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This article from
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Times are a-changing
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CHRIS BURTON
CEO, Coutts Offshore
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BEFORE the Norman Conquest, Jersey formed part of the Duchy of Normandy, but when continental Normandy was freed from English rule in 1204 Jersey retained its allegiance to the English Crown.
This year, Jersey celebrates 800 years of allegiance to ‘Our Duke’ and throughout this time has enjoyed a comfortable relationship with the Crown. For many years, visitors to the Island used to comment, affectionately, that Jersey never changes. However, Jersey, like other offshore centres, is going through a metamorphosis – and not least in the finance industry. As Jersey strives to maintain its position as a leading finance centre in the eyes of both investors and regulators, the finance industry has witnessed a significant increase in legislation and regulation. Financial services businesses have implemented rigorous procedures in order to verify the identity of their client and the source of his or her wealth and, in this respect, are following best international practice. Compare these current requirements with customary practice – say – 20 years ago when it was often only a single reference that comprised the due diligence on a new client. It is in the regulation of the trust business that Jersey takes the lead over other financial centres. Several practitioners have raised the question whether it is desirable for Jersey to lead the world in such regulation, but the decision to regulate trust businesses appears to have been vindicated by a recent survey of London lawyers which revealed that Jersey is their jurisdiction of choice for trust business. Many international trust lawyers regard Jersey’s trust law as a new law, yet it was 20 years old this year. To keep pace with client needs and with developments in competitor jurisdictions, the time is now right for this law to be overhauled. Consideration needs to be given as to whether Jersey should enact alternative trust legislation, as the authorities in Cayman and the British Virgin Islands have done, and whether Jersey needs a Foundations Law.
Investors are, generally speaking, becoming more sophisticated. Governments have encouraged wider share ownership through tax incentives and the privatisation of publicly held companies. With that wider share ownership has come the desire by investors to gain a better understanding of the financial markets. This has led to more transparency in the structure and pricing of investment products and the need for investment managers to have a clearer understanding of investors’ appetite for risk.
Investor demand for cost effective, risk weighted portfolios has led to investment managers advising their clients to invest in collective investment schemes rather than in discrete portfolios. Coutts was one of the first investment managers to move to a multi-manager strategy for managing client funds and recently celebrated a successful fifth anniversary since the launch of its Coutts Investment Programmes in 1999. Collective investment schemes are now available on a retail basis and have become the introductory form of investment to those new to the investment market.
Falls in the world stock markets encouraged investment mangers to find solutions to the declining values of portfolios. It is in a bear market that hedge funds can come into their own. Only a few years ago, investing in hedge funds was the preserve of the very wealthy and financially sophisticated but it is now common to find hedge funds in modest portfolios. We are also seeing the emergence of retail hedge funds as the smaller investor recognises the value that these alternative investments can add.
While managing changing client needs and working within a tighter legal framework, Jersey’s financial service businesses are also dealing with external pressures and uncertainties. The OECD initiatives and the EU Savings Tax Directive present the Island with major challenges, but with challenge comes opportunity. The zero-ten tax challenge will, undoubtedly, cause some short-term pain but these measures are to ensure the long-term survival of the finance industry. The EU Savings Tax Directive also presents some challenges, but while some investors might move their funds to a non EU, and some would say less safe jurisdiction, the creation of fiduciary holding structures can take the investor outside the scope of the directive, thus retaining the funds in Jersey. As governments around the world introduce domestic financial legislation, particularly with regard to the selling of investments, Jersey’s international financial services businesses are becoming more aware of the need to work within an international framework. To some, this means establishing a presence in another jurisdiction and to others it means registering with the authorities in the countries concerned. However, to some it means that the costs of doing business in certain countries, in terms of specialist skill required, licensing fees and reporting requirements and so on are such that it is no longer viable to market services to residents of the countries concerned.
Increased regulation throughout the world has increased the costs of managing financial services businesses and has been the instigator of various forms of strategic reviews. Increased competition, which has led to fees being contained (if not being cut), has added to the pressure. Some institutions have taken the decision to concentrate on their core business and to do that business in just one offshore centre, whilst others have created critical mass by concentrating front office services in one jurisdiction and back office duties in another. With improved technology, a few hundred miles between offices does not present any difficulties.
As Jersey continues to maintain its position as a leading financial centre, major changes are underway in the type of business that financial services businesses undertake and in the way that business is conducted. Increased complexity and increased regulation has led to businesses concentrating on their core offering and being managed by specialist staff. If the visitors to the Island comment that Jersey never changes, we hope this can be taken as a sign that through a period of significant challenge and development, a seamless service is being delivered to our clients.
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