Substance is a key determinant of jurisdictional choice: why Guernsey emerges stronger and better placed than many competitors

19 December 2019

Written by Dr Andy Sloan Guernsey Finance Dr Andy Sloan

More and more managers are looking to Guernsey as a result of global substance requirements introduced in 2019. Guernsey Finance has spent much of this year highlighting how the island has emerged stronger from the EU's "economic substance" process. In his latest blog, Deputy Chief Executive, Strategy, Dr Andy Sloan explains how substance has positioned the island ahead of some of its competitors in investment funds.

I was recently reading a note explaining how, due to the need to meet new substance requirements, Cayman is making amendments to its Securities Investment Business Law, specifically that the category of “excluded persons” under the law is being replaced with the category “registered persons”, who will now become subject to many of the same licence provisions as full licence-holders, including the “four eyes” principle – the need to have a minimum of two natural persons in management roles.

The note was explaining, that Cayman managers are now faced with re-registering, and falling within regulatory and economic substance scope, or changing contractual arrangements to fall outside of the scope of the law when it takes effect on January 15 next year.

Reading about these substantive changes that Cayman is making to remove itself from the EU greylist gave me pause to re-consider our own substance experience.

When Guernsey’s revised substance guidelines were published last month, I made the comment once again that Guernsey emerges stronger and more competitively placed.   I have been consistent on this point throughout the substance process and in recent weeks I’ve been repeatedly asked to explain this view.

First and foremost, it is important to recall, that Guernsey was placed on the whitelist at the earliest opportunity in the process in March 2019, and my being confident of that outcome was very much due to insight I had picked up from being involved in earlier dialogues on tax with the EU and international bodies.

Being directly involved in dialogue on taxation with the European Commission in the early 2010’s, and in the regulatory dialogue in the mid 2010’s, gave me a first hand experience of the high regard in which Brussels officials hold our standards and application of rules.

Given the genuine economic substance of the jurisdiction, with a third of our workforce being employed in financial services; our large non-executive director community, with one of the largest branches of the Institute of Directors in Britain; the requirements to demonstrate that companies are “directed and managed” in Guernsey in relation to the substance activity; that they have adequate employees, expenditure in the island and physical presence; and that core income-generating activities (CIGA) undertaken are carried out in Guernsey was, as certain marketing campaigns I have seen say, nothing more than ‘dotting the i’s and crossing the t’s’.   It’s clear, others have had to make material change in their attempts to meet economic substance requirements.

Again, its perhaps easy to say now, but demonstrating we are a jurisdiction of real substance, is not something that is difficult if you were to visit us. I recall Wolfgang Klinz, German MEP and member of the European Parliamentary Committee on Economic and Monetary Affairs (ECON), suggesting that we just needed to get all MEPs to visit, and our job was done.

Having been involved in international securities regulation and supervision, I fully appreciate why legislative amendments in many other jurisdictions are so material.

It was clear from the result of the review of jurisdictional equivalence by ESMA of the AIFMD regime that ESMA considered there to be “clear blue water” in the application of those rules between us and other jurisdictions including the Caribbean territories.

Now, as jurisdictions are having to make changes to their regulatory and supervisory framework for fund managers, we in Guernsey are seeing increased numbers of inquiries from fund managers looking to migrate to gain the confidence and security from domiciling in a jurisdiction of genuine economic substance.

Many friends, lawyers and administrators alike, are reporting a significant uptick in company migrations. It is good that our modern companies law and pragmatic regulation make it easy for companies to be migrated to the jurisdiction and licensed and to continue in existence without the need to change existing contracts.

Economic substance is now a key industry issue and firms and fund managers today look to jurisdictions that can and have met these new global standards. Research that we, Guernsey Finance, published earlier this year had nine out of 10 respondents stating that substance was now a key determinant of jurisdictional choice.

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