance’s promotional activities,” Pleasant affirms.
The country has been grey-listed over insufficient action around money laundering and financing of terrorism, something that Pleasant says came as no surprise to Guernsey-based funds active in the region, nor to the Guernsey regulator. Operating in South Africa will require enhanced client due diligence and client base analysis, he explains, but “all firms have rigorous policies and procedures in place to meet their obligations.”
The Middle East is also a key focus area, with Aaron Russell-Davison being appointed as a dedicated representative of the Guernsey Finance Business Development team in the latter half of 2022.
As a region with a rich concentration of high net-worth individuals, the Middle East “holds many opportunities for Guernsey,” Russell-Davison says. To attract the next generation of private wealth holders, he posits, the jurisdiction must emphasise its sustainability credentials — which shouldn’t be a challenge, given its ESG track record.
A green outlook
ESG considerations are another factor that companies consider when choosing a jurisdiction, and this is an area where Guernsey shines.
Rules for the Guernsey Green Fund (GFF) were published in 2018, outlining the three main goals of a GFF product as seeking a return for investors, spreading risk and mitigating environmental damage.
At least 75 per cent of a fund’s assets must be in line with the ‘green criteria’ outlined by the Guernsey Financial Services Commission for it to be classified as a GGF, something verified either by a “suitable independent third party” or a Guernsey-licenced fund manager or administrator.
The GFF is the first regulated green investment fund product in the world, and as of March 2023 it channels more than £5.6 billion into sustainable investments.
There’s no doubt that Guernsey is one of the leaders of the pack when it comes to sustainable finance, something evidenced again by the launch of the Natural Capital Fund in September 2022.
The Natural Capital Fund specifically focuses on nature, covering both harm reduction and positive impact schemes. Its framework is more relaxed than the GFF, acknowledging transitional investment strategies and therefore allowing a greater number of funds to gain accreditation.
Following COP15, the fund’s rules now align with the global ‘30 by 30’ target, the goal of which is to conserve and manage a minimum of 30 per cent of land, coastal areas and oceans, and restore 30 per cent of terrestrial and marine ecosystems by 2030.
Guernsey is quick to update its sustainable frameworks and policies to meet evolving global targets, proving itself once again to be an alert, responsive jurisdiction.
As Pleasant states, “Guernsey has never been slow in innovating and adapting to exploit opportunities.”
The jurisdiction encourages innovation, and keeps a close eye on changing regulatory conditions to offer market participants the best possible environment for their operations.
Digitally ready?
However despite this reputation, a recent study from Guernsey Finance warned that its expertise around digital assets and blockchain requires improvement. With digital assets and all they entail becoming an increasingly prevalent part of the market, being able to accommodate them — and offer firms something new — is a challenge that the island will have to face head-on.
Thus far, Guernsey has been considered just as forward-thinking in its approach to digital assets as it has been to other emerging asset classes and regulatory developments. In 2017, it rolled out the first commercial blockchain technology for the private equity market, and in 2022 it launched its first cryptocurrency fund. But the digital asset world moves quickly, and matching investor demand in such a competitive market is something that financial centres are having to face the world over.
Over its long history as a financial services hub, Guernsey has faced every challenge that’s been thrown its way — and it seems likely that it will keep doing so. Although it may be held back by the spatial and hiring restrictions its diminutive size causes, the island is on track to maintain its reputation and continue to grow, innovate and evolve.
