As the Channel Islands continue to attract business from around the world, BL asks leading figures in Jersey and Guernsey for their expert view on the challenges and opportunities in a number of global regions. All opinions were written prior to the UK’s referendum on Europe on 23 June.
AFRICA
Lindsay Bateman, Business Development Director, Brooks Macdonald
Economic uncertainty and regulatory requirements for foreign service providers pose challenges for Channel Islands-based firms marketing the benefits of offshore investment in Africa. However, there are significant opportunities for firms that are committed to structuring their businesses to support local requirements.
President Zuma’s decision to remove two South African finance ministers in just four days last year was a stark reminder of the political instability and economic uncertainty that remains in parts of Africa – even South Africa, which has historically been regarded relatively highly on the international stage.
As one of the most sophisticated financial services markets in the region, South Africa is an interesting case in point. The country is at an inflection point, balanced between implementing business friendly policies – to support renewed economic growth – and a slippery slide to junk status, just as we saw with Brazil last year.
This economic ambiguity, coupled with the fact that South Africa contributes less than one per cent to global GDP, provides a strong argument for residents to diversify offshore. Yet the weakening of the domestic currency has made offshore investment relatively expensive, and complex tax and exchange controls mean investors looking to externalise assets must be selective over the firms they work with.
Economic and political difficulties pervade other parts of Africa. Nigeria remains a significant African economy, but is struggling through its lack of real diversification away from oil production, with allegations of corruption at their highest levels.
Elsewhere, Zimbabwe, previously the breadbasket of southern Africa, is battling a prolonged economic crisis that’s led to job losses, closures and declining consumer spending. The number of residents seeking to protect their remaining wealth through international diversification is declining, as the country continues to suffer increasing economic degradation. Lack of local regulation contributes to the difficulties experienced by providers in these regions.
While South Africa has a more robust regulatory framework, challenges remain. ‘Foreign service providers’ require regulatory approval from the Financial Services Board, which is accompanied by increased compliance liability and costs. Substantial opportunities in parts of the continent mean competition is increasing. Growing numbers of international entrants are making it harder for investment management firms with offshore capabilities to capture market share.
Channel Islands-based providers with the suitable regulatory licence (there are currently relatively few) stand in good stead to benefit from opportunities coming out of Africa. South Africa’s strong regulatory framework is largely based on UK regulation, allowing companies with experience of such regulation to support local firms, providing guidance on best practice.
The weakening of the rand, and political and economic uncertainty over South Africa remain a strong argument for offshore diversification. Alongside relaxation of exchange controls and the Special Voluntary Disclosure Programme, announced as part of the 2016 budget, this environment has facilitated greater levels of offshore investment. In December 2015, the South African Reserve Bank reported that South African investment abroad had reached its biggest quarterly outflow on record – 24.2bn rand, compared with 10bn rand in the previous quarter.
Turning to the wider continent, estimates are that the African investment market will grow by seven per cent per annum over the next 10 years. Ghana and Kenya are often seen as the most promising emerging African markets, with increasing diversification across their economies and a growing middle and high-net-worth demographic.
Botswana and Namibia are often overlooked, although both also present opportunities. The former enjoys stability, steady economic growth and a sophisticated financial services capability. The latter, too, has smaller pockets of wealth, where offshore diversification opportunities are well received.
Regulated, independent international firms are well received by African clients seeking true international exposure. Jersey and Guernsey have both built strong reputations in Africa as reputable finance centres built on innovation and a supportive but robust regulatory framework. This places Channel Islands-based investment management firms in a strong position to provide African residents with a stable and secure investment environment against an often uncertain backdrop.
FAR EAST
Paul Hodgson, Managing Director, Butterfield Trust (Guernsey)
The Asian region continues to present opportunities for fiduciaries based in the Channel Islands. The recent opening of the Guernsey office in Hong Kong is a logical development of its initial investment in a Shanghai office nine years ago. Jersey has had an office in Hong Kong since 2009 and now has a ‘launchpad’ presence in Shanghai through the China Britain Business Council.
These offices have seen recognition of the jurisdictions significantly improve. In the past, a Hong Kong lawyer told a local service provider they didn’t deal with Guernsey or Jersey as they would "only work with first-class offshore financial centres, such as the Channel Islands"!
Despite lower economic growth in the region from the very high levels of recent decades, factors continue to underpin opportunities for Channel Islands-based fiduciary service providers. The sophisticated structures in which the islands specialise are well suited to holding the range of assets accumulated by wealth-generating Asian families, including business assets, and allow principals to develop strategies for dealing with issues around succession planning and wealth protection.
In particular, both islands are used to structure holdings in Asian-based businesses that are being listed, usually on the Hong Kong Stock Exchange. The current strength of the IPO market in Hong Kong is therefore expected to benefit local service providers.
It’s important to distinguish between the principal financial centres and understand which countries tend to favour them. Hong Kong is preferred by families from China, Taiwan and the Philippines; Singapore by families from Indonesia, Malaysia and Vietnam. Each of these countries has differing needs and attitudes towards structuring, so the region doesn’t represent a one-size-fits-all opportunity. This is why the Channel Islands’ mature wealth planning and structuring services are so well suited to this market.
Until recently, succession planning has been based on simple structures, as fee sensitivity has been high. However, as families have become more global in their residency patterns, they’ve been driven towards sophisticated structures. In doing so, we’re able to demonstrate our expertise in designing and implementing complex structures. This could include the use of private fund structures such as Guernsey and Jersey limited partnerships.
An early challenge in such discussions is that the concept of giving away one’s assets to a third party is unnatural to business owners who want to keep control of their wealth. This often leads to consideration of innovative and complex structuring. One solution to this dilemma could be the transferring of assets into a vehicle that doesn’t conflict with the desire for control, such as a reserved powers trust.
Having identified the opportunities that Asia presents to local fiduciaries, it’s also important to consider some of the principal barriers that have historically meant, for some, that the region remains in the ‘too hard’ basket. This has included difficulty in obtaining and verifying due diligence and source of wealth to the standard required by local regulations. But this is changing as local standards in this area increase.
In addition, both Hong Kong and Singapore are themselves seen as alternative jurisdictions for structuring for non-residents. Particularly in Singapore, the level of competition has meant that fees have been driven to uneconomically low levels for Channel Island-based practitioners.
Finally, for some potential users, Asian language capability is seen as a necessity and a presence in the region a benefit. For most local fiduciaries, these have been the reasons for losing opportunities that were otherwise attractive. Despite these challenges, families in the region are moving towards proven, expert and well-regulated jurisdictions such as Guernsey and Jersey, and the more sophisticated and robust structures in which we excel.
The views expressed are those of the author and do not necessarily reflect the opinions or views of Butterfield Trust (Guernsey) or its affiliated companies.
MIDDLE EAST
Graeme Fairlie, Head of Business Development, and Justine Wilkinson, Director, Fairway Trust
The Middle East offers huge opportunities to those financial service providers who are prepared to offer a long-term commitment to the region. This has been apparent from recent marketing visits from the Channel Islands to the region, which have included Bahrain, Dubai, Lebanon, Oman, Qatar and Saudi Arabia.
Local political instability and a growing trend to diversify away from the reliance on oil prices – coupled with the volatility in the region, which is likely to continue – have all resulted in an increased demand in offshore structuring services.
As the oil price falls, infrastructure subsidies in some GCC countries are under review and there have been discussions on introducing taxes in the UAE from early 2018 – the impact of which should be considered by clients from the region.
Whilst these all result in challenges for clients in terms of their local wealth, it also provides a number of opportunities as, in turn, those clients seek new investments and bespoke offshore structuring to house their assets. Clients are therefore investigating how and where they wish to structure their assets and family wealth going forward.
Wealthy Middle Eastern families are known to select their working partners very carefully. Experience and trust in the relationship is as crucial a factor as the preservation and safeguarding of their family wealth.
This type of confidence doesn’t happen overnight, so wealthy individuals build up their trust and relationship with those working partners over time. Clients want advisers who are not only professionally qualified and experienced but who also have a regular presence in the region. This is a pre-requisite to long-term relationship building.
For professional advisers with either a local presence or a commitment to the region with a regular visiting schedule, there is a great opportunity to develop and enhance the reputation of the Channel Islands as a world-class jurisdiction.
In the private client world, we’ve seen an increasing demand for bespoke private wealth structuring to preserve and protect family assets. Similarly, in the corporate client world, there has been an increase in the number of UAE-based managers wanting to establish regulated funds in order to hold real estate investment in the GCC countries. In each case, this has been driven by clients and investors in the region wanting the governance and additional scrutiny that comes with the highly regulated environment in Jersey or Guernsey.
The proximity of the Channel Islands to the UK is an added advantage in terms of accessibility to London and its professional advisers, and that’s coupled with the lack of language, time zone and currency barriers.
Whilst the islands themselves remain outside the European Union, the effects of the outcome of the UK referendum on the EU will be felt. There’s no doubt, however, that Jersey and Guernsey will react quickly and efficiently to maintain their status as respected international finance centres.
UNITED STATES
Emma Russell, Partner, Carey Olsen
While, at the time of writing, the UK faces uncertainty ahead of the EU referendum, the US has its own reasons to be unsettled, with the race to the White House well underway and Donald Trump as the presumptive Republican presidential nominee.
Financial markets have always been affected by the US presidential campaign, but this one seems to have brought a higher level of uncertainty to global economies and there is a general consensus that the US market is holding its breath.
The restrictions imposed by increasingly complex financial reporting are also having an ongoing impact, including those imposed on fund managers based outside the European Economic Area through the Alternative Investment Fund Managers’ Directive (AIFMD).
Increased competition from other investment fund jurisdictions, such as Luxembourg, also has a bearing, as does the Volcker Rule, which restricts US banks from making speculative investments that don’t benefit their customers, as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act.
All this, however, hasn’t prevented the Channel Islands from remaining the leading jurisdiction for establishing fund marketing on a global basis. Of the big four buyout funds (all Guernsey domiciled) coming to market this year, plus the recent $7bn raised by Coller Capital (also Guernsey domiciled), where there are numerous US investors, it continues to be a very positive climate for the islands and their relationship with the US.
With the introduction of the European Securities and Markets Authority (ESMA), which aims to improve the functions of European financial markets and strengthen investor protection and co-operation between competent national authorities, the relationship between the US and the Channel Islands should continue to strengthen.
ESMA delivered an opinion to the EU Parliament, Council and Commission last year issuing advice on the potential extension of the passporting regime to the management and/or marketing of funds by non-EU AIFMs and to the marketing of non-EU funds by EU AIFMs.
The long-awaited announcement assessed that managers and funds based in Guernsey and Jersey may, once in receipt of their passport, be marketed to professional EU investors, subject to meeting a number of regulatory obligations. This is a positive step for US funds looking to market in the EU through the Channel Islands without the pitfalls that accompany greater regulation.
Guernsey and Jersey are particularly well positioned to nurture these relationships and to continue to educate the US market on their pedigree as leading offshore centres, with compliance and regulatory standards that are best in class.