The offshore island of Guernsey is riding high on a wall of business emanating from the global upsurge in wealth management.
The offshore island of Guernsey is riding high on a wall of business emanating from the global upsurge in wealth management. In this, the Crown dependency is not alone. Other jurisdictions too are able to boast enviable increases in private banking, fund management and administration and fiduciary services. What makes Guernsey interesting is not just its obvious success in turning an economy based on tourism and horticulture into one of the world’s foremost niche financial centres, but that its challenges to maintain the momentum are well recognised and discussed both amongst the island’s financial community and in the wider population. Guernsey is a small island, just five miles by eight miles, small compared with its neighbour, and friendly rival Jersey and dwarfed by the Isle of Man, another jurisdiction that is frequently a point of comparison. Its 62,000 inhabitants are very well aware of the space constraints, and a trip around the island confirms that the balance between residential housing density and maintaining Guernsey’s unique charm is already under threat. And this is the root of the main problem that Guernsey faces. The island, like Jersey, faces a so-called budgetary “black hole” in coming years after the zero-ten corporate tax regime comes into effect in 2008 when most corporate taxes will be charged at nil rate. To maintain services and avoid dipping into reserves, as the government has pledged to produce a balanced budget, the financial services sector must grow at an ever faster rate. On the face of it, Guernsey is very well placed to meet this challenge. It has an enviable regulatory reputation with very short lines of communication which makes gaining approval for new funds comparatively easy. The legal framework, soon to be upgraded with trust legislation, is benign without being lax and the workforce is highly educated and motivated. Quality of life issues on the island extend beyond just a shorter commute to work than is often the case in large cities. It’s made a conscious effort to move up the financial services food chain, placing more emphasis on good compliance, and, on the whole, going for higher quality rather than more quantity business. E-fulfilment and e-gambling have also taken a prominent place in the island’s commercial landscape. The European Union’s Savings Tax Directive has not had a noticeable effect on business. In fact it’s been a red herring, according to Rothschild director Stephen Dewsnip. “Our business in Guernsey is not based upon tax avoidance. We compete on the basis of the Rothschild name and our people.” But what concerns many in the financial sector on the island is how can its current growth rate be sustained when there are rigid controls on people coming to work in Guernsey? And most importantly, how can high service levels be maintained in a short-staffed environment? Quality of life issues, including a great climate and a favourable personal tax regime have led ex-pats to see Guernsey as a good place to live. This in turn has produced a dual market in house prices with the open market now edging past London prices, but the local market being more reasonable. To be allowed access to the local housing market, a new-comer must have a housing licence and these come in either five or fifteen year varieties. The idea behind the five year licence is that it doesn’t allow the holder to put down substantial roots. Fifteen year licences are like gold dust and are awarded in what is sometimes viewed as an inconsistent and arbitrary manner. Pressure from the financial services industry to amend or extend the current system has so far fallen on deaf ears in the island’s parliament, the States of Deliberation. A proposal to allow 200 new entrants per year was recently thrown out, much to the dismay of many within the industry. Locals worry that a right to inhabit may, in future, be upheld by the European Court of Justice. Peter Niven, chief executive of GuernseyFinance, and director of finance sector development on the island was reported by The Guernsey Press as saying that the licence system was “a drain on business” and proposed a more pragmatic approach to matching economic needs of the finance industry. But Mr Niven later told WealthBriefing that he was confident that this problem would be resolved in time. So competition is hotting up for qualified staff already in Guernsey. Jobs are being created to fit the individual, and people are being recruited into the financial sector from other industries. More attention is being paid to encouraging young people who receive tertiary education on the UK mainland to come back to work in Guernsey. Education is taken very seriously by the Guernsey financial services industry. “We encourage all our technical staff to take the STEP qualification. We think this is the most useful and relevant qualification and most people are STEP qualified here,” said Ciara Gurney, director, Investec Trust, Guernsey. And, as Bank of Butterfield’s Bob Moore points out, staff shortages push people to improve their productivity and to receive professional training. “But we’ve also increased staff numbers by around 25 people so far this year, not only from the local finance market, but from other sectors as well. Staff shortages are an issue everywhere,” he said. Although tensions between the island’s rulers, its indigenous population and the newly-created financial services sector are discernable, the consensus is that the island has faced many economic and other challenges before and will deal with this in its own way without being pushed into a corner by outsiders. The over-riding feeling on the island is that the future will sort itself out. Praxis Fiduciaries director Jeff Wilkes-Green told WealthBreifing that he thinks a solution can be worked out jointly amongst Guernsey and the other Crown Dependencies. But don’t expect to see skyscrapers or filled-in harbours in Guernsey any time soon.