04 July 2017

The role of Guernsey Resident Non-Executive Directors in Guernsey Funds

The changed regulatory environment

There is still, regrettably, a lingering (albeit dwindling) perception that the requirements for Guernsey resident directors in connection with Guernsey funds add little or no value to the fund and act mainly to provide sinecures to local non-executive directors ("NEDs").

The basis for such criticism is perhaps historic. Guernsey has always adapted its offering to the demands of the market and this perception dates back to an era when non-executive directors in all spheres and markets (including those companies listed on the London Stock Exchange) fulfilled a more passive role.

As the world has evolved, and shareholders and regulators alike have demanded more from their non-executive directors, and as tax authorities have demanded more substance around governance structures, so the NED market in Guernsey has changed with it.

NEDs are now required to add real substance to the board in the context of greatly increased regulatory demands and scrutiny (and willingness on the part of Guernsey's financial services regulator, the Guernsey Financial Services Commission (the "GFSC"), to initiate proceedings in the event of a failure to meet the standards expected).

The GFSC places tremendous importance on the composition of Guernsey boards, which are closely scrutinised both before and after any approvals or licences are granted. A "fit and proper" test is applied to all directors of licensees and funds, having regard to factors such as their probity, competence and experience, professional qualifications and understanding of the obligations to be assumed. Guernsey also has primary legislation, conduct of business rules and codes of corporate governance relating to the establishment and operation of licensed entities based on international equivalents.

Guernsey's NED community now enjoys a tremendous depth and breadth of experienced entrepreneurs, asset managers, senior partners of law and accountancy firms and other professionals available to assist, more often than not often with specific asset expertise.

In this context, it is relevant to highlight the significant number of Guernsey domiciled, London-listed funds. These have a number of Guernsey directors appointed and will [often / typically] subscribe to the Association of Investment Companies' Code of Corporate Governance as well as the Financial Reporting Council's UK Corporate Governance Code. Other than the UK, Guernsey has (by a significant margin) more companies listed on the LSE than any other country, meaning Guernsey directors and service providers well versed with the highest standards of governance.

Scope of involvement of Guernsey NEDs

Fund promoters should be aware that they are largely able to involve Guernsey directors to the extent to which they choose. This could be anything from a board comprised fully of Guernsey directors to a solitary director to satisfy regulatory oversight requirements.

In a typical Guernsey fund structure (a Guernsey Limited Partnership with a Guernsey Company as general partner ("GPCo") managing the fund pursuant to a licence, with the GPCo administered by a Guernsey administrator), the GPCo is only required to have one Guernsey resident director. The GFSC requires this for a simple and practical reason: to provide a point of contact between the fund and the GFSC to facilitate regulatory oversight.

However, should the fund require greater involvement of Guernsey based directors, Guernsey's NED community is able to provide the requisite depth and breadth of experience and technical expertise to satisfy the GFSC's "fit and proper" board composition requirement and to ensure the highest standards of corporate governance.

Finally, there is no absolute requirement for board meetings to be held in Guernsey. It is principally the risk of the vehicle being deemed to be managed in other jurisdictions – and the possible negative tax and regulatory consequences that may ensue - that drives this. We would, though, qualify this by pointing out that the administrator will often require at least quarterly meetings to be held in Guernsey to enable it to discharge its regulatory oversight requirements.

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