The power of Guernsey’s global distribution: supporting international investors and the City

05 February 2018

Written by Dr Andy Sloan

Dr Andy Sloan, Acting Director of Strategy at Guernsey Finance, says that Guernsey’s strength in fund products and distribution has a significant role to play in supporting the UK funds sector to pivot towards a “rest of the world” trade strategy.

"The opportunities for future trade liberalisation and regulatory co-operation are key." Not my words but those of the UK’s Investment Association. It is a narrative that we in Guernsey fully endorse and it's driving many current developments in fund servicing and distribution. Indeed, following our efforts last year, we’re now looking to provide further support to mutual recognition initiatives, and help drive forward regulatory harmonisation and cost reduction for the global fund industry.

A traditional marketing point for Guernsey has been the superiority of our specialist service offer. Lesser-recognised perhaps is the strong distribution capability for funds through existing agreements and equivalences across non-EU jurisdictions, a strength built up through decades of commitment to international co-operation.

In the meantime, what is also key in the current Brexit-fuelled trading environment is supporting investment managers with a UK nexus to pivot their business models to a more "rest of the world" focus. A current focus of the Guernsey Investment Fund Association’s technical committee is Guernsey’s excellence in service and global distribution, and how this could be put to better use supporting British funds and managers with the UK strategy to pivot its trading to the rest of world. We’re seeing our position as a complementary centre to the UK asset management industry gaining greatly in appreciation among senior industry figures as a result.

"A current focus of the Guernsey Investment Fund Association’s technical committee is Guernsey’s excellence in service and global distribution, and how this could be put to better use supporting British funds and managers with the UK strategy to pivot its trading to the rest of world. We’re seeing our position as a complementary centre to the UK asset management industry gaining greatly in appreciation among senior industry figures as a result."

I was reminded of this point when the FT quoted industry figures suggesting about £1 trillion in assets could be repatriated by the UK investment management industry if HMRC would waive the tax charge on restructuring. A more practical route would be to reinstate recognition of open-ended Channel Island schemes under section 272 of FSMA, which was removed when the UK transposed AIFMD. Practical because the Channel Islands are complements, not competitors, to the City in this space.

What I thought most interesting about the Luxembourg story was the fact that £1 billion of Luxembourg funds were effectively single domicile funds for British investors. I have always thought it a bit of a myth that the Luxembourg funds industry was the preserve of pure multi-domicile funds, and had suspected that a large proportion of Lux assets would be plain vanilla single-domicile funds. The billion figure from the Brits lends itself to a situation where if a similar circumstance applied to German and French funds it could be easily the case that single-domicile funds could account for as much as half of total assets. 

It has become a default option to park assets in Luxembourg on the assumption that it’s a cost-effective distributional hub and the marketing of this point has been highly successful. Yet the actuality is probably a little more complicated than that. I was present at the ALFI funds forum in 2016 when Deloitte and Fundsquare presented research which suggested that a single hub distribution model was not of itself more cost-effective than a multi-market model. 

It’s analogous to the marketing facts that passporting is a cheaper, more effective option under AIFMD.  Anecdotal evidence, and some major industry associations, such as the BVCA, suggest it's not. In many cases it's multiple private placement. The European Commission knows there are cost issues with cross-border distribution in Europe, which is why it’s incorporated a review of costs of cross-border distribution into its Capital Markets Union programme.

The major irony being that in any event, there is little demand for major multi-market capability, even in the EU context. The real demand is for fast, flexible product that can be exploited across several markets spanning several global regions. It is no accident that more than 70% of Guernsey alternative asset funds comprise investors from two or more regions. And it’s here, pivoting to ROW multi-market distribution that, where we see a real trend developing post-Brexit and where Guernsey product can help the UK asset management industry compete against its EU competitors.

Back in 2014, Guernsey’s contribution to the “Channel Islands value to the UK economy” campaign was to publish research that demonstrated not just the economic value of the investments routed into the UK and EU through the islands, but the fees flowing to UK professional service firms from Channel Islands-administered assets. The figure was about £1 billion back in 2014. It is estimated that UK professional services firms earn three to four times more from Guernsey structures than from managing assets administered in Luxembourg.

"It is estimated that UK professional services firms earn three to four times more from Guernsey structures than from managing assets administered in Luxembourg."

London and the Channel Islands’ funds centres have a symbiotic relationship. The UK's intention to emerge from Brexit as a more free and vibrant financial trading hub is key for the islands, while we will play a key role in supporting and complementing the City's efforts.

In future years that may well be through the global funds recognition template that we see as likely developing with time. At this point it’s a case of Guernsey providing a complementary, flexible, cost-effective product with powerful distribution, as capital flows pivot to accommodate more globalised investment patterns in a post-Brexit environment.  

 

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