Fiduciary businesses IQE and Ifina announce cooperation agreement

IQE Limited, the IOM based fiduciary services group formerly known as Simcocks Trust, has announced a new co-operation initiative with fund administration specialist International Financial Administration Group Limited (Ifina).


The announcement is short on detail explaining the nature of the co-operation agreement, but it is aimed at extending the services offered to clients of the two firms, and allowing each business access to new jurisdictions.


David Karran, IQE Limited Managing Director, commented: “The co-operation initiative with Ifina Group Limited is part of our strategy to expand our global proposition whilst continuing to service our clients’ needs. Ifina are established fund administrators with a global reach, and as such are an ideal partner for IQE Limited. Our respective services, and commitment to delivering first class service for our clients, compliment [sic] each other. This is a sector in which a number of our existing clients are active, and they require support from an experienced Administrator. We very much look forward to working with Ifina co-founders and directors Derek Adler and Sam Bratchie, and their colleagues.”


Ifina Group Limited is a multi-jurisdictional group of companies providing investment fund formation, administration, and valuation services for investment funds domiciled in a number of international centres – including UK, USA, Hong Kong, Switzerland, Austria, Panama, Malta, Cayman, and British Virgin Islands.  It has over 160 funds and assets of US$1.8 billion under administration.


IQE, which rebranded last year, is a Manx fiduciary services business which evolved out of Simcocks Advocates.  

Jersey signs full Double Tax Agreement with Hong Kong in boost to its Asian business ambitions

In days gone by, one of the notable characteristics of many of the smaller international finance centres routinely given the “offshore” label was the absence of double tax treaty networks.   It seems that things may be slowly changing as the IFCs adapt to changing political landscapes, and seek to forge agreements with their trading partners.  A significant step in that journey for Jersey has now been made with the announcement that it has signed a Double Tax Agreement (DTA) with the Government of the Hong Kong Special Administrative Region of the People’s Republic of China.

This is the third full DTA that Jersey has signed that complies with the OECD Model Agreement.  The other two DTAs with Malta and Estonia are in force.

The DTA provides for the avoidance of double taxation in respect of both corporate and personal incomes including business profits, dividends, interest, royalties, income from employment and pensions. The DTA also provides for the exchange of information on requests equivalent to that provided for in the Tax Information Exchange Agreements (TIEAs) that Jersey has signed. 

Jersey Finance has had a permanent office in Hong Kong since 2009 and facilitates visits for Members regularly, with the next visit due in the second half of the year.

As well as strengthening the ability to exchange requested tax information with Hong Kong, the agreement is expected to bring significant commercial benefits to Jersey’s finance industry, resolving issues relating to potential double taxation of both corporate and personal incomes, such as business profits, dividends, interest, royalties, income from employment and pensions. 

Investment from Hong Kong and China in Jersey remains substantial, with nearly £7 billion of banking deposits emanating from the Far East. The first Chinese company was registered in Jersey in 1994, whilst more recently a number of influential deals have been listed using Jersey companies following approval in 2009 for Jersey holding companies to list on the Hong Kong Stock Exchange.   In addition, a quarter of the Chinese companies that have listed in London have done so through Jersey.   Geoff Cook, chief executive of Jersey Finance, said "That China's GDP is expected to continue to grow at around 8% reaffirms that there are clear opportunities for Jersey to grow its private wealth management business through its specialist trust and foundation structures and popular expat banking servcies.  Jersey's flexible company structures also continue to be attractive as capital market activity in Hong Kong accelerates.  In all these areas, this DTA will add significantly to the reasons for investors and institutions to have confidence in and choose Jersey as their preferred European financial centre to invest in Western markets."

UK law firm to offer family-office services for HNWIs

Up until now, UK law firms have tended to focus squarely on the provision of their core business of legal services, save for some fairly low level company secretarial and trustee work where that was a necessary adjunct to client legal work.  Many of the offshore law firms, by contrast, have developed extensive ancillary businesses to their legal practices, offering a full range of fiduciary and family office services, and these have in many cases proved to be very lucrative ventures, in some cases eventually dwarfing their law firm roots.  There are now signs that UK firms may be starting to follow suit.

In 2010 Mishcon de Reya launched a global concierge service for its high net worth clients in conjunction with Quintessentially.  It has now announced that it is to go a step further and launch a private client business for high-net-worth individuals, offering private bank relationship management advice and asset reporting in addition to tax and structuring advice.  It is not yet clear to what extent this will also involve the firm in agreeing to take on fiduciary roles for client structures, but it is a clear attempt to move into the realms of family office services.  It is believed that the initiative is targeted at the higher end of the market, focusing on individuals and families with assets of more than £50m.

Mishcons managing partner Kevin Gold said: “With so many high-net-worth clients that themselves constitute the equivalent of multinational companies, we can see a market to service them as such, with an offering that goes beyond their legal needs.”

It will be interesting to see whether Mischon’s next step is an alliance with one of the offshore law firms or fiduciary businesses, as it would seem to be a logical progression.   A very significant proportion of the VHNWI population utilizes offshore structures in tax planning, and a family office offering is likely to be more coherent if the onshore and offshore advice and fiduciary elements could be combined.

 

Mischcons intend to set up their new business as a separate company and as such do not need to convert to an alternative business structure (ABS) in order to achieve it.  However, the firm has separately applied for an ABS licence to give it the option of taking outside investment and allowing non-lawyers in the business to join the partnership.

Obama proposes minimum tax rate on foreign earnings

President Obama has set out his proposals for corporate tax reform in the US, and it will comes as no surprise to those in the offshore finance centres that anti-offshore rhetoric continues to underpin many of the changes. 

The key element of the plan is to cut the corporate tax rate to 28% from the current 35% rate, but at the same time closing loopholes used by corporations to reduce their tax burdens.

The US corporate tax system currently has notionally the second highest statutory corporate tax rate among developed countries (although in reality, the enormous deductions that are permitted mean that many companies pay far less in reality) and the US Treasury has concluded that the current system is “uncompetitive, unfair, and inefficient”.

The most important aspect of the proposals so far as international finance cerntres are concerned is the proposed establishment of a new minimum tax on foreign earnings, to encourage domestic investment.  The Treasury report says that the current system “is subject to gaming, as corporations manipulate complex tax rules to minimize taxes and, in some cases, shift profit actually earned in the United States to low-tax jurisdictions.”
The current US tax system allows foreign subsidiaries of US-based multinationals to defer taxes on their overseas income until they repatriate it to the United States. However, as many companies reinvest, rather than repatriate, a significant portion of their income overseas they may permanently avoid US taxes on much of it. This gives US corporations a significant opportunity to reduce overall taxes paid by shifting profits to low-tax jurisdictions — either by moving their operations and jobs there or by relying on accounting tools and transfer pricing principles to book profits there.

Under Obama's proposals, income earned by subsidiaries of US corporations operating abroad would be subject to a minimum rate of tax, although as yet there is no indication of what rate might be set for such a proposal, and nor is there any discussion of how such a plan would be operated and enforced in practice.

A second initiative in the plan, which mirrors what is going on in some Scandinavian countries, is the proposal to treat “carried interest” as income, rather than capital gains - something which has been trailled for some time now but which remains hugely unpopular with the private equity and venture capital industry.  Today, fund managers pay the capital gains rate of 15% on their carried interest but, under Obama's proposal, it would be increased to an ordinary income rate that, for most fund managers, would be around 35%.

The Obama proposals are likely to be very unpopular with international finance centres and fund managers alike, but they can take comfort from the fact that the plan is unlikely to be passed through a Congress that has been paralyzed on tax matters, at least until the November elections.

Cayman and Bermuda get into a very public spat

Whilst offshore finance centres are fiercely competitive, they usually steer clear of explicitly denigrating each other in public.  As in the world of international diplomacy, overt criticisms of other jurisdictions are fairly rare and tend to be couched in polite or veiled terms. However, McKeeva Bush, the Caymanian Premier, has never been one to worry too much about such niceties and has launched an extraordinary attack on rival Bermuda, which has traditionally been the world’s leading centre for the insurance and reinsurance industry.  Speaking at the 11th annual Insurance-Linked Securities Summit, Bush said that the Cayman Islands was now a better choice and could grow in this market “without the malice, without the inhibitions of race, without the inhibitions of transport” that, by implication, he accuses Bermuda of suffering from. 

His comments come on the back of changes to immigration policy in Cayman designed to entice the insurance industry (such as immigration concessions specifically for the insurance industry, and fast-tracked application processes which may result in permits being granted in days rather than the usual weeks or months) and an indication that his government intends to offer financial concessions that will reduce operational costs compared with other financial centres.  All this comes at a time when Bermuda has adopted new capital rules which are similar to the European-led Solvency II regulation – something which some insurance industry experts believe will lose Bermuda a significant amount of insurance business, and which is believed to have come about as a result of European political pressure.

The fact that Cayman is bringing in initiatives to try to out-do Bermuda is hardly surprising – the international finance centres are all engaged in a constant competition to get an edge over their rivals and the insurance/reinsurance markets are a highly lucrative prize.  But the choice of inflammatory and grandiose language is certainly unusual and has clearly upset the Bermudans.

Apart from his jibe about malice and race, McKeeva also said that immigrants in Cayman could still build decent homes and could still own them, and crowed that “My rating is still AA3 rating – what is theirs?”. This was a reference to the downgrade of Bermuda’s sovereign credit rating last year to AA-, but in referring to it as “his” rating McKeeva Bush shows an extraordinary degree of hubris.

Bermuda’s Premier Paula Cox responded robustly to the attack, but in more measured terms, saying, “Only the naive would be foolish enough to count Bermuda out,” and that Bermudians were "fearless in representing our national interest" but "principles-based". She said “You cannot seriously hope to operate a credible, successful, premier international centre without being reputationally sound and intellectually nimble and innovative.”

Whilst some amused onlookers await the next round of the sparring match there are others who believe that at a time of economic instability and political turmoil, the smaller international financial centres should be working together to protect the offshore proposition as a whole, rather than taking pot-shots at each other.

Appleby open PRC fiduciary services business

Appleby has announced that it is to open an office offering fiduciary services in mainland China on 2 April this year.  The new office will work closely with with the firm’s existing Hong Kong office, which has operated for over 20 years.

The Appleby Group has existing offices in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, the Seychelles and Zurich and claims to be the largest combined legal and offshore fiduciary group in the world. 

Shanghai is predicted to be one of the world's largest financial centres by 2025, a fact which has not gone unnoticed by many in the fiduciary sector, and there has been notable interest in establishing Asian presences from many offshore service providers.   However, Asia is a difficult region in which to establish new businesses and those, such as Appleby, who have a long track record in the region can be expected to have a natural advantage over many of the newcomers. 

Horizon - a cautionary tale for investors

Interest in trust companies is flying high at the moment, with many investors attracted to the annuity income that they tend to generate, and their relative resilience through a period of downturn. 

For over 20 years from the 1980s, the fiduciary business enjoyed a golden period where it seemed that anyone who had the presence of mind to open for business could do so with little difficulty, and could expect to reap the rewards of a very healthy steady income for many years to come.  And many did just that - in Jersey alone there were hundreds of trust companies established, ranging from small 2-3 man bands, to large integrated fiduciary businesses. However, increasing regulatory complexity and stiff market competition, combined with the current economic turmoil being experienced in many of the world's key markets, mean that whilst opportunities undoubtedly exist for the better fiduciary groups to build phenomenally strong businesses we are starting to see clear winners and losers emerge. 

18 months or so ago Horizon Group was a successful multi-jurisdictional trust company employing around 40 people and with US$1 billion in assets under management.  Since then, things have gone badly wrong, with the company having ceased trading and the only glimmer of light being the fact that Jersey Trust Company and Spearpoint have agreed to take on large parts of its business.  This will save 12 jobs in total, with 9 of the Horizon employees moving to JTC, and a further 3 to Spearpoint - undoubtedly a big comfort to the individuals concerned, but nonetheless a sorry end to a business which was once proud to boast of its market credentials.

Whatever the reasons for the dramatic decline of Horizon's business, its experience should be seen as a cautionary tale for investors.  The fiduciary business is a competitive and difficult one.  The fact that a company built a successful portfolio of business in the boom years cannot necessarily be taken as an indicator that it will be capable of withstanding a prolonged global downturn and an ever tougher regulatory environment, and investors really must have a very solid understanding of what they are acquiring, and the fundamental soundness of the business.  There are numerous examples of companies which turned in a healthy profit year after year when times were easier, but which now find themselves in unfamiliar territory and with management teams who are ill-equipped to deal with the changed circumstances.

Market consolidation offers opportunities to buyers who know what they are letting themeselves in for (and we can see emerging some who are particularly adept at acquiring stressed businesses in this market), but there are dangers lurking for those who are blinded by past success and an eagerness to jump on the fiduciary bandwagon because of its historically strong performance.  There will undoubtedly be more winners and losers to emerge in the coming months, so the key for investors is to understand what makes a winning formula in this new environment.

Offshore Mansion Tax Looming?

Rumours abound that the UK government are considering a move against offshore companies holding UK property in the next budget by imposing what is being referred to as an "offshore mansion tax".  The conservative party has always stood strongly against the Lib-Dems' desire to introduce a general mansion tax in the UK, primarily over fears that it would be politically disastrous in areas such as London and the home counties, where families who do not consider themselves to be rich may well own properties valued in seven figures.  However, it seems that this new variation on the theme, which would impose an annual tax of 1% of the value of homes worth over £2 million which are held in offshore structures, is seen as a more politically acceptable way of increasing tax revenue.  The rumours come in the wake of research which has established that there are 18,700 properties in London held through offshore structures, believed to be primarily so that the purchasers can avoid the need to pay stamp duty on sale.  This equates to roughly one in 20 properties in London, although anecdotal evidence from the capital's estate agents suggests that in the high-end boroughs such as Belgravia the proportion is probably closer to one in three.

The government apparently sees the Offshore Mansion Tax, which would only apply to properties which are held through offshore companies, as a politically popular means of recouping some of the cash lost through its inability to levy stamp duty on sales of the holding companies. 

FATCA - 5 jurisdictions agree new bilateral approach

A couple of weeks ago the US Treasury Department said that it was to take a series of measures designed to ease the burden which will be imposed on many financial institutions under the Foreign Account Tax Compliance Act (FATCA), after having faced a barrage of criticism. Yesterday, we saw the first moves towards this, with the announcement of bilateral arrangements with five EU nations (France, Germany, Italy, Spain and the United Kingdom) under which there would be a "new government-to-government framework for implementing FATCA".  The 5 nations will work together with the US to create a means to collect the information from their banks and send it at a governmental level to the United States, rather than each financial institution doing it separately.  Although it is good that the US is apparently trying to respond to the almost overwhelmingly negative feedback from financial institutions affected by FATCA, it remains to be seen how much this new initiative really relieves the burden on banks and trust companies.  The fact remains that the organisations will still have to have mechanisms to track and report on US persons, albeit that the reporting will be to their national government, rather than direct to the US Treasury.

Under the new bilateral arrangements, the US Treasury said the United States would reciprocate by collecting and sharing information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.  This is doubtless something which will cause consternation amongst US institutions, who may have a taste of the difficulties of complying with such onerous reporting burdens.

Noticeably absent from the initial group of 5 nations who have apparently signed up to the bilateral arrangements were many international banking nations such as Canada, Switzerland, the Netherlands, or any of the offshore financial centres such as Ireland, the Cayman Islands and the Channel Islands.  It remains to be seen whether the US will make efforts to include such territories in similar arrangements in the future, or if in fact this is an attempt further to isolate them.  The jury is still out.

Competition hots up for hedge fund administrator

On 1^st February the independent directors of GlobeOp Financial Services, the hedge find administrator, stated that they intended unanimously to recommend acceptance of a buyout offer from TPG Capital, which valued the business at £508 million, giving an earnings value of 11 times the adjusted operating profit for the 12 months ending 30^th June 2011. They reported that the Management Team and GlobeOp Directors who hold Ordinary Shares have irrevocably undertaken sell all of their shares to TPG if the offer becomes wholly unconditional.

But in a statement on the 5^th February financial software provider SS&C complicated the picture by announcing that it had been conducting due diligence on GlobeOp since January 14 with the approval of GlobeOp's independent directors and was still considering its position.  It urged shareholders to wait for its next move before deciding whether or not to accept the offer from TPG.  GlobeOp subsequently confirmed that they have indeed been cooperating with SS&C in a due diligence exercise, which perhaps makes the timing of the TPG announcement somewhat surprising.

It remains to be seen whether SS&C will indeed come forward with a higher offer than TPG, but even if it does not then the GolbeOp story seems to be one of impressive success since its inception in Luxembourg in 2000 by a group of alumni from the collapsed Long Term Capital Management.  The independent financial administrator specializes in middle and back-office services and integrated risk reporting to hedge funds, managed accounts, and fund of funds, through 11 offices in onshore and offshore jurisdictions.  It now has US$173 billion in assets under administration, a remarkable recovery from a drop to less than $80 million in 2009.

The financial turmoil that erupted in 2008 undoubtedly created many term challenges for GlobeOp, but the longer term impacts of the crisis were in fact were very positive for it, as investors demanded greater asset valuation transparency from fund managers, independent confirmation that assets actually existed, and improved risk analysis – all services which GlobeOp specialised in providing.  As a consequence of this and other increasing administrative and regulatory burdens, fund managers who had previously managed their own funds internally began in greater numbers to hire independent administrators, and GlobeOp’s AUM began to rise steadily.  

This is a very similar dynamic to that which has been seen in other areas of the fund industry, such as private equity, where funds have increasingly abandoned in-house administration in favour of an out-sourced model.  Clearly TPG and SS&C have recognised the potential of businesses which are likely to thrive from the increasing complexity of regulation and administration which has been an inevitable consequence of the market problems and scandals which have beset the financial industry in the past 4 years.

Duke Street announce first leveraged buy-out of UK law firm

For the last few years, many law firms have been predicting that the Legal Services Act, which came into force on 6th October 2011, would be something of a damp squib and make little impact on the majority of law firms.  However, early signs are that in the commodity end of the market at least, where personal injury insurance litigation is big business, there are some big changes coming to the competitive landscape, with the announcement of the first ever leveraged buy-out of a UK law firm. 

Private equity house Duke Street has today announced that it has acquired a majority stake in the Parabis Group, the parent company of insurance litigation law firms Plexus Law and Cogent Law, in a deal which values the combined group at between £150m and £200m.  Although EBITDA figures are not available, it is understood that revenues for Parabis are expected to be approximately £160 million in the current financial year. 

Parabis provides personal injury litigation services via its Plexus and Cogent Law arms, and acts for a large number of insurers in the UK.  But the firms have gone further than the provision of traditional legal services, as, like Jersey's CPA, they have a number of other non-legal service deivisions, which handle claims management outsourcing, rehabilitation, loss adjusting, health & safety assessment and audit work. 

The combined Group has 60 partners, approximately 400 lawyers and 600 paralegals and is led by chief executive Tim Oliver and commercial director Tim Roberts.  They will be joined by Paul Lester, former chief executive of VT Group, and Bob Scott, former group CEO of Aviva, who will be appointed as non-executive directors. Lester will become chairman of Parabis on the deal's completion, which is expected to be within 3 months, and is dependent on regulatory approval.

Duke Street, who follow a buy-and-build model, are expected to focus on extending the business process outsourcing elements of the business, and will be looking to acquire other complementary firms.

The annoucement by Duke Street follows on from Australia's Slater & Gordon, the world's first publicly listed law firm, having acquired UK personal injury specialist law firm Russell Jones & Walker, and the Liverpool-based personal injury law firm Silverbeck Rymer having been acquired by software and outsourcing firm Quindell Portfolio.

There will no doubt be a temptation for those working in other parts of the legal market to dismiss these developments as something which are unlikely to spread outside of the specialist work of personal injury, but to do so could be a dangerous misjudgement.  The introduction of significant investment capital into providers of outsourced services for law firms is likely to have an impact on the wider legal sector, as clients become increasingly unwilling to pay top City rates for relatively low level work.  Firms who ignore this dynamic do so at their peril.

JFSC pulls the plug on Trustcorp Services

The JFSC has decided, following an investigation into a number of companies in the Trustcorp Group (including Trustcorp Services Limited and Trustcorp Secretaries Limited) that they are not fit and proper persons to be licensed for trust company business, and will revoke their licences following an orderly winding up of the businesses.

In addition, the principals of the business, Michael Kenney-Herbert, David Roberts, David Hill, William Davies and William Simpson have also been found not to have acted with fitness and propriety in the management of the businesses, and have accordingly been disqualified from having any involvement with another registered business without the prior consent of the JFSC.

The failings catalogued by JFSC are numerous, but key amongst them are failure to keep proper accounting records for client entities; over-reliance on intermediaries and a failure to independently verify the purpose of a transaction; ineffective money-laundering procedures and a failure properly to record and manage conflicts of interest.

The investigation did not concern affiliated business Trustcorp (Jersey) Limited, which continues to be authorised in the conduct of its business by JFSC.  Hawksford announced its acquisition of Trustcorp (Jersey) Limited last week.

The ruling by JFSC will put more pressure on smaller trust companies who may lack the infrastructure properly to be able to manage compliance risk to the standards required by the JFSC, a dynamic which has already led to some consolidation.   JFSC is determined to be able to show to the world that the fiduciary business in Jersey is properly controlled and managed, and key to this is taking tough action against those who fail to meet the standards set.

Jersey's new Private Placement Fund regime

Jersey has relaxed its famously tough stance on promoters of funds somewhat, as part of  the introduction of a new streamlined regulatory regime for authorisation of Private Placement Funds - closed-ended funds which are privately offered to up to 50 potential professional or sophisticated investors who are each investing at least £250,000 in the structure (“PPFs”). 

The new regulations are likely to be attractive to private equity and real estate funds, and particularly those with relatively new or less established promoters, as they represent a relaxation of JFSC’s traditional “promoter test” (which sets out detailed criteria against which the JFSC vets new promoters of funds).  Under the new regime, the promoter of a private placement fund must be of good standing and, among other things, be established in an OECD member state or another jurisdiction with which the JFSC has entered into a Memorandum of Understanding on investment business and investment funds and either (a) be regulated in that jurisdiction; or (b) have amongst its principal persons relevant experience in relation to promoting, managing or advising on institutional, professional or sophisticated investors' investments using similar strategies to those to be adopted by the fund.  This is expected to make it easier for promoters comprising small teams of individuals who have left larger financial institutions to set up new businesses in the Island.  Traditionally, such promoters have sometimes found it difficult to obtain authorisation to establish in Jersey, but the new regulations should not only make it simpler for them to do so, but will also provide a fast-track 72-hour authorisation process for the approval of funds which meet the criteria of a PPF. 

The Alternative Investment Fund Managers Directive, which must be implemented by EU Member States in 2013, should allow PPFs to be marketed to professional investors in the EU pursuant to national private placement regimes until at least 2018.  

The new regulations have been designed to balance Jersey's need to maintain its reputation as a strong and responsible regulator, with the need to remain internationally competitive by allowing a lighter regulatory touch for structures aimed at sophisticated investors.  The new rules have been widely welcomed by Jersey's fund industry, which has shown resilience in the face of the international economic downturn.  Latest figures show a 10.5% year-on-year growth in the net asset value of funds being administered in Jersey.

Jersey will continue to operate its COBO regime also for those specialist private funds which do not fall within the scope of the new Private Placement rules.