This news service talks to the agency promoting the island as an IFC, asking how it is trying to stay ahead, cope with investment fashions, Brexit, demands for digital assets, ESG funds, and more.

International financial centres have a constant battle to keep and build a competitive edge. With developments such as Brexit (remember that?) and a changing approach to beneficial ownership disclosure and tax, IFCs have to adapt.

An example is that of Guernsey, the UK Crown Dependency. As the world is buffeted by geopolitical clashes and worries about the stability of some financial centres, the island is in a position to push its case. 

The three themes of ESG (environmental, social and governance-themed) investment, cryptocurrencies and financial technology are ones that the island is keen to stress, although they are just parts of the overall pie. That was the takeaway from an interview with Rupert Pleasant, chief executive of Guernsey Finance, the agency promoting the island and representing its financial sector. 

“In ESG we are market leaders in terms of our regulatory regime, the actions taken by government, and the investment sector. We launched the Green Fund structure, the world’s first Green Fund regime,” Pleasant said. There are 13 such funds as of the time of writing, with about £4 billion ($5.3 billion) of AuM in total.

What is the reason for this success, given that everyone today says they are on the ESG train? 

Pleasant argued that the differentiator for the Green Fund model is that it is regulated – “this vastly reduces the risk of greenwashing.” He added that the Guernsey Financial Services Commission recently put Green Funds through a “thematic review.” “We know they [green funds] do exactly what they say on the tin,” Pleasant continued.

Greenwashing” (see here) is a significant challenge for the wealth sector, so jurisdictions which are able to manage the problem are going to gain a competitive advantage.

“The Guernsey Green Fund regime has a very narrow set of internationally recognised criteria, so investors know absolutely that a GGF is positively contributing to the cause of mitigating climate change, and results in a verified net positive outcome for the environment,” Pleasant said.

Guernsey Finance has been developing thought leadership/guidance for fiduciaries and others on how to implement sustainability ideas and has done the same for the pensions sector, he continued. 

Guernsey’s status as an IFC has to be placed against the background of a tough economic environment. 

The bounce-back in global markets in March 2020, and the rise through 2021 – before hitting a wall at the start of this year – has helped assets of Guernsey’s funds keep on track. The total net asset value of funds rose in sterling terms during the fourth quarter of 2021 from the prior quarter by 4.7 per cent to £303.6 billion ($400 billion). Over the past year, total net asset values have risen by 23.7 per cent. (Within that figure open-ended funds domiciled in Guernsey assets rose 11.3 per cent to £54.5 billion; closed-ended funds rose 26.8 per cent to £249.1 billion.)

The island is home to a raft of international banks, such as Bank J Safra Sarasin; Julius Baer; Barclays; Banque Cantonale Vaudoise; BNP Paribas; Butterfield; EFG Private Bank; Credit Suisse; FirstRand; HSBC; Investec; Northern Trust; RBC and Rothschild & Co, among others. 
 

Digital and catastrophe
As this publication has already noted, digital assets – such as non-fungible tokens, cryptocurrencies and the like – are affecting the wealth sector. Guernsey is no exception in wanting to be on board with this trend, provided it is done in the correct way, Pleasant said.

The island launched its first cryptocurrency fund, and the world’s first Tier 1 bitcoin exchange-traded fund (ETF), in October last year. The ETF was designed by Guernsey-based regulatory consultancy Midshore Consulting. (It is open to institutional investors.) Another move last year came with a twist on the idea of insuring against disaster. The first humanitarian catastrophe bond covering pure volcanic eruption was completed using a Guernsey insurance-linked securities structure.

In that case, a $3 million privately-placed issuance, sponsored by the Danish Red Cross, was brought to market by Replexus and Howden Capital Markets through a Guernsey-domiciled reinsurance structure, Dunant Re IC Limited. It is managed in Guernsey by Aon Insurance Managers.

And here’s the digital twist: the “catastrophe bonds,” or CAT bonds, were settled using Replexus’ blockchain-based ILS platform, the ILSBlockchain. The bond covers the risk of eruption of 10 volcanoes across three continents. Capital supports humanitarian aid in the aftermath of an eruption. Initial investors in the volcano cat bond included ILS specialist managers Plenum Investments, Schroder Investment Management and Solidum Partners.

We need to talk about Brexit
The UK’s departure from the European Union means in some ways that Britain now has the same kind of “third country” status relationship with Brussels that Guernsey and neighbouring Jersey have always had. Will a more independent UK, driving to cut global deals and shed red tape, be more of a rival for Guernsey? 

Pleasant thinks that Guernsey still has a complementary relationship with London. 

“We have got a good relationship with the CityUK (pan-industry organisation) and we are happy to work with the UK and not against it. There is a lot that can be evolved over time. For the next two to three years, the message is clear to use us if you want our private placement regime…it is tried and tested. We are also looking at other markets,” he said.

“We have always had a good relationship with the UK and the City of London as a complimentary partner, and see this continuing in future,” he said. 

About £49 billion of inflows to the UK from the US come via Guernsey and a similar amount goes back as well. 

This is likely to be a common refrain in future. Guernsey Finance likes to point to a study from Frontier Economics (September 2020), stating that in mid-2019, Guernsey funds helped UK investors deploy £51.3 billion into overseas investment opportunities, including £23.8 billion into Europe, £12.2 billion into the US and £10.6 billion into the rest of the world.

Out of some £43 billion flowing into the US via Guernsey funds, around two-thirds of this originates from elsewhere in the world. The report also noted that private equity is the “dominant asset class” for Guernsey funds, in particular for investors based in the US. More than half (56 per cent) of the value of Guernsey funds in mid-2019 was in PE funds, with US investors putting almost 95 per cent of their investment into the space. The share of private equity in total funds has, however, fallen since 2013, the report added.