Guernsey is set to add foundations to the "toolkit" available to its legal and financial services industry. This article examines the thinking behind the new legislation and how advisors might use these structures.

Guernsey is set to add foundations to the "toolkit" available to its legal and financial services industry. This article examines the thinking behind the new legislation and how advisors might use these structures. The second part of this feature is to follow tomorrow.

As international financial centres, the UK Crown Dependencies compete vigorously with their peers on the world stage in terms of introducing new products and services, and are known for their innovation. Guernsey, however, is soon to introduce not one, but two new pieces of legislation which look set to become big business for the island’s financial and legal sectors.

While most eyes might be on Guernsey’s imminent overhaul of its Intellectual Property regime to offer better image rights protection for celebrities, it is the island’s coming introduction of foundations which has its fiduciary sector excited. Guernsey’s proposed Foundations Law promises to be a game changer which will lay to rest some of the previous negative connotations surrounding the use of foundations, industry experts told WealthBriefing during a recent trip to the island.

The six-week consultation period for Guernsey’s proposed Foundations Law finished on 23 May and the final law will go before the island's government next week for approval. If passed (as expected) and ratified by the UK Privy Council, it is hoped that clients will be able to deploy Guernsey foundations by early next year. It is a long-awaited piece of legislation which has been kicked around by the island’s legal industry and government for several years, and will put Guernsey on a level-footing with Jersey, which introduced foundations in 2009. Guernsey’s Trust Law Revision Working Party first identified an increasing interest in a locally-regulated foundations back in 2004. The States of Guernsey - the island’s legislative body – then approved the concept in 2006, alongside revisions to the island’s trust law; law officers, regulators and industry representatives have been working on finalising the consultation draft of the foundations law for the past five years.

The technicals

Private foundations used to be a structure primarily used in civil law jurisdictions, and are already well-established in IFCs like Liechtenstein, Panama and the Bahamas. The first crucial difference between a foundation and a trust is that the former has a legal personality (and can therefore sue and be sued). The second is that foundations are governed by a charter which ensures that its assets are administered according to contractual terms, rather than under fiduciary responsibility. Guernsey Foundations will have to file their charters with the Guernsey Company Registry and make similar filings to a company, much in the way that Jersey foundations must file with that island’s Register of Companies.

There are however several key differences between Guernsey and Jersey foundations. Firstly, Guernsey’s law obliges its foundations to start with an initial endowment, whereas Jersey’s does not. Secondly, Guernsey’s law will allow the founder of the foundation to set out the rights of its beneficiaries, while Jersey law says that the beneficiary has no rights (unless otherwise provided for). Thirdly, in Guernsey the council members who administer the foundation will have a fiduciary duty, whereas Jersey law appears to negate any such duty.

However, the most important difference between the laws of the two islands relates to the role of the guardian (whose role embodies some aspects of the protector of a trust or the enforcer of a purpose trust). In Jersey the guardian acts for the foundation to ensure that the council carries out its functions, but in Guernsey the guardian is accountable to the beneficiaries, and in particular any who are disenfranchised through age or disability.

Generally, foundations tend to incorporate some elements of a trust and some of a company, and different jurisdictions have chosen to bias their foundations one way or another – a Panama Foundation is closer to a limited company, whereas the Jersey version resembles an incorporated trust. In simple terms, Guernsey foundations take the civil law concept of a foundation and combine it with elements of trust and corporate law.

International appeal

On one level, Guernsey’s introduction of foundations is an attempt to draw more international business and it is hoped that the new structure will be attractive to clients from civil law jurisdictions in Europe, and in emerging markets like China, Russia and Latin America. Clients in civil law jurisdictions are typically not as familiar with the concept of trusts as their counterparts in common law countries like the US, Canada and the UK. “Guernsey foundations will be an easier ‘sell’ to those with a civil law background…in all likelihood they will be more comfortable with it,” said Alasdair Davidson, partner at Bedell Cristin. . A crucial part of this acceptance is that foundations have an identity in law or “persona ficta” (rather like a company) whereas “a trust doesn’t legally exist…it’s simply a relationship,” he continued.

In addition to foundations being more familiar to clients from civil law jurisdictions, trends such as the rapid globalisation of business and increased international mobility within families mean that foundations now have far wider applications than previously. One very useful way in which they might be deployed is at the head of family business structures where family members (and business divisions) are located in both civil and common law jurisdictions. Here, a family could establish a purpose foundation to hold shares in a private trust company which controls the international trading interests of a family and its various businesses. Experts predict that foundations are likely to become much more common among the wealth structures deployed by Asia and South American client families (which are of course broadly entrepreneurial in character).

The fact that Guernsey has an eye on the preferences of emerging markets clients is in fact indicative of a broader trend which has seen the island aggressively ramping up links to Asia, for example. While traditionally the Channel Islands may have looked to the UK and northern Europe for the bulk of their business, this is changing due to the fact that much of the world's wealth creation has been happening elsewhere over the past decade. “A transformation is definitely happening…Guernsey is moving away from being UK/Europe dependent,” said Andreas Tautscher, chief executive for the Channel Islands at Deutsche Bank Private Wealth Management.