In the first of a new series, BL asks leading figures in the Channel Islands for their take on the industry in which they operate. And as this is the Wealth Edition, it"s only natural that our experts address the challenges and opportunities facing banks, wealth managers and trusts
Banking
Rob Girard, Island Director Guernsey, RBS International
Almost eight years on from the global banking crisis, the fallout from those difficult days in 2008 continues to be felt by banking institutions around the world. This backdrop presents a challenging environment for banks in the Channel Islands, with the impact of a "lower for longer" interest rate environment and, for some currencies, negative credit interest rates affecting operating models and profitability.
The islands have long been recipients of client wealth in many forms, but a core part of most banking institutions" business models has been the holding of deposits, and the ability to derive a margin from these by lending to other customers or institutions in addition to earning fees for service provision. Market dynamics will continue to have an impact on banking profitability for some time to come, until business models are changed and banks reduce their reliance on interest margin returns, improve efficiency and deliver a higher quality of service.
In addition to such core financial challenges, the legislation enacted following the Vickers Report on banking, and the requirement for UK-based retail banks to "ring fence" their operations, is also a key issue for some of the major banks in the islands. The result of this is that they won"t be able to be part of the UK ring-fenced banks and will need to adapt their models, which has some potential positive benefits for island economies.
As with all such scenarios, those institutions that transition most effectively to the new reality will be the ones that benefit most moving forward.
Allied to these changes, a key challenge for the industry as a whole is the rebuilding of customer trust. That in turn should drive a real customer focus from banks as they seek to understand what their customers want from them and deliver it in a simple, easy-to-understand and fair manner.
With a real underpinning focus on customers and very clearly defined and effective scrutiny from their regulators, banks (and, in turn, their customers) should be well placed to support our island communities. They could do this domestically, through mortgages and local business support, or internationally through support for the key funds, fiduciary, trust, insurance and private wealth management sectors.
The islands" banks have built a strong reputation for capability, innovation and integrity, which positions them well in the wider international markets. Banks, working alongside other practitioners in the financial services sectors in the islands, present further opportunity for the sector to grow, and again act as the glue that holds the islands" financial sectors together.
Aligned to this focus on existing markets, it"s clear that the initiatives in financial innovation - from fintech, through to crowd funding, peer-to-peer lending and increasingly innovative payment service solution providers - will all grow in significance across the islands and will need banks as supportive partners to thrive.
Wealth management
Andy Finch, Head of Wealth Management, Canaccord Genuity Wealth Management Guernsey
While there"s no shortage of new opportunities to develop business, there"s no escaping the fact that global trends and changes - such as a shift in client expectations, changes to tax regimes and technological advances - are among the challenges facing wealth managers.
While the fiduciary sector continues to be an important source of business, the traditional, and local, hunting grounds for new business don"t exist as they once did.
Historically, it was very easy to go to London for a meeting with professional introducers who were helping clients establish a structure in the Channel Islands. Changes to the laws and rules surrounding tax planning, imposed by successive governments and other authorities, plus ongoing initiatives in this area, have resulted in fewer structures being established in the islands that require the services of a wealth management professional. In the 21st century, we have to look further afield to attract new business.
At Canaccord Genuity Wealth Management we have a dedicated business development team that regularly visits the Middle East, Asia and South Africa. Given the importance of personal relationships, it"s vital to be there in person. That said, it can take time to build the relationships and level of trust that will result in new business - the further away we are geographically, the greater the challenge.
With increasingly demanding global consumers and changing expectations, we also recognise the importance of getting close to private investors on a personal level. Usually working with their intermediaries, we want to ensure we better understand and meet their needs - and so reassure them how their wealth will be looked after. Culturally, first generation wealth is different to second or third generation.
People who have earned the money themselves have different views and expectations compared with those who have inherited the money. There can be suspicion about handing over hard-earned money to someone else, whether it"s to be placed in a trust thousands of miles away or subject to the day-to-day decisions made by a discretionary portfolio manager.
This is where the smart use of technology represents an opportunity - by both maintaining direct and frequent communication with the experts managing clients" wealth and giving the younger generations of wealthy families access to information and reporting in a style and format that they expect.
Clients increasingly want the peace of mind and confidence that comes from dealing with a larger organisation with a global perspective. In the Channel Islands there are some very strong local businesses but, in a shrinking world, their ability to compete in the international arena will be challenged on a daily basis.
More locally, while financial services across Guernsey and Jersey are considered to be some of the most trustworthy and stable businesses, there is always a risk of a locally regulated institution failing, perhaps due to the impact of regulatory changes or perceived "moral tax issues".
If this were to happen, it would undoubtedly send shock waves across the industry - and, given our reliance on the financial services industry, it would also present a very real threat to business confidence in the islands more generally.
Trusts
Naomi Rive, Chief Trust Officer, Coutts & Co Trustees (Jersey)
The next 12 months look set to be busy ones for the private client industry in Jersey and Guernsey and they won"t be without their challenges. The global move towards tax transparency will take a substantial leap forward, with further reporting under the Foreign Account Tax Compliance Act (FATCA) and UK FATCA happening at the same time as the implementation of the Common Reporting Standard (CRS) continues.
While Channel Islands-based trust and company service providers (TCSPs) appear to be in good shape for the move, the preparatory costs - gathering client data, upskilling staff and ensuring appropriate technology platforms are in place - will not have been insubstantial.
First reporting under CRS will follow quickly in 2017 and, although FATCA has paved the way in terms of the groundwork required, the number of clients affected by CRS means that it will undoubtedly be game-changing for the industry.
Many clients accept the need for tax transparency, but concerns over privacy are plentiful. If the industry is to maintain its client base and attract new clients moving forwards, then it will need to provide reassurance that appropriate measures are in place to safeguard an individual"s or family"s legitimate rights to confidentiality.
Such measures do exist within the CRS, and the tax authorities in the Channel Islands won"t exchange information with foreign tax authorities unless and until they have been approved by the OECD as having appropriate data protection and confidentiality provisions in place. Whether clients take confidence in such safeguards remains to be seen.
At the same time as grappling with tax transparency, the full force of the Fourth Money Laundering Directive is yet to be felt and the Channel Islands will no doubt be giving further consideration to demonstrating their full commitment to international standards.
The current consultation taking place in Jersey on Beneficial Owners and Registers of Directors could bring about automatic updating of the companies registry by TCSPs upon change of beneficial ownership and control over the 25 per cent threshold, as well as the introduction of a central register of directors.
For some clients and prospective clients, this may be viewed as a further erosion of the privacy afforded to them historically by offshore centres and will, no doubt, raise questions about the value of trust and company structuring. This is especially true in instances where the fiscal benefits of structuring have already all but disappeared, as is the case for many UK property holding structures.
The Channel Islands have, however, positioned themselves at the top end of the private client market. Their proposition has been built on quality and substance. Long-term sustainable wealth structuring and family succession planning are the key drivers for much of the new private client business coming into the islands.
The clients we attract, while fiercely guarding their privacy, are realistic about the world we live in. They choose their partners carefully so as to limit the risk of sensitive information falling into the wrong hands, but once a relationship has been established it can be extremely fruitful both for the jurisdiction and an individual TCSP.
In addition, both Jersey and Guernsey work hard to ensure that their trusts laws remain attractive to international high-net-worth families. A consultation paper looking at further proposed amendments to Jersey"s trusts law (due to be published as BL went to press), will consider a number of potential amendments designed to ensure that the right balance is achieved between confidentiality and accountability in the context of trusts.
Beneficiaries" rights to information and enforced arbitration provisions are just two of the proposals open to consultation and, along with various other topics covered in the paper, will provide industry with an opportunity to debate whether Jersey is doing enough to attract the business of foreign resident settlors to the island.
Challenging times lie ahead but, as ever, the Channel Islands have worked hard to ensure that they are well placed to meet these challenges. Their private client industries have worked hard to differentiate themselves from those of many other offshore centres.
This means that they should continue to attract high-value clients whose families and business operations often cannot function effectively without robust offshore structuring.