Guernsey's Law of Offshore

In its Annual Report for 2003, the Guernsey Financial Services Commission (GFSC) drew attention to the publication during the year of the International Monetary Fund's (IMF) report on the Bailiwick's financial regulation and criminal justice framework, revealing that Guernsey was assessed by the IMF to have a high level of compliance with international standards of regulation in banking, insurance, securities, trust and company service provision, anti-money laundering and combating the financing of terrorism.

Additionally, the report announced that during 2003, the Commission was involved in a number of initiatives with industry, working to ensure that the Bailiwick maintains its competitive edge whilst adhering to recognised standards. Director general of the GFSC, Peter Neville observed that: "2003 was a very good year for the Commission. We received an excellent IMF report, which commended our high regulatory standards. These same standards were cited by Robert Finch, the Lord Mayor of the City of London, as good reason to do business with the Island and he acknowledged that we stand alongside the City in terms of our integrity, innovation and standards of service."

In March, 2004, the Financial Services Commission issued a statement on anti-money laundering standards for existing customers following the issue of revised Recommendations by the Financial Action Task Force in 2003. The statement requires financial services businesses to assess the risk of each business relationship and to make sure that they have customer due diligence information appropriate to the level of risk.

It allows businesses in the financial services sector to consider whether simplified or reduced information is appropriate for low risk businesses and lower risk customers. This could mean for example, locally resident retail customers who have a relationship which is understood by the financial services business.

"The Commission has worked with the Guernsey Joint Money Laundering Steering Group, which contains representatives from across the finance sector, in developing this new statement,” explained Peter Neville. “The statement extends the existing flexibility provided by the Commission's Guidance Notes on the Prevention of Money Laundering and emphasises that unnecessary demands on lower risk customers should be avoided," he added.

The Commission has said that it is not issuing more detailed recommendations at this stage on how the FATF standard should be applied in practice. It has further announced that it intends to consult with industry over the coming months by way of observation during on-site visits and by way of discussions, to develop such recommendations for inclusion in the revised Guidance Notes. A revised version of the Guidance Notes will be issued only after full consultation with industry and the other Crown Dependencies.

The Trusts Law 1989 provides a modern statutory basis for trust management activity. The Edwards Report acknowledged that Guernsey ranks highly among IOFCs for the quality of its regulation. Unlike the banking sector, however, the Guernsey trusts industry has not been subject to any formal system of supervision.

Partly as a result of the Edwards Report, a law was prepared by the States' Advisory and Finance Committee under the name of The Regulation of Fiduciaries and Administration Businesses (Bailiwick of Guernsey) Bill 2000. The law - known as the Fiduciary Law - came into effect on 1 April 2001.

Anyone who, by way of business, carries on regulated fiduciary activities in or from within the Bailiwick of Guernsey requires a fiduciary licence granted by the Commission under the Fiduciary Law. Section 2 of the Fiduciary Law sets out the activities which are regulated, and section 3 provides for exemption in some circumstances. A licence is required by any company, wherever registered, providing fiduciary services in the Bailiwick and by Guernsey-registered companies providing fiduciary services anywhere in the world.

The new law contains a 'four eyes' rule, standards for capital adequacy and compulsory indemnity insurance. The offer or provision of fiduciary services without a licence incurs criminal sanctions. Prudential rules are also imposed; clients' funds need to be segregated from other trust assets; and new accounting safeguards have been installed.

The law provides extensive powers to the Guernsey Financial Services Committee in the granting, refusal, revocation, and application of conditions to fiduciary licences. It also has authority to control the names of, and advertising by, fiduciary businesses, rights to obtain information and documents, and powers to conduct investigations.

The Guernsey law of trusts was codified in 1989 along broadly Anglo-Saxon lines in the Trusts (Guernsey) Law 1989. This law does not apply directly in Alderney or Sark, but has a substantial influence on trusts in those jurisdictions.

Trust documents are in English. There are no registration requirements for trusts, no fees are payable on formation, and there are no annual reporting requirements other than for resident trusts (ie those with resident beneficiaries). Trust accounts must be kept but there is no audit requirement.

The maximum perpetuity for Guernsey trusts is 100 years. The law provides for non-recognition of foreign judgements, and forced heirship provisions in foreign law can be over-ridden. The Hague Convention has been incorporated into Manx Law.

In September 2005, the Guernsey FSC launched a consultation with trust professionals, lawyers, accountants and regulators to: investigate the requirement for changes to enable new trust products and services to be available to the Fiduciary Sector in Guernsey; to consider the availability of competitor trust products and services from other jurisdictions; to consider marketing requirement for the Fiduciary Sector; and to make recommendations for the desired changes.

Banks are registered in Guernsey under the Banking Supervision (Guernsey) Law 1994 as amended in 2003, which is administered by the Guernsey Financial Services Commission. Applications from new banks are carefully vetted both from a prudential point of view and commercially.

It contains capital adequacy rules which are stiffer than the Basle requirements.

In November 2001 the Financial Services Commission announced that it would be applying customer 'due diligence' standards according to the Basel Committee on Banking Supervision's "Customer Due Diligence for Banks" paper (4 October 2001, "the CDD paper").

Section 2.2.3 of the CDD paper sets out what the Commission now regards as best practice for banks on introduced business. The criteria listed under paragraph 36 include the recommendation that "all relevant identification data and other documentation pertaining to the customer's identity should be immediately submitted by the introducer to the bank, who must carefully review the documentation provided. Such information must be available for review by the supervisor and the Financial Intelligence Service or equivalent enforcement agency, where appropriate legal authority has been obtained."

Under Regulation 1(4)(a) of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 1999, in determining whether a person carrying on any financial service businesses in the Bailiwick of Guernsey is in compliance with the regulations, a court may take account of "the Guidance Notes on the Prevention of Money Laundering issued from time to time by the Guernsey Financial Services Commission and any other guidance issued, adopted or approved by the said Commission."

The Commission said its announcement represented guidance issued by the Commission for the purposes of Regulation 1(4)(a) mentioned above.

In early 2002 the Guernsey FSC, along with its peers in Jersey and the Isle of Man announced new measures to tighten anti-money laundering regimes.

In December, 2003, the FSC responded to concerns raised by the jurisdiction’s financial services sector by clarifying kyc rules for 'introduced business' following the introduction of the FATF's revised 'Forty Recommendations' which included rules comparable to the Basle rules but administratively somewhat simpler.

The FSC said: "Accordingly, from the date of this statement, the Commission will adopt the standard embodied in FATF Recommendation 9 (see below) with regard to the provision of information to financial services businesses in respect of introduced business. As a minimum, financial services businesses should receive written confirmation from the introducer, by way of a certificate or summary sheet(s), detailing the necessary information and the documentation held by the introducer and also take adequate steps to satisfy themselves that copies of the necessary information specified in FATF Recommendation 9, will be made available upon request without delay."

"The Commission expects that financial services businesses should have a programme of testing to ensure that introducers are able to fulfil the requirement that relevant documentation can be made available upon request without delay. This will involve financial services businesses adopting ongoing procedures to ensure they have the means to obtain that information and documentation."

"In order to determine that the new standard is being applied, the Commission, during its on-site visits, will seek to verify that financial services businesses have obtained the necessary information by way of a certificate or summary sheet(s) and that the requirement for copies of such identification data and other relevant documentation to be made available upon request without delay has been tested."

"It should be noted that, ultimately, the responsibility for customer identification and verification will remain, as always, with the financial services business relying on the introducer."

Insurance companies are regulated by the Financial Services Commission under the Insurance Business (Guernsey) Law 1986, updated by the Insurance Business (Bailiwick of Guernsey) Law, 2002, the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 and the Protected Cell Companies Ordinance 1997.

The minimum capital requirement is GBP100,000; a fee of GBP3,380 is payable on registration and annually thereafter.

Annual audits are needed, and there are substantial annual information requirements, including business plans, solvency calculations, reports on claims, banking and investment schedules, and, for life companies, actuarial certification.

Collective Investment Funds are supervised by the Financial Services Commission (FSC) under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) and the Collective Investment Scheme Rules 1988.

Open ended funds may be established as Class A, B or Q funds and are constituted as companies, protected cell companies or unit trusts. Closed ended investment funds are constituted as companies, unit trusts, limited partnerships or protected cell companies.

Open ended schemes are authorised and entities involved in controlled investment business are licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. The Commission has made a number of rules under the Law which set out the detailed requirements to be followed by all authorised schemes and licensees. These include:

The Collective Investment Schemes Rules 2002 (which cover Class A schemes); The Collective Investment Schemes (Class B) Rules 1990 (which cover Class B schemes);
The Collective Investment Schemes Qualifying Professional Investors (Class Q) Rules 1998 (which cover schemes designed for qualifying professional investors);
The Collective Investment Schemes (Designated Persons) Rules 1988;
The Licensees (Conduct of Business and Notification)(Non-Guernsey Schemes) Rules 1994.

Class A schemes are those which meet the Commission's Collective Investment Schemes Rules 2002 and are therefore eligible for recognition by the UK Financial Services Authority for sale to the public in the United Kingdom under section 270 of the Financial Services and Markets Act 2000.

The rules for Class B schemes incorporate a measure of flexibility. This policy recognises that Class B schemes range from the retail fund aimed at the "general public" via institutional funds to the strictly private fund established solely as a vehicle for investment by a single institution. Their investment objectives and risk profiles are similarly wide-ranging.

The Class Q Rules seek to provide a clear and concise set of requirements for the operation of professional investor funds and have been designed to encourage innovation.

A Qualifying Investor Fund (QIF) regime was Introduced following consultation with the financial services industry in the latter half of 2004, and was welcomed by the island's fund industry. Under a streamlined application process, the Commission undertakes to grant fund approval within 3 working days provided that an appropriately licensed Guernsey applicant has certified that: the fund will be restricted to professional, experienced and knowledgeable investors; the applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; and the applicant is satisfied as to the fund's economic rationale and the disclosure of any risks associated with the investment vehicle.

New criteria for Qualifying Investor Funds released by the Guernsey Financial Services Commission in 2006 met with support from the island’s finance industry.

Chief executive of GuernseyFinance, Peter Niven, suggested that the move "will serve to bring more business to the island", whilst Chairman of the Guernsey Investment Fund Association, Mike de Haaff, announced that:

"GIFA welcomes the change in criteria as it brings Guernsey in line with other offshore jurisdictions. The change in definition of a professional investor will encourage more take up of QIFs and can only be seen a positive move for the island’s fund industry."

Under the new rules, the definition of Professional Investor has been widened to include an individual investor who invests a minimum of US$100,000 in such a fund.

The revised guidance note issued by the FSC also re-emphasised the due diligence obligations which Guernsey Licensees undertake when submitting applications for Guernsey Qualifying Investor Funds.

The growing use of Guernsey structures as vehicles for hedge funds has highlighted a number of areas where the existing investment fund framework can create problems, leading the Guernsey Financial Services Commission to issue a consultation document: ‘The regulatory framework for Hedge Funds in Guernsey’ in November 2003, setting out a range of practical issues, and seeking views from interested parties on those issues and the solutions which may be available.

The Guernsey Financial Services Commission also issued guidance on the disclosure regime for closed-end investment funds. That guidance re-emphasised the flexible nature of the Commission’s approach. Guernsey domiciled closed-end funds are subject to Guernsey company law and the Control of Borrowing regime, and it is clear, from the closed-end hedge funds already established under those arrangements, that few structural problems arise.

In the open-ended sector, the position is more complex. Open-ended funds are subject to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, (“POI”) and to rules and regulations made under that law. POI provides, inter alia, that all Guernsey open-ended funds must be authorised by the Commission - there is no provision for “unauthorised” funds – and that each fund must have a designated manager and a designated trustee or custodian.

In mid-2004, the GFSC published a document setting out its main conclusions regarding hedge funds. The findings are directed at the funds industry for vehicles which are popular with institutional investors, said Fiona French, the commission’s assistant director of investment business: "We always had the power to waive our rules. Now we’re saying publicly to hedge fund managers that these are the ones we’re prepared to waive to establish funds here. We’re technically not changing the rules because some elements we’ve always waived."

Areas where the commission will show flexibility include: not requiring a Guernsey-domiciled and licensed custodian to fill the role of a suitably qualified prime broker; no need for complex segregation requirements for prime brokers holding fund assets; waivers for funds which can demonstrate a need to use estimates of net asset value in advance of final NAV determination; and where estimation is permitted, there may be waivers of client money rules requiring segregation of subscription and redemption monies.

In May, 2006, the report of a Committee appointed in 2005 to consider investment sector legislation and regulation and to report to the Guernsey Financial Services Commission and to the Commerce and Employment Department recommended the creation of a "registered" fund sector, alongside the existing "regulated" sector. Unlike regulated funds, registered funds would not need prior approval from GFSC.

The report suggests that the same framework should apply to both open and closed end funds, which should be subject to a dedicated Funds Law, leaving the existing Protection of Investors Law to deal with other aspects of investment business.

It also recommended that public offers should be made subject to specific Prospectus legislation, rather than to the current Control of Borrowing regime, and that provision of services to certain funds domiciled outside Guernsey should also be liberalised.

The report additionally recommended that definitions of investment business in the POI Law be reviewed, that economic benefit should be abandoned as a criterion for licensing investment firms, and that some of the sets of rules made under the POI Law should be merged.

The report further reflects on the importance of expanding Guernsey's intellectual capital by attracting new service providers in areas other than fund administration, and notes the significance of personal tax rules and housing policy in achieving those objectives.

Peter Neville, Director General of the Guernsey Financial Services Commission, announced following publication of the report that:

"We very much welcome the proposals put forward in the Harwood Committee report. Streamlining authorisation and licensing processes will benefit: the investment sector by allowing faster responses; the Commission by letting its dedicated staff extend their monitoring of licensees rather than on pre-vetting funds; and Guernsey in general by ensuring that the service delivered by Guernsey investment firms continues to support and enhance our established reputation."

"Recent trends have seen new businesses - stockbrokers, asset managers and private wealth managers - outside the pure funds sector establish themselves here in Guernsey. We also endorse the report's recognition of the importance of expanding the widest range of investment activity in Guernsey."

"Once we have seen how the investment sector responds to the consultation, we look forward to working with them, with the Finance Sector Group and the Department of Commerce and Employment to bring about agreed change as soon as possible."