The evolution of private wealth structuring – what Guernsey has to offer
04 May 2016
Andrew Walters and Michael Betley of Trust Corporation International on the evolution of Guernsey's private wealth industry and its structures.
Despite wider macroeconomic difficulties, Guernsey continues to attract new and ever-more complex private wealth and institutional clients. The obvious attractions are well known; the island has a stable system of government, an elected parliament, an enviable constitutional position, a neutral tax regime and a mature and sophisticated legal system. However, it is the flexibility and continuing refinement of the island’s laws and regulation, alongside its range of first-class professional service firms, that sets it apart from its peers in the eyes of professional investors and their advisers.
Investment in the island’s wealth management infrastructure is the bedrock of its continuing success. This investment includes an obvious rolling programme of legislative updates, but also rests on the less visible interconnecting relationships between government, the regulator and the financial services industry.
One theme (which is not unique to Guernsey) is that the number of private wealth clients being serviced is declining while the value of assets being managed is increasing substantially. Guernsey’s appeal to the market is well suited to the more sophisticated multi-jurisdictional sector of the private wealth market. This naturally leads to the establishment of specialist hubs such as family offices and bespoke investment clubs.
Wealth has never been more global or mobile, which is also true of ultra–wealthy individuals. Private banks used to provide these families with full wealth management services, but the families have changed their attitudes because of costs, performance and conflicts. Similarly, the risk appetites of private banks have changed and they are, in many cases, no longer ‘one-stop shops’ and are becoming more geographically selective. As a consequence of these dynamic changes, many families with substantial assets are developing home-grown ways of doing things. Guernsey is perfectly suited to meet the needs of this segment of the private wealth market as a result of its ability to evolve and be flexible.
There is no universal definition of the phrase ‘family office,’ but in essence it is a dedicated team of employees whose sole employer or ‘client’ is a single family. Family offices therefore come in all shapes and sizes and will manage all or part of the personal needs of the family in question, ranging from treasury and accounting functions to the management of homes, aeroplanes, yachts, collections and wider investment assets and portfolios. This dedicated team will often outsource functions that are either beyond their skillset or have to be located or performed in a particular jurisdiction. Subject to the needs of the family, the private office function will be based either in a location convenient to the principal or in a ‘tax-benign’ environment, especially if the activities being undertaken might be deemed taxable.
Increasingly, high-net-worth families’ globalised interests create a need for an accessible central hub to help co-ordinate, structure and manage their assets. Guernsey’s 40-minute flight time to London, coupled with its convenient time zone and English-speaking community, makes it a perfect location to have a family office. More often than not, however, the family office will be located elsewhere with specific functions relating to the ownership or management of assets being undertaken in jurisdictions like Guernsey and, very often, one of Guernsey’s 155 regulated trust companies will be chosen to undertake these functions.
Guernsey also offers a flexible regime within which to establish and operate private trust companies (PTCs). A Guernsey PTC can be established for the exclusive use of a single family and can act as trustee to existing and newly-formed trusts, including those established under the laws of other jurisdictions. Assuming it is not remunerated for the provision of trustee services, a PTC is unlikely to be viewed by the Guernsey regulator as conducting a regulated fiduciary activity and should not require licensing. A family might like the idea of creating its own corporate trustee (a PTC) because it can influence the management of the PTC and the administration of the underlying asset base. Typically, institutional trustees will not act as trustees of assets other than tradable securities. In other words, a family will have to make alternative arrangements if the asset base includes operating businesses or other esoteric or highly risky assets.
A PTC board can determine its investment policy and the assets it is prepared to own and manage; this is why such arrangements continue to be so attractive. In places (including many civil law countries) where practitioners do not easily understand the concept of a trust, the use of a PTC which may be populated, in whole or in part, by family representatives allays any fear the family may have of losing control to a foreign, often faceless, institution.PTCs have become popular with wealth creators, who are trying to establish increasingly portable structures for their assets. To the extent that a client is dissatisfied with its service providers, the management of a PTC can be moved elsewhere without the need for the retirement of existing trustees and the appointment of new ones in respect of each trust it manages. Ownership of such vehicles can, where necessary, be detached from the family through a purpose trust or foundation while retaining some degree of family involvement through representative directors.
In 2008, the concept of the purpose trust was introduced into Guernsey law. It proved popular among family and institutional investors alike, adding to the many benefits the island offered. This permits the creation of a trust to fulfil a specific purpose other than simply benefiting the beneficiaries. In fact, a purpose trust does not require any beneficiaries. Examples of possible purposes include the furtherance of a particular cause or the holding of shares in a particular vehicle. It is unsurprising, therefore, that purpose trusts have been used for the specific purpose of owning shares in PTCs, thereby effecting a separation of ownership between this-or-that PTC and the family it is formed to benefit. The introduction in 2013 of the Foundations (Guernsey) Law added more to the ownership and structural options of a PTC.
In the light of Guernsey’s pioneering introduction of cellular structures, the protected cell company (PCC) has been used in the most innovative ways in both commercial and family wealth planning contexts. The PCC allows for the creation of any number of cells inside a single corporate entity, each cell being statutorily ring-fenced from the core and other cells. Guernsey PCCs have, among other things, been used for the purpose of allocating assets, by means of separate cells, among different family strands and have thereby avoided liabilities attributable to one contaminating the assets of another. Guernsey’s incorporated cell company structure provides a further layer of flexibility in that individual cells can be detached from the cellular structure to become independent entities. This provides a convenient means of disposing of family assets without the need to ‘de-envelop’ the asset itself from its existing corporate home.
Since the introduction of the Companies (Guernsey) Law in 2008, the States of Guernsey have continued to consult people in the financial industry to identify ways of refining and enhancing this regime. After a lengthy and detailed industry consultation, the States of Guernsey adopted the Companies (Guernsey) Law, 2008 (Amendment) Ordinance in July 2015. This came into effect on 3 September 2015 and has made the administration of companies significantly more flexible. It has improved a variety of older provisions in relation to the disclosure of directors’ interests, the issue of shares in multi-share-class companies, shareholder correspondence notice requirements, director report requirements and the redemption of partially paid shares, among other things. Furthermore, Guernsey companies can now take names in non-Roman scripts, something that is expected to appeal to clients in the Middle East and Asia.
Similarly, government and industry representatives are working on reforms to the island’s limited partnership law with a view to maintaining its international position as a leading provider of private equity solutions. Precise details of the proposals have yet to be released but an early policy letter indicated that the consultative process would include a consideration of protected cell partnerships, amalgamations, a migration mechanism and more.
Guernsey’s corporate and commercial insolvency regime has benefited from various improvements over recent years, including the introduction of an administration regime and the ‘solvency test protections’ of 2008. In 2014 the States of Guernsey launched a detailed and wide-ranging consultative exercise about further improvements to the island’s commercial insolvency regime and the allocation of ‘business failure risk’. The consultative paper sought opinions from the financial industry on a range of options, including the introduction of a combined personal and corporate insolvency regime, an ‘official receiver,’ variations to the existing preferences regime and the introduction of fixed and floating charges.
The consultative paper floated the idea that reforms should build upon Guernsey’s ‘creditor-friendly’ underpinnings in order to make Guernsey vehicles more appealing to lenders and other market counterparties. The first stage of this consultative process is now complete and the States of Guernsey are analysing the responses.
Guernsey’s reputation for managing private equity structures has spawned the growth of unregulated private funds or ‘investor clubs’ established by wealthy entrepreneurs and corporate investors unconstrained by the need to raise money publicly. Growth in this area has also led to new ‘business-to-business’ opportunities, particularly in lending and venture capital funding. It is by virtue of these never-ending efforts to innovate and improve that Guernsey retains its appeal in the institutional and family office sectors. By consulting interested parties about which innovations and improvements it should back, the States of Guernsey has made both its business structures and regulatory arrangements robust, user-friendly and ‘fit for purpose.’
An original version of this article was published in the WealthBriefing’s IFC World 2016 Guide, April 2016.Back to News
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