Guernsey has weathered the financial crisis well. Guernsey Finance, the Guernsey Financial Services Commission's (GFSC) and others believe the jurisdiction can build a stronger industry in future.

Flying into Guernsey the unwary visitor would be forgiven for thinking the island’s economy rested on agriculture. But the greenhouses sheltering tomato plants and flowers from the storms of the English Channel mask the reality of Guernsey’s status as a true international finance centre.

Over a fifth of Guernsey’s workforce, almost 7,000 people, is currently employed in financial services with a further 2,000 or 6% in professional activities including legal and accounting.

The island is proud of its reputation as a well-regulated financial services centre. While the funds industry acknowledges Guernsey has not escaped the difficulties of the past two years, both from an industry and a macro perspective, it believes business is coming back.

“We have obviously been through a very difficult time but we’re not alone in that,” says Guernsey Finance chief executive Peter Niven. “What’s happening at the moment is that we’re seeing some green shoots of recovery as far as Guernsey’s concerned. We’re finding that people are coming back to us. They like what we do. We’re stealing a march over some of our competitors who are finding things a little bit slower.”

Niven’s observation is backed up by the Guernsey Financial Services Commission’s (GFSC) director of investment business Peter Moffatt. “This year is better than last year,” he says, in terms of the number of funds being launched in Guernsey. He adds he cannot discern any trend towards one particular type of fund or type of investment strategy.

Services providers from lawyers to administrators also believe new business is coming back to Guernsey after a period of difficulty.

“I think it comes down to the right menu of options for people,” says Niven, offering an explanation for the industry’s buoyancy.

According to Niven that “menu” includes sound regulation, a choice of fund structures, strong service providers and an attractive -tax regime.

Unlike its neighbour Jersey, Guernsey currently has no form of goods and services tax (GST) or value added tax (VAT). Personal and company income tax is capped at 20% of income and for individuals earning over £1 million a year from foreign and Guernsey sources at £200,000.

Niven says the government has given a guarantee that an increase in personal tax is “not an option”. VAT or GST could be more likely, particularly given continued forecasts of a reduction in gross domestic product despite the fact many in Guernsey are wary of introducing such a tax.

Guernsey has now signed 16 tax information exchange agreements internationally, the latest with Portugal. In March, Guernsey was visited by the International Monetary Fund (IMF) for a regular review of its financial services regulatory regime. The report is expected to be favourable and taken together with Guernsey’s inclusion on the OCED’s white list of countries complying with tax information exchanges, the state believes it well deserves its reputation as a respected -financial centre.

Rupert Dorey, an independent non-executive director working in Guernsey, believes the island’s financial services regulation has been the foundation of a professional, rigorous and well-regulated funds industry that is keen to do business.

Moffatt says Guernsey’s funds regulation has been designed not to favour one sector over another. “That really means we have always tried not to write special regimes for hedge funds,” he explains.

He says the GFSC has been developing its fund architecture generally over the past few years. That process has included creating legislation to protect investors and introducing a fast-track application process for closed-ended funds. Moffatt explains a “properly constituted application” to launch a fund will be approved by the GFSC in three days.

Such an application includes a warranty from the fund’s administrator certifying the manager is fit to run the fund and that documentation complies with all the necessary regulatory requirements.

Moffatt says the commission is undertaking some post-facto testing of adminstrators’ warranties and has found some providers who need to improve. He thinks this demonstrates the fast-track process is not “just a rubber stamp”.

He acknowledges that different structures suit different types of investment. When it comes to hedge funds, Moffatt reveals Guernsey has considered a structure that would allow the establishment of a “Caribbean-style hedge fund” on the island. However, several obstacles stood in the way, among them the definition of a hedge fund and the inability of some to see the economic benefit in a fund which might not have its service providers based in Guernsey.

In contrast, many can see the benefit of having hedge fund management companies on the island. Several small companies are already present but the issue has been pushed into the spotlight with the migration of BlueCrest Capital Management’s headquarters to Guernsey earlier this year.

Mark Bousfield, a director at alternative asset management company Cenkos, welcomes the arrival of larger businesses. “If you do have the likes of BlueCrest moving here they have clients coming and that’s got to be good for the Channel Islands,” he says.

“I don’t think we’re considered a backwater offshore world anymore. If you pour more brains into the Channel Islands there’s probably going to be more ideas that come out. I quite like it because you’re out of London. You’re not on the fund manager circuit so you can step back,” Bousfield adds.

According to Niven the reappearance of Guernsey’s asset management business is good news for the island. “We’re not just like a back office. We’re not just providing structures. It’s much deeper than that. I think that’s very important for us to show that we can provide that spread of skills,” he says.

Another growth area in Guernsey is the provision of non-executive directors for funds. Dorey believes the island’s pool of non-executives is diverse and many bring with them wide variety of experience in diverse parts of the financial -services industry.

Anne Ewing, co-founder of compliance and corporate governance business Dextra, notes: “Hedge funds themselves are quite a specialised investment vehicle. I think you need people who -understand regulation.”

She says Guernsey has a tradition of learning from regulation brought in other jurisdictions. “The good thing with Guernsey is that very often we’ll watch what other jurisdictions do and then we’ll put in place a form of regulation that’s better. We’re not far behind but we’re not first in the queue.”

One such aspect of regulatory reform concerns corporate governance. The GFSC is in the middle of reviewing corporate governance for financial services, including hedge funds and other investment vehicles. In January 2010 it released a consultation over a draft corporate governance code which caused a significant amount of discussion.

“The interaction between the administrator and the manager and the board of directors is very important and there was a wish to ensure that the directors fully understood their duties. They were in charge of the fund and they had a duty to investors. It’s not always easy to make sure that that focus is maintained,” explains Moffatt.

However, the draft turned out to be more prescriptive than many had expected and the code is now being redrafted after a torrent of feedback. Moffatt says the commission is taking the feedback on board and there will be further discussion. “I think it’s got some way to go,” he adds.

The final code is likely to allow for more variety between different vehicles. Some in Guernsey question the need for an island-specific corporate governance code when many funds on the island already comply with either industry guidelines such as the Hedge Funds Standards Board standards or the UK Corporate Governance Code (previously the Combined Code).

“The reality is we also have to remain competitive. The regime has to be workable. It has to be robust. It has to be sound,” says Dorey.

At the Channel Islands Stock Exchange chief executive Tamara Menteshvili points out many of Guernsey’s funds already comply with the corporate governance requirements that come with listing. “Every listed issuer must conform to obligations of any statutory exchange. That encapsulates corporate governance,” she says.

Niven says tweaks to regulation like the corporate governance review encapsulate Guernsey’s attitude. This, he says, stands the island in good stead in lobbying related to the European Union’s (EU) alternative investment fund managers (AIFM) directive. He thinks Guernsey has managed to convince regulators in Brussels that the way Guernsey works is tighter than -onshore jurisdictions.

Moffatt describes the AIFM directive as a “difficult and intractable topic. We have spent a lot of time liaising with people in Brussels and elsewhere about the way that this is developing.”

While the GFSC is “entirely sympathetic” with the concept that all funds come under regulatory scrutiny, Moffatt is concerned about the potential impact for existing Guernsey funds of the directive. He is keen to see agreement over the handling of non-EU funds although he expects Guernsey to meet easily any equivalency criteria.

“The islands are taking steps to make sure that the Guernsey and Jersey case is properly represented in Brussels,” Moffatt says, explaining the islands have set up a joint office to build closer links with the EU. “If we accept that there will be a directive then continued uncertainty is unhelpful.”

At a Guernsey level Moffatt says the GFSC plans to try and review its funds regulation more often, using a model that closely involves the industry. “A process of small, continuous improvements is probably better,” he notes.

“We’ve got to be an international good neighbour but equally we have got to look at the business we’ve got and the business we want to get and make sure that that regulatory framework is absolutely right,” adds Niven.

As the head of the island’s financial services promotional agency, he is keen to market Guernsey and the Channel Islands across the world. Recent efforts in emerging markets including Asia and the Middle East are, Niven says, paying off with business flows. Guernsey Finance is planning trips to India later this year to boost the island’s profile there.

The three sides of Guernsey’s funds industry – Guernsey Finance, the GFSC and the managers and service providers – are united in praising each other’s work.

“I respond to what they’re doing and what they want to do. We work very well as a team. None of us can do what we’re doing in isolation,” says Niven.

In the future many would like to see closer co-operation between Guernsey and Jersey, although the barriers to this include sorting out profit and expenses sharing and the historical divide between -the islands.

“There are areas that I personally think that we can work more effectively together. There would be economies of scale. Sometimes what we do separately serves to potentially confuse,” Niven admits.

Any such co-operation is likely to take years to develop. In the meantime Guernsey is prepared to do what it must to maintain the profile and activity of its hedge -funds business.