Lucy Carter takes a look at how the Channel Islands have fared after a globally challenging year, and what the jurisdictions are doing to prepare for the future of financial services
The Channel Islands’ relevance in the financial services industry is without dispute.
For decades it has been the jurisdiction of choice for firms seeking an accessible and flexible location to domicile their funds. While there are some intrinsic problems associated with the region — scale being one, talent availability another — the islands remain popular.
As we move into a new year, how are the islands placed to deal with new challenges, adapt to changing investor demands and maintain their eminent status?
Guernsey update
“At a macro level, the continued climb of inflation rates in 2023, after nearly 15 years of net zero inflation, has had an impact on Guernsey,” says Dave Sauvarin, head of Northern Trust’s Channel Islands business. He highlights the return of cash as an asset class, and subsequent difficulties in the fundraising environment, as a particular challenge. That being said, reports over the past year have seen the island weather the storm far better than other jurisdictions.
In a March 2023 update to its Global Financial Centres Index (GFCI), London-based think tank Z/Yen ranked Guernsey as 59th, one of only two jurisdictions to rise more than 10 places since the previous report. In the September 2023 update, it rose again to 58th.
Similarly indicative of the jurisdictions’s success, Monterey Insight’s December 2023 Guernsey Fund Report found that a total of 80 new groups and sub-funds were launched in Guernsey that year, with Sauvarin suggesting that “the island’s differentiated product set has meant it’s been relatively well-insulated.”
Further affirming the continued success of the island, the report notes an increased number of serviced schemes and sub-funds since 2022; 1280 to 1343 and 1520 to 1564, respectively. A minimal year-on-year drop in fund assets serviced was also highlighted, with Guernsey down just 0.05 per cent in USD between June 2022 and 2023.
Recent years have seen a considerable drop in global assets under management (AUM), with PwC reporting a 10 per cent fall between 2021 and 2022, down to US$115.1 trillion. With this in mind, Guernsey has fared especially well.
Jersey update
The headline news of Monterey Insights’ January 2023 Jersey Fund Report was a 58 per cent increase in new business inflow for the island; the island saw similar success in Z/Yen’s GFCI, moving up from 59th to 52nd place between March and September 2023.
Last year witnessed a number of changes in Jersey’s financial services sector. Financial services law was altered to cover two new forms of investment business (retail investors arranging for another person to deal in investments, and operating an investment exchange), and the definition of ‘investments’ was altered to better align with that outlined in MiFID II.
A revised outsourcing policy was also introduced, requiring businesses regulated or supervised by the Jersey Financial Services Commission (JFSC) to assess their service providers and comply with the updated rules before the start of 2024.
Considering the island’s global position, “Jersey has always taken a very joined-up approach to new international regulatory standards and innovation,” says Elliot Refson, head of funds at Jersey Finance, with the jurisdiction ensuring that it is best placed to be an innovator and early adopter.
This attitude was formalised in 2023 with the creation of an Innovation Committee, Refson continues, with representatives from the Jersey Funds Association, the Government of Jersey and the Jersey Financial Services Commission working together to remain at the cutting edge of the industry.
“One product of this was Jersey’s limited liability legislation,” Refson shares, “which came into effect in early 2023 and is aimed squarely at supporting US alternative managers”. As the island continues to seek growth opportunities, initiatives such as these can be instrumental in ensuring that the jurisdiction remains attractive to international market participants.
Keeping up
It seems clear that the Channel Islands are not losing their relevance — but that doesn’t mean that the path ahead is clear. The industry is constantly evolving, with regulatory, technological, political and social change all contributing to the domicile selection process. It’s vital that the jurisdictions remain responsive to industry interests and demands to remain competitive.
According to Refson, “the overriding trend lies in digital assets”. While some in the industry may be moving away from the boom, he notes that Jersey has seen “significant growth” in this area, and in the infrastructure that supports it, over recent years.
“The mainstay of Jersey’s funds industry lies in real assets,” he says, “so the trend in this space is towards the digitalisation of real assets”. Law firms are setting up specialised Digital Funds Groups, while administrators are establishing digital leads or innovation committees and managers are establishing digitalised funds to get ahead of demand. Refson states that this is a priority for the island’s Innovation Committee and that plans are in place to support this new era of finance.
A step across the Channel in Guernsey, Northern Trust’s Sauvarin observes greater innovation from global fund managers. “They’re increasingly offering a broader set of products to attract capital and deliver returns to their investors,” he says. “This is resulting in more complex and diverse funds, which Guernsey’s long-established funds industry has the experience and flexibility to support.”
Responding to emerging trends in the market is essential if jurisdictions want to differentiate themselves from competitors and remain enticing for market participants. Guernsey Finance CEO Rupert Pleasant considers Guernsey’s USP to be linked to the Guernsey Financial Services Commission’s accessibility and flexibility. For many companies, island has built up a reputation over the years as a safe, forward-thinking location in which to base themselves.
In Jersey, differentiation is achieved by maintaining focus on specialist support at the service provider and jurisdictional level, Jersey Finance’s Refson asserts. He adds that the island’s political and fiscal stability, “critical to Jersey’s competitive edge”, are supported by its robust infrastructure.
Like Guernsey, Jersey is an accessible jurisdiction that offers global distribution capabilities and a flexible regulatory environment. However, Refson goes on to commend a more unexpected perk of the island: its broadband speed, which he claims is the “fastest in the world”. This inevitably benefits those working in the jurisdictions, both on an individual and company-wide basis.
Thanks to their strong reputations in the industry, specialised workforces have emerged on both islands. While a high concentration of industry experts has its benefits for employers, Guernsey and Jersey housing markets have become excessively competitive and the risk of resource strain across both islands has increased.
Speaking to AST in 2023, Apex Group’s Chris Hickling drew attention to what may seem a converse issue of talent acquisition in Guernsey. As in other small, economically vibrant jurisdictions such as Luxembourg, the highly-skilled workforce is limited in size and is in high demand. In many cases, this leads to a competitive, potentially ‘illiquid’ hiring market.
Jersey is taking measures to rectify this issue. According to Refson, companies are focusing on recruiting recent graduates and school leavers for industry roles on the island, bringing new talent into the pool. “We’re also engaged in bringing professionals back who, for one reason or another, have left the industry,” he says.
Scaling up
Speaking off the record, some market participants have questioned whether Guernsey’s diminutive size is negatively affecting its image. With a population of just over 67,500, and a mere 23.94 square miles to its name, it has been suggested that the island may lose some of its business to Jersey.
However, it seems that for now, at least, this is just speculation. “Guernsey is well-equipped to support change in the industry,” assures Northern Trust’s Sauvarin. He draws attention to the jurisdiction’s “strong record” in near-shoring and outsourcing certain models to enable greater growth, stating that the island is “a great incubator of new ideas, with the ability to implement changes quickly.”
Jersey Finance’s Refson adds that although the Channel Islands may be more acutely aware of scalability issues, “it’s an issue for all international finance centres”. Jersey is approaching the issue from a number of angles, including prioritising new financial and regulatory technology.
Guernsey, too, is focused on developments in this area.
“From a service provider’s perspective, we believe that digital technologies can facilitate asset managers’ access to services, solutions and new technology across the investment lifecycle,” Sauverin says, asserting that “digital transformation is key to supporting scalability as we enter 2024”.
ESG
As ESG continues to be a key factor in many investors’ considerations, asset servicing providers are working to support their demands. In 2023, Guernsey renamed its Guernsey Green Finance initiative to Sustainable Finance Guernsey in an attempt to reflect the jurisdiction’s sustainability efforts beyond just environmental projects.
Commenting on the rebrand, Guernsey Finance’s Stephanie Glover, head of strategy and sustainable finance, emphasised the broader impact that the change implies. “We are now aligned with other local initiatives such as Sustainable Finance Week, TISE Sustainable and the Guernsey Financial Services Commission’s suite of sustainable funds,” she explained. Beyond that, the moniker allows for consistency with global initiatives such as the United Nations Sustainable Development Goals and the United Nations Financial Centres for Sustainability.”
Although a rebrand may not seem to be a particularly impactful change at first glance, use of the word ‘sustainable’ has been contentious worldwide over the past year as the industry tries to reach an agreement on its definition. Guernsey’s decision once again demonstrates its commitment to all three ESG focus points.
The island has been making waves in the ESG space for some time now, having launched the Guernsey Green Fund in 2018 and the Natural Capital Fund in 2022. We Are Guernsey, a joint government and industry initiative to promote the island’s financial services sector, runs an annual sustainability week to encourage discussion and learning in the space, and the keynote speaker at its 2023 Funds Forum in London was naturalist Steve Backshall. The jurisdiction appears to take every opportunity it can to drive sustainability, remaining on the frontlines of the ESG battleground.
Like Guernsey, Jersey is a member of the UN Financial Centres for Sustainability network. It has also committed to achieving net zero by 2050. Jersey Finance published its long-term sustainability vision and strategy in 2020, along with a two-year ‘Pathway to Success’ plan designed to accelerate the island’s sustainable finance journey and “build its reputation as a jurisdiction of choice for sustainable finance”.
To date, “the approach has been around building in flexibility across the regulatory framework rather than having a distinct ESG brand,” explains Refson, allowing the island to maintain its “robust structuring and governance” while granting investors and managers greater freedom “in a space that is evolving rapidly”.
Responding to investor interest, “Jersey has worked hard to put an ecosystem in place that meets their demands”. So far, this includes increasing the proportion of ESG specialists in the workforce and a focus on the development of fintech solutions that are “turbo-charging sustainable finance innovation”, he adds.
Moving on up
Looking at the year ahead, “we are starting to see signs of central bank monetary policy having an effect on inflation,” says Northern Trust’s Sauvaurin. This could indicate the end of peak interest rate cycles, potentially signalling an economic growth cycle over the next two years. If that’s the case, “asset managers need to position themselves to capture that growth as it comes through”.
Sauvaurin affirms that Guernsey “continues to be well-positioned to harness that demand”, thanks to its broad product set and speed-to-market infrastructure. The year is already off to a good start for the island, with January seeing a collaboration with Dubai International Finance Centre and Bailiwick receiving the ‘EU data adequacy status’. We Are Guernsey’s Finance Industry Update event, held 24 January, will relay progress made during 2023 and is set to offer a more detailed outlook on 2024.
For Jersey Finance’s Refson, one item on the 2024 agenda is more direct engagement with investors. “They’re the group that shapes the industry the most since they, above any other group, determine fund domiciliation,” he explains. “To date, we’ve accessed investors through our network and those of others, but in 2024 we’re taking a more ‘top down’ approach to engage with the largest investors, get our message across, and nurture mutually beneficial relationships.”
Jersey Finance will also be reinforcing its global presence through business development teams, operating in Africa, the Middle East, Asia and the US. International outreach is key as the jurisdiction looks to increase its investor base — for example, Jersey Finance’s New York office, opened five years ago this year, prompted US-originated assets under administration to increase more than twofold, Refson reports.
“Our product base will grow to reflect the underlying trends and demands of the market”, he says, concluding with a statement that applies to international fund centres worldwide: “It’s critical for our jurisdiction to evolve to support the managers and their industry — this remains our number one priority.”
