Guernsey: A laboratory of innovation
The funds sector has matured and developed into a more sophisticated market than it was 10 years ago. Technology advances and product innovation in new asset classes has deepened the funds industry, creating more complexity as a result. At the same time, over the last decade, demands on jurisdictions have risen in terms of the level of support that needs to be provided, in terms of substance and effective oversight. Guernsey has always been cognisant of this and has evolved in step with those changing times.
“One of the requirements has been to innovate and to develop new products in new markets,” says Dr Andy Sloan, Acting Director of Strategy, Guernsey Finance.
“We are at a global pivot point right now. For Guernsey, I see it as being a catalyst not just for UK/EU issues but potentially having an impact on the way global trade evolves in the 21st century. It is in our best interests to orientate ourselves to where the global capital pools are growing most, such as China and other growing economies.
“Whatever we do as a jurisdiction, it always harks back to the stability and security we provide, which enables us to service the requirements of global investors and provide a point from which they can pivot to global capital markets.”
From a global macro perspective, it is not inconceivable to suggest that as global trading patterns change there are going to be nodal points, such as Guernsey, which, because of its stability, substance and sophistication, will be well positioned to support global distribution activities. If fund managers want to reach new markets, new parts of the globe, they will be able to do it through a trusted jurisdiction like Guernsey.
“Going forward, as a jurisdiction I think we will see more of an alignment of key pivot points such as the Far East, the US and the UK. We want to position ourselves to give investors the products they are demanding,” says Sloan. “In light of global initiatives such as the Paris Accord, one area we’ve focused on, with respect to product innovation, is green investing in the financial services industry. We have developed policies in response to expected demand for green investment products over the next two or three decades; what I mean here is verifiable, certifiable green products.
“Our strategy has been to utilise our regulatory autonomy to create the world’s first green fund product; the Guernsey Green Fund (GGF). We intend to build on this and develop more ESG products. It’s necessary to anticipate what fund managers will want, going forward, and be able to provide them with the product capabilities and wrap-around services.”
The consultation process for the GGF closed at the start of June, incorporating feedback from industry players, and the Guernsey Green Fund was launched earlier this month. This is effectively an entirely new asset class for the jurisdiction where the underlying assets will need to conform to green credentials and will need to be verified by a third party or a licensee.
Sloan explains that an overlay of rules and regulations will be put in place to ensure that the “green” credentials have been verified and accredited. The GGF is applicable to all types of fund, can be compliant with AIFMD, and will be a fully regulated fund product, subject to the rules and regulations of the GFSC.
“Green investing is a trend that fund managers and investors have been pursuing for some time now. We’ve worked with UK policy makers, we are in dialogue with London Green Finance Initiative, we’ve had discussions with the United Nations and the OECD. It is a pretty substantial initiative for us,” adds Sloan.
Dominic Wheatley is Chief Executive of Guernsey Finance. Discussing the drivers of green finance, he points out that when one considers the amount of money one needs to attract into new investment areas, managers have got to find a way to create products that marry up investors with the assets.
“I think the issue around green investing and other aspects of impact investing is how you provide a product that people can put their money in, knowing that the impact income they are expecting from the investment is part of the regulatory oversight,” says Wheatley.
“Then you might start to see pension funds investing more heavily, as they know the fund is regulated and includes the assurance that it meets green investing criteria. At the moment, a lot of green and impact investments are ‘we do no bad’, but that doesn’t mean to say they are doing any good.”
The GGF is designed to go a step further and for managers to demonstrate that they are indeed making a difference; investing in wind farms, for example.
Ultimately, the raison d’etre of a small niche jurisdiction is to do things better than anyone else. To achieve that, it needs to create a business environment where the fire of innovation can burn bright. Over the years, Guernsey has proven its capability at pulling together the right level of regulation and skill sets among industry practitioners to foster a competitive, compact business ecosystem; one where everyone works together and knows each other.
It is possible to walk from one end of the financial district in Guernsey’s main centre, St Peter Port, to the other in approximately 15 minutes. A pleasant coastal environs, along the way you will find the likes of Ogier and other international law firms located cheek by jowl alongside the GFSC, The International Stock Exchange, Guernsey Finance and numerous accounting, administration and trust firms.
Anyone who visits the island can easily spend a day meeting with the GFSC, or the Economic Development Department of the States of Guernsey, while its service provider community are more than willing to open up their diaries.
Moreover, there is a fine selection of coffee houses, which is very much in keeping with the innovation theme. After all, Jonathan’s Coffee House, which opened in Change Alley in London in 1680 was the original site of the London Stock Exchange, and Lloyd’s of London was established from the site of Edward Lloyd’s coffee house in Tower Street in the same period.
“My background is in insurance and I always think coffee houses are great places for talking business,” says Wheatley. “There are four or five coffee houses where, depending on which industry I’m interested in, I know I will find various people there. I believe innovation comes from sharing ideas and having access to different people with different skills. We also have close links back to the City of London. Our lawyers and accountants have access to additional expertise through their networks of contacts and that, combined with our ability to create the business environment and regulatory infrastructure, is a key advantage.”
Digital technology is also high on Guernsey’s agenda as it seeks to evolve and expand its value proposition. According to Paul Smith, Chairman, Guernsey Investment Fund Association (GIFA), it is crucial to the island’s future. “As we see the industry evolving, technological developments will become vital,” remarks Smith. “I think Guernsey has already demonstrated its innovation and is a test bed, as it were, for new fintech ideas and tools.”
A good example of this is Northern Trust, who recently introduced a blockchain solution for one of their private equity fund managers. To construct the blockchain record keeping solution, Northern Trust selected IBM to provide the cloud infrastructure. That they regarded Guernsey as the best place to test the waters, is testament to the island’s reputation. Since then, Northern Trust has extended the blockchain solution so that audit firms can now carry out audits of private equity lifecycle events directly from the blockchain. Northern Trust, working with PwC and other audit firms in Guernsey, has proved that auditors can now access fund data held on the private equity blockchain to audit specific events.
“With respect to blockchain, the GFSC needed to understand how to perform the necessary oversight and monitoring, and satisfy themselves of the governance structures being put in place. It just required a change of regulatory process and there are now guidelines in place,” confirms Wheatley.
There are wider implications as to what these DLT-based solutions being developed for complex, closed-ended funds, could mean for the wider industry. As Smith points out: “If you go back a few years Guernsey was home to a large number of open-ended funds, which were fairly labour intensive. Guernsey, like other jurisdictions, went through an era where it had to outsource a lot of back-office functions because it didn’t have the human resources on the island to carry out that work.
“Now, I believe there is an opportunity for Guernsey to bring back some of those back-office operations because of the digital revolution. It is something that we as a jurisdiction, both as industry bodies and with the government’s support, need to focus on so as to encourage people to come to the island. There are a number of exciting fintech projects that I am aware of but cannot reveal at this stage; suffice to say that I hope to see them get up and running soon so that we can start talking about them to the wider financial community.”
In his view, the potential myriad applications that one might apply using DLT and other digital technologies could lead us into the next Industrial Revolution. A lot of this is about democratising the investment process and making it more accessible to people, who may not regard themselves as typical investors. Mobile wealth management applications, robo-advisers, crypto strategies; these are all springing up and changing the way people think about investing, and where the next investment return opportunity may lie.
“Guernsey is a very important node in the global Internet, in terms of being a junction between the UK, Europe and the US. The e-gaming industry that we set up, which has been highly successful, relies on good connectivity, back-ups and capacity; all of that is in place. We just need to build on it to further support fintech entrepreneurs and fund managers alike,” adds Smith.
If blockchain technology improves the way PE/RE funds are administered, Guernsey could find itself well positioned to attract global PE/RE managers and sources of investment capital from emerging markets in the Far East, Latin America, etc.
Guernsey has a wealth of expertise in the PE and VC sectors and Smith believes that fintech could enhance business activity in those two sectors.
“It should make transactions easier to execute and make them more transparent as they will have the electronic audit trail that is a key feature of blockchain technology. I think it’s going to be crucial for all alternative fund managers – not just PE managers but RE and Infrastructure managers,” states Smith.
Changes in Guernsey’s population management law introduced last year have made it easier for people to come and base themselves in Guernsey. “We have excellent cybersecurity as well as physical security on the island,” adds Smith. “It is a very safe place to live. I’m not suggesting we need tens of thousands of people, but we could accommodate a few thousand more people quite easily. It’s a question of attracting key people who are able to take advantage of our flexible entrepreneurial environment.”
Crucially, as well as attracting talent, Guernsey also has a good number of people living on the island who are able and willing to invest in fintech start-ups.
“The one thing that excites me about this whole era at present is that it reminds of the early stages of the financial industry, in the sense that there is so much opportunity. There’s a new sense of excitement coming back, a sense that anything is possible. Guernsey as a jurisdiction has always been very entrepreneurial. If you look back at industry changes over the last couple of decades, Guernsey has always been flexible and looked for the next best thing. When it sees an opportunity, it goes for it,” asserts Smith.
In terms of technology application, Sloan says that Guernsey has been deliberately keeping its powder dry with respect to things like crypto currencies, ICOs, etc.
“We have a mature risk appetite and sophisticated understanding of the issues associated with these new asset classes,” he says. “We’ve been deliberate, to date, as a jurisdiction. Our approach is being ‘technology neutral’ in terms of the application of technology, not withstanding that we have established leadership in this space. Northern Trust has its private equity project under way and in the ILS space, secondary listings have been done using the application of DLT.
“As a jurisdiction, we’re now building on that, exploiting our key strengths and our legal autonomy, to develop our electronic transactions law, itself a far-sighted primary legislation introduced in the early 2000s, to look to build something quite special – the most secure, robust legislative environment for electronic agency to provide a supportive environment for the application of AI and machine learning in finance and other services.
“The application of DLT will make the onboarding of investors and AML/KYC processes unrecognisable in three or four years’ time, and we want to be one of the first movers into that space.”
The way for Guernsey to facilitate future growth is to keep doing what it does best, which is to look at things objectively, think laterally, and embrace innovation for the future well being of the jurisdiction.
“As a jurisdiction, to be successful you need to have a dominant position in any given market,” says Sloan. “We are looking to move forward to create new leadership positions in new markets and that involves leveraging our current expertise to move into green finance. We think there is an opportunity for us to create a leadership position in that market.”
Given the breadth and depth of its finance industry, Guernsey has all the tools in its toolbox needed to help businesses get up and running, and succeed. In many way, it is the ideal test bed for new technologies, new ideas.
“We combine innovation with niche expertise, providing services better, quicker, more cost-effectively and in a sustainable way. After London, there are more listed PE funds in Guernsey than anywhere else in the world. We have lawyers who, quite simply, are extremely good at doing the work.
“In the end, one of our key functions is to provide a laboratory-like environment for people to come up with ideas and test them in the market,” says Wheatley.
With Brexit still to be finalised, this is when the stability of a jurisdiction like Guernsey comes into its own.
“Long-term secular forces are such that global financial centres should be invigorated by a Brexit process, where the UK rediscovers its internationalist DNA and moves away from merely looking at, and servicing, the EU single market. The UK will need to look for a growth strategy post-2019 and that plays to our traditional economic role, providing routes for capital into London’s financial market,” concludes Sloan.