Auditing and accounting in Guernsey is experiencing an upswing in hedge fund business says Ernst & Young and Deloitte. Work focuses around transactions, share reissuing, advising and restructuring.

In plush new offices with the ubiquitous Guernsey view of the sea, Ernst & Young (E&Y) partner Michael Bane is reflective about how the hedge fund audit and accountancy business has been going over the past 12 months.

“The last calendar year was a slow and difficult time for pretty much everybody in the industry,” Bane says. He notes that any transaction activity for companies such as E&Y consisted of restructuring work, share reissuing and advising clients on de-leveraging.

“That kept our business busy in the sense that there was quite a lot of work to do,” he adds.

Deloitte audit partner John Clacy agrees it was this type of advisory work that occupied auditors and accountants until the end of 2009.

Now Bane believes the industry has turned a corner and is seeing new enquiries, albeit at a steady rate rather than a rush.

“This recovery remains pretty fragile and that’s always going to remain the main driver. While investors remain nervous it’s going to be hard to raise new money. I think there’s still quite a long way to go in terms of overall confidence,” he says.

Clacy thinks an ongoing issue that could be delaying business for funds service providers as a whole in Guernsey is the European Union’s alternative investment fund managers (AIFM) directive.

“For Guernsey in particular the issue is the uncertainty of it all. When we know what’s going to happen we can deal with it,” he says.

Clacy believes the island will be able to meet any equivalency criteria laid down by the EU in order for Guernsey-domiciled funds to be marketed to investors within the union. But he thinks some managers may have hesitated over setting up a fund in Guernsey due to the ongoing inability for the EU to reach agreement over the AIFM directive.

“I think that the important thing is going to be speed of response to what the outcomes are and I think the island is very ready for dealing with that,” adds Bane.

For Guernsey he thinks there has been a positive angle to the AIFM and other onshore regulatory changes such as tax increases. He attributes the recent arrival of alternative investment management companies to Guernsey, including hedge fund giant BlueCrest, to these changes.

The Guernsey government recently announced a consultation over the island’s corporate tax regime and auditors are keen to ensure the results of the review and any changes do not damage the nascent asset management industry.

“Whatever we do with our tax regime, we must ensure that we retain the benefits for these types of managers,” notes Clacy.

Bane sees the possibility for more asset managers to move elements of their business to the island, although he thinks the model will be predominantly for back-office functions and doubts there will ever be a significant number of hedge fund managers based in Guernsey.

One of the reasons for this is the capacity constraints imposed both by Guernsey’s small size and its strict housing regulations. Capacity issues before the financial crisis also led companies such as E&Y to outsource elements of its business to lower-cost jurisdictions. Bane says E&Y outsources some of the “number crunching” parts of its work to India, including the pricing of financial instruments and that this “works incredibly well”.

Capacity was eased a little by some reduction in headcount during the crisis, he adds, but the composition of the workforce in the industry has also changed since the boom years.

According to Bane four or five years ago E&Y was routinely bringing in around 20 people a year to the Channel Islands from outside the EU. He says this has since dropped to just two people in 2009.

“We have got much better at recruiting people locally and also much better at people staying within the business. Here we have found it has become much easier to recruit local people straight out of school or graduates,” he adds.

This is done by offering bursaries to Guernsey school leavers to go to university in mainland UK but giving them an incentive to return to the island with a job afterwards. The model, used by several companies in different service provision areas, helps build up the island’s talent pool for the future.

Clacy and Bane are optimistic business will keep coming in for Guernsey’s auditing and accountancy sector as the industry is supported by a strong regulation.

“There’s a sense of people deserting the Caribbean for jurisdictions with more robust regulation,” believes Clacy. He adds that the close relationship with the City of London and UK-based hedge fund managers should continue to thrive. “In a way we have always been the City of London’s offshore financial centre and I think we’ll continue to be that,” he concludes.