By Brett Dale Bridge, Director – Business Development, Europa Trust Company Limited

In the fast-paced, ever-changing world of finance, where new trends appear and vanish with astonishing speed, there’s a pillar of stability that often goes forgotten amidst the glitz and glamour of new-age financial products.
Enter the humble Gibraltar limited liability company, a timeless structure that has weathered the storms of economic evolution and remains an enduring choice for savvy entrepreneurs and businesspeople.

Separate legal entity

A limited company is a business structure where the company is a separate legal entity from its owners, managers, and employees. This means the company itself can own property, incur debts, enter contracts, sue, or be sued. The term limited refers to the fact that the shareholders’ (owner’s) liability for the company’s debts is limited to the amount they invested in the company.

While recent years have seen a surge in interest surrounding new financial ventures and buzzwords like NFTs, ICOs, and cryptocurrencies, the reliable and steadfast allure of Gibraltar’s limited liability companies have persisted.

Gibraltar limited liability companies date back to almost a century. Despite their long history, they have not remained static. They have evolved alongside the shifting financial landscape and adapted to modern demands while still retaining their core of simplicity and reliability.

Companies Registry

Unlike the complex intricacies and high risks associated with more recent financial ventures, establishing a Gibraltar limited liability company is refreshingly straightforward. With the ability to tailormake a company within 24 to 48 hours, entrepreneurs do not encounter the complex processes and steep costs often associated with the latest financial trends. Since March this year, the local Companies Registry now offer a same day registration.

But a simple and straight-forward process of incorporation does not equate to limitation. On the contrary, Gibraltar limited liability companies offer a remarkable degree of versatility. They can not only facilitate traditional business activities but can cater to a wide array of business endeavours from trading and consultancy to investment and asset holding.

Red Ensign Flag

Gibraltar limited liability companies can also extend their reach into the unexpected realms, such as maritime ventures. The ability to hold a Gibraltar vessel, complete with the prestigious Red Ensign Flag benefits, underscores the adaptability and breadth of opportunities these companies can afford.

While Gibraltar companies can provide a platform for diverse entrepreneurial pursuits, they also allow for directors and shareholders to be of any nationality with the added advantage that company officers need not be resident in Gibraltar.

Above all, it is possible to start and mange a Gibraltar limited liability company from the comfort of your own home and receive the same expertise and assistance from local licensed company managers, each step of the way as if you visited Gibraltar in person, with no changes in the quality of service.

Beyond the advantages of her limited companies, Gibraltar itself, boasts a host of advantages that makes it an attractive jurisdiction choice for businesses aiming for tax efficiency and credibility.

Gibraltar is a popular financial destination for an eclectic mix of international executives. authors, sportsmen, corporations, individuals, families, and many others, who want to achieve their financial and business objectives. They understand the importance of tax and succession planning and protecting their assets from unexpected events.

Automatic access to UK business

The jurisdiction has established itself as a prosperous financial centre over the last 40 years. With a favourable low corporate tax rate that has been subject to and passed the scrutiny by the European Union, MoneyVal and the OCED. Gibraltar is positioned on the Whitelist also offers a stable political and economic environment, with commitment to international standards of transparency and regulation. This ensures that companies operating within its jurisdiction can enjoy the benefits of a reputable and well-regulated financial centre. Additionally, company and Trust Managers must be authorised and are regulated by a supportive Financial Services Commission.

It is also the only territory in Europe with automatic access to the UK in insurance, banking, investment services and any other similar area where EU crossborder directives currently apply, making it a compelling proposition for businesses.

Gibraltar presents itself as an enticing destination for those looking to establish a solid foundation for their ventures. The global financial world rapidly changes with many trends appearing and vanishing. While these trends come and go, it is reassuring to know that the timeless constancy of Gibraltar’s best and humble business structure, the limited liability company, quietly endures, offering a steadfast anchor with its advantages in the ever-shifting tides of the sea of modern finance. Now is the time to incorporate your Gibraltar company.

The post A legacy of stability in the financial world appeared first on Gibraltar International Magazine.

By Thomas Gehlen, Senior Market Strategist, SG Kleinwort Hambros Bank Limited Gibraltar Branch

It’s all been a bit much. In quick succession, a pandemic, an armed conflict, and a banking crisis upended life as we know it. Demand shifted, inflation ensued, and central banks sprang into action. Now, more than two years after the first-rate hike, central banks have finally reached their peak. Tighter monetary policy will undoubtedly weigh on economic growth, although any resilient economy should adapt to it. It’s not the pandemic, war, or banking failures shutting it down either – countless such events occurred since reliable records began some 400 years ago. More fundamentally, two of the main drivers of economic expansion – population growth and labour productivity – are now beginning to stagnate.

Once upon a time

The banking failures in March raised uncomfortable memories of the great financial crisis of 2008. But lenders have failed much earlier than that. In 1672, King Charles II effectively defaulted on debts racked up over years of waging war in France. The dire economic consequences of the resulting collapse of goldsmith bankers led to the founding of the Bank of England to support the management of public finances going forward.

In the 350 years since, the United Kingdom never defaulted on its debt again. Meanwhile, inflation has been more erratic and interest rates were higher than today, but the empire prospered: economic growth not only nurtured private wealth, but significantly improved the standard of living of the general population. Life expectancy rose, child mortality dropped, and the public enjoyed the spoils of an increasingly global economy.

Ostensibly, a rising empire utilised the immense technological progress of the industrial revolution. Upon closer inspection though, the pace of expansion hinged on two factors that not only outlasted the empire but indeed accelerated following its demise: population growth and labour productivity. Now, both are beginning to slow.

Popular demand

In a modern economy, a growing population is invaluable. Rising consumption leads to higher income and, ultimately, enhanced economic growth. In the early 1800s, the average woman of childbearing age would give birth to five children in her lifetime, although life expectancy was still around 40 years. By 1950, the fertility rate had fallen but was offset by a significant increase in life expectancy. The world population grew without precedent.

In the near future however, for the first time in recorded human history, the global population is likely to peak. Dramatically improved living standards pushed life expectancy past 80 years, but progress is naturally diminishing. Simultaneously, fertility is falling below the crucial replacement rate of 2.1 children per woman in developed countries. Estimates for the timing and magnitude of the global population peak vary, but researchers agree that it will happen in this century.

Productivity perils

To offset the effects of a smaller labour pool, resources must be used more efficiently. Indeed, the acceleration of technological advance over the past few hundred years has truly been colossal, especially in the latter half of the 20th century. The invention of the steam engine and the light bulb were roughly 100 years apart; generations of workers would retire in broadly the same technological paradigm in which they first took up their trade. In comparison, the seven decades following the development of the first computer in the 1950s saw the invention of the space shuttle, internet, smart phones, and, lately, artificial intelligence.

After decades of soaring productivity, we are beginning to see stagnation on a global scale. In developed economies, processes are sophisticated; supply chains optimised. Future technological innovation is naturally unfathomable, and the rise of artificial intelligence may ring in a new era of productivity gains. Nonetheless, in developed economies, a return to the advances of old is unlikely.

Future challenges

In the wake of the financial crisis of 2008, investment returns became detached from real economic growth. The emerging paradigm – a return to less remarkable growth and money supply – does not signal the end of prosperity, innovation, or wealth creation. However, for investors it will become more challenging to identify value and capitalise on it.

• Challenge assumptions: Economic growth has been anything but normal over the past seven decades, and its drivers and impact on asset returns will almost certainly change over the next seven.
• Think quality: As liquidity drains from the system, it becomes even more critical to assess how investment opportunities will fare in the new environment.
• Think global: The nexus of population growth and productivity is the new holy grail. We may be entering the Indian century, or the Nigerian one. It will pay to be flexible and avoid unnecessary restrictions.

Successful investors endure because they constantly re-evaluate their environment, challenge their assumptions and adapt their processes. Flexibility will be key, and active management more important than ever.

The post Entering an age of normalisation appeared first on Gibraltar International Magazine.

2022 proved challenging for investors, with the pandemic aftermath and the Ukraine war, Fahad Kamal, Chief Investment Officer, Kleinwort Hambros suggests real assets could be one attractive option for 2023

Last year traditional balanced portfolios – consisting of 60% stocks and 40% bonds – suffered a disastrous double whammy. Equity markets were hit by lingering supply chain issues, shifting demand and tightening financial conditions, while bonds struggled with the reversal of the ultra loose monetary policy that has lasted more than a decade. Among other assets, gold rallied during the initial stages of the war but then fell, given the increased attractions of interest bearing assets. Meanwhile, cryptocurrencies plummeted, with many losing 50% or more of their value.

Rising inflation

In an environment of rising inflation and declining markets, investors needed prudent positioning and maximum diversification. One possible solution: real assets, such as property, commodities and infrastructure.

Unlike most financial assets, their value is largely defined by their inherent physical worth. The most basic example is property: a building which generates a steady cash flow from the rent charged to its occupier.

These days, however, investors can take a much more nuanced approach to real assets. Within property, they can invest specifically in hospitals, schools, prisons, affordable housing or care homes. They can also take advantage of attractive opportunities in infrastructure, such as toll roads and bridges, trainlines, smart grids, waste-toenergy plants and digital infrastructure. Many of these assets derive their value from their intrinsic worth to society: they are fundamental to all aspects of modern life.

Financial market movements

While the value of real assets is not decoupled from financial market movements, their risk profiles tend to be markedly different from those of other risk assets, such as equities. This gives them the diversification benefits investors desperately need when equities and bonds are falling in tandem. Crucially, cash flows for real assets are often based on long-lasting contracts, and hence are less sensitive to short-term economic factors than equities. This dependability of cash flows also allows their managers to pay out a large proportion of revenues to investors with regularity once projects are up and running.

This greatly reduces swings in the capital value of the investment. For example, over the past three years (which includes the pandemic), the simulated volatility of a diversified portfolio of infrastructure and specialist property assets averaged 10.8% (measured by its annualised standard deviation of returns), well below the 18.5% for the MSCI All County World Equity Index1. Real assets can also provide an element of inflation protection. That is because contracts for the usage of real assets often include clauses that periodically adjust cash flows to account for inflation.

Open-ended REITs

Naturally, investing in real assets comes with its own challenges, notably liquidity. Even the more liquid vehicles, such as openended Real Estate Investment Trusts (REITs), traditionally employ gates to prevent large outflows at times of market distress when managers would not be able to liquidate holdings fast enough to meet redemptions.

However, during this time of uncertainty and slower global economic growth, we believe real assets are a valuable diversifying investment for the same reasons that we rely on them in real life. They are dependable pillars of society whose value is less affected by short-term economic issues.

The post Keeping it real in challenging times appeared first on Gibraltar International Magazine.

 Fahad Kamal, Chief Investment Officer, Kleinwort Hambros, reports on the possibility of renewed inflation in a post vaccination landscape

We began the year mired by the latest wave of the Corona Virus. On the horizon lays a post vaccination world, a surge in economic activity and the resulting inflation that may likely result.

Inflation is not a small matter and is potentially a huge risk to the market.

The potential sea change has several supports.

1. While neither quantitative easing (QE) nor deficit spending are novel, the sheer scale of the programs today certainly is. Most notably, the newly elected Biden administration in the US has pushed through a $1.9 trillion stimulus package on top of the $900 billion support bill passed in late December – together, a staggering 13.4% of GDP.
2. Money supply has shot up dramatically, particularly in the US. In previous editions of QE, nothing on this scale occurred because much of the liquidity stayed on bank balance sheets. Therefore, the money multiplier remained low amid muted demand for loans.
3. With a rapid ramp-up in vaccinations in most developed countries, expectations are that a surge of spending will occur once restrictions on mobility are lifted later in the year, particularly in the services sector. Economists fear that unleashed consumer spending will overheat the global economic recovery and stoke the inflationary pressures fomented by huge government spending and monetary excess.

For these (and other) reasons, inflation expectations have surged from the historical lows witnessed in the throes of the pandemic last year. Presumably, if inflation continues to rise, central bankers may have to start raising rates, thereby calling into question historically high prices of stocks when compared to earnings.

Undoubtedly there is going to be a short-term high velocity impact to inflation however, it will likely come back down again once those base effects have been taken into account. However, there are important mitigants.

1. The labour market:

There are gaping output gaps in the labour market. US employers now report 10 million fewer jobs than before the pandemic and US unemployment is at 6.3% vs. 3.5% last year. Wide swathes of the public are dependent on cash injections from the government simply to stay afloat; this is where the stimulus is largely targeted.

2. Real estate:

There is enormous underutilised capacity for office and retail real estate. If we assume these difficulties are representative of the retail industry in general, it is clear that the process of finding new owners as well as recognising losses for existing owners and lenders is going to be long and painful. If the downturn in the office market turns out to be as severe as in retail, the situation will become even more difficult. The development is set to work itself through the sector slowly and painfully (for the owners), for a considerable time to come. To compete with online platforms, lower prices must be part of any package offered by those businesses continuing to sell on the High Street or in shopping centres. Landlords should expect considerably lower rents to enable their tenants to compete.

3. Energy:

In March 2021, OPEC estimated that the world’s oil demand fell by roughly 10% in 2020 to 90.4m barrels a day. Given that productive capacity did not shrink, the self-restraint of major OPEC producers – cutting supply in order to maintain the price – was remarkable. But can it last? Several factors suggest it cannot. One of these being that all major producers have faced increased financial pressure in 2020.

A rise in actual inflation would presumably not be rapid, given the huge excess capacity in the labour market, diminishing demand for commercial real estate, and downward pressures on energy prices.

Prices may start to rise in the short-term, as a result of pent-up demand once economies go through post-vaccination bonanzas and subsequent increases in money velocity. However, this should be transitory, not structural. Moreover, this constructive spending surge should lead to robust economic growth and earnings, as well as higher employment. This is beneficial to corporates as it increases sales and profits while allowing for maintained margins, which helps support the case for equities and risk assets.

Finally, we take central bankers at their word that they have little intention to raise rates until pre-pandemic levels of unemployment and economic activity are firmly in hand. It is much more likely they act to curb the increase in yields – buying long-dated bonds as part of ongoing QE programs for example – than raising rates and endangering a nascent recovery.

The post Economic activity and the possible resulting inflation appeared first on Gibraltar International Magazine.

 By Fahad Kamal, Chief Market Strategist, Kleinwort Hambros

The first half of 2020 is now behind us, but it is a period indelibly etched into our collective memories. We entered this year cantering towards the eleventh year of a bull market, a long rally seemingly impervious to its own impermanence. Of course, it all came to a shuddering halt as the breadth of the Coronavirus pandemic began to register. The first quarter saw global equities (i.e. MSCI AC World index) fall by 20.4%. Volatility was at an all-time peak; in March, the global equities index moved by more than 3% in any direction 11 times out of 22 trading days. Context is important: prior to 2020, the last time global equities moved by +/- 3% in a single day was in 2016. In this environment – with critical unknowns as to the Coronavirus health consequences or the length of imposed lockdowns – we reduced risk across multi-asset strategies.

 Fiscal spending

What came next was nearly as surprising. Despite widespread lockdowns, near-total economic stasis, surging unemployment and a terrible toll in illness and death, the second quarter witnessed a powerful rally in risk assets, with global equities rising by 17.7%. With the benefit of hindsight, we can synthesise the underpinnings of the rally into two distinct categories: lockdowns – where enacted and complied with – worked well; Governments and central banks unleashed hitherto unthinkable levels of fiscal spending and monetary stimulus to help stabilise economies and provide liquidity to financial markets.

The critical question today, in the third quarter, is where do markets go from here? Indeed, volatility remains high, the Coronavirus is still surging across much of the globe – including in the US, the world’s anchor economy. Interestingly, while risk-assets have rallied given the reasons above, safe-haven assets have been equally well bid, with gold trading above $1,800 – a near-decade high – and government bond yields near all-time lows.

It is exactly at times such as these – where uncertainty and imperfect information rule the roost – we must rely on the investment principles which underpin our investment process. Those principles are to get the big decisions right (i.e. the broad weight of risk assets versus safety assets in portfolios); to take risk only when it is likely to be well rewarded (i.e. when valuations for risk assets are attractive); and to avoid large losses (i.e. as they are harder to recover from than shallower losses). At present, this is how we view the world through the lens of our investment process which considers the economic regime plus valuation, momentum, and sentiment signals from markets:

Economic Regime

Despite significant economic data surprises on the upside, the global economy is on track to suffer its deepest recession since World War II in 2020 according to the World Bank’s latest forecast (8-June), with global output set to contract by 5.2%. Per capita income will fall in the largest proportion of countries globally since 1870. While they are opening, advanced economies are still projected to shrink by 7% this year. In perfect conditions, a rebound may begin as soon as the third quarter. Our inhouse Leading Economic Macro Indicator (LEMI) has just registered an uptick from a regime of “contraction” into one of “recovery”, a favourable environment for risk-taking. However, given unusual noise around the indicators at present, we are awaiting further confirmation of economic stabilisation over the coming months.

 Valuations

Valuations for equities – the largest source of risk and return in most strategies – remain challenging on absolute terms. The US equity market, equal to nearly 60% of the global total, is currently trading at a forward price-to-earnings multiple of 22x, the highest since 2002. That is expensive. However, with rates near zero, there is a good case for a higher than usual tolerance to valuations, particularly for large-cap companies that appear to be immune to the business cycle (“secular growth”). Moreover, when compared to cash or government bonds, equities still have a clear advantage in terms of long-term expected returns. Therefore, while equities are expensive, there are few alternatives amongst the core asset classes.

Momentum

The second-quarter surge in equity markets is a case in point of why momentum is a critical factor in our asset allocation process. Markets don’t have to follow expectations, or even logic, and trends themselves can prove to be self-fulfilling. We view momentum on a slow-moving, month-end basis as it helps avoid whipsaw in oscillating markets, guiding us to take advantage of trends that have sufficient strength. As of the end of June, the global equity market just tipped into positive territory on the ten-month moving average metric that we favour. Should this be sustained, we will view it positively for risk-taking.

Sentiment

Sentiment for risk assets has oscillated wildly over the last few months. Of the indicators we follow, some, such as the S&P 500 net speculative positions imply some bullishness. Others, such as the ten-year US treasury net speculative positions, imply more bearishness. Overall, we are in neutral territory.

 Bottom line

Risk assets remain volatile (e.g. VIX near 30, well above its long-term average) and thus more unpredictable than usual; they are also expensive on most measures. Nonetheless, we note the economic regime and the momentum signals we follow have shifted towards increasing risk. Should these signals continue to be supportive, we may seek to add risk in the months ahead.

The post Getting warmer appeared first on Gibraltar International Magazine.

By Alan Mudie, head of Research and Strategy, Societe Generale Private Banking

The outlook for 2018 looks very familiar to keen observers of economies and markets. As was the case in 2017, we expect synchronized growth, sub-par inflation and stimulative monetary and fiscal policy, creating a supportive environment for risk assets such as equities.

Main Street versus Wall Street

In the years following the Global Financial Crisis and Great Recession, many observers were struck by the gap between sluggish economies and booming asset markets.

On one hand, companies were reluctant to expand their workforce or to make new capital expenditure commitments. This meant that many workers felt they were losing out, with talk of a jobless recovery. Low capital spending led to low productivity growth, implying little room for wage increases. And spiralling costs – e.g., for healthcare in the United States – suggested a decline in living standards.

On the other, interest rates were cut close to or below zero in an attempt to kick-start growth, pulling government bond yields down to historic lows in their wake. This meant less income for depositors, falling net interest margins for banks and rising liabilities for pension funds. Investors felt compelled to stretch for returns in riskier categories of bonds, pushing prices higher and yields lower. In turn, this helped spark a long bull-run in equity markets.

As has become apparent with the increasingly polarized political landscape, the benefits of the rise in asset values accrued in the main to a small number of already wealthy individuals, and the painful recovery from the crisis was mainly felt by the working and middle classes. It is hardly surprising that non-mainstream politicians and parties have gained such traction in recent years.

At last!

But at the same time as Donald Trump and Emmanuel Macron were seizing their presidencies, signs were emerging that a healthier economic recovery was underway.

First, the long slump in global trade has begun to reverse. Volume growth averaged 2.2% between 2010 and 2016, well below the long-run average of just under 5%, but accelerated to 5.1% in 2017. Despite worries about “deglobalisation” and protectionism, the synchronized upswing in the global economy is bearing fruit.

Second, companies around the world have begun to sanction higher capital expenditure budgets. And we continue to note signs of growth in corporate capex plans – Standard & Poor’s forecast an increase of 5.5% in 2017, after four years of declines. If confirmed, these increases suggest that we can look forward to improvements in productivity, which might open the door to higher wage settlements at long last.

Third, the Organisation for Economic Cooperation and Development’s latest Economic Outlook report forecasts an acceleration in global growth from 3.1% in 2016 to 3.6% last year, strengthening further to 3.7% in 2018. This is very close to the 1990-2007 average, encouraging news especially given that not one of the 45 countries covered is expected to contract over the next three years.

Finally, the United States Federal Reserve System has developed both a template for normalization for other central banks to follow – taper asset purchases and then halt them, hike rates then hike again and finally unwind securities holdings – and two guiding principles to achieve success, i.e. management of expectations and gradual implementation. For 2018, the economic outlook suggests further normalization but sluggish inflation means central banks will be in no hurry to over-tighten policy settings – all in all, a rather benign environment.

Staying the course

When we turn to financial markets, further similarities emerge. Corporate earnings growth is globally robust – the combination of low borrowing costs, negligible wage growth and strong demand helped boost profitability last year and should do so again next. Strong growth and rising inflation should eventually lift the long end of the curve. Credit spreads – the difference between sovereign and corporate bond yields – are narrow and should remain so. And expansion mode in the global economy tends to favour equity markets.

This being said, the economic expansion is well advanced in comparison with previous cycles, the positive backdrop described above is increasingly recognized by a broad consensus of investors and valuations across asset classes are stretched. As we embark on Another Lap of the economic and market track, the environment looks reassuringly familiar but we must be aware that the easy part of the race is behind us – it will be tough to maintain the same rate of progress this year.

The post Another lap appeared first on Gibraltar International Magazine.

The British overseas territory’s private banking sector goes back more than 160 years and today is developing new areas of operation, writes Ray Spencer in the second part of a report on Gibraltar banking

Key has been the adoption of digital banking – albeit somewhat later than the retail banking side of business – for private clients, a concept that seems to go against the image of close, even secretive, personal encounters with High Net Worth Individuals (HNWI).

The merger of S G Hambros with Kleinwort Benson (KB) last year by parent Société Générale, to create Kleinwort Hambros (KH) marked more than a change in name.  “We are developing a digital banking strategy for private wealth management – delivering a service through on-line advice,” new chief executive Eric Barnet, declared.

He was introducing the rebranded business to journalists in Gibraltar, where it has had operations since 1981 having bought Crédit Agricole in 2003 and ABM Hambros in 2008 – “a track record of commitment to the jurisdiction, which I hope, and expect, to continue”, he said.

The KB part of his business was already ahead, but by end-2017 Barnett expects KH “to have introduced digital account handling, with a wider range of customer services to include Kleinwort investment skills at lower initial levels of entry – down from the present £75,000 general minimum threshold to around a couple of thousand pounds when people are investing – from pensions to ISAs, for example”.

The rationale is that on-line competition arises from tech start-ups that have no history of investment, whereas with KH “people will know that it is a business used to dealing with money, they will gain reassurance, and we can reach a wider range of clients and offer an additional layer of comfort”.

The Gibraltar operation is “profitable”, he told Gibraltar International, and growth in assets under management in recent years – at a rate of 5-10%pa – “has come from expanding the market with HNWIs locally and across the world, not from other players”.

A Swiss privately-owned Gibraltar bank and asset management firm, Turicum, was established in 1993 by bankers, asset managers and lawyers from Geneva and Zurich, (where it has a representative office), and since January has offered internet access to accounts, check balances, make transfers and contact individual relationship managers.

Chief executive, Andreas Businger, relates: “It has been a major project, like driving a car whilst at the same time building and exchanging the motor, and a major challenge, but one that we – unlike some of the major private banks – have been able to do.” Turicum says it does not depend on external financing and “in order to protect the Bank and our clients’ wealth we do not engage in any risky banking activities”, including corporate and investment banking services, mortgages or commercial loans.

Another Swiss-owned private bank, Lombard Odier & Cie, has operated in Gibraltar for 30 years and provides a private client investment and asset management service, plus technology and banking services. Peter Caetano, managing director of the local business since 2015, says the bank “has witnessed and undergone many changes in its time, most significantly the ability to cater for Gibraltar resident clients following the end of the tax-exempt regime in 2010.

“We went from a booking office to a fully-fledged bank, adapting to the ever changing regulatory market”, he explains. With most clients being local or from the UK, he points to the bank’s “ability to constantly re-evaluate the world around us and create fresh perspectives”, a philosophy emphasised in its latest ‘Rethink Everything’ branding campaign.

The introduction of automatic exchange of tax information from this summer with more than 50 other jurisdictions as part of Common Reporting Standard (CRS), adds “a new dimension to the on-boarding process for new clients, and has placed an additional administrative burden on banks to report on impacted clients accurately and in a timely fashion”, Caetano points out.

Serious offence

More than 100 jurisdictions have committed to the swift implementation of the CRS and in 2018-19, CRS extends to much of the rest of the world! Automatic exchange of information involves the systematic and annual transmission of “bulk” taxpayer information by the source jurisdiction to the residence jurisdiction of the taxpayer.

As James Tipping, director of Gibraltar Government’s Finance Centre, points out: “Since January 2011 tax evasion has been a serious criminal and indictable offence with possible imprisonment of up to seven years, which was then a starting-gun for financial services firms to review their client lists and, if they had any doubt about the origin of money they handle, they need to have reported it.

“Thus, it is an offence not to report any suspicion as it could relate to money laundering as well as tax evasion.” It is a particular issue for banks generally, but particularly so for private banks.

For two years, the US FATCA (Foreign Account Tax Compliance Act) has meant banks provide information on US customer accounts, to which a UK-originated version was added last year for Crown Dependencies and Overseas Territories, and automatic exchange of information under the EU Directive on Administrative Co-operation for member States comes into effect in September.

In addition, Gibraltar has circa 151 tax information exchange mechanisms with some 90 countries around the world, including 27 bi-lateral tax information exchange agreements (TIEAs) that variously came into force from 2009 to allow for specific requests by competent authorities for detailed information.  It is believed that Gibraltar has received around 200 TIEA requests regarding individuals resident overseas or entities controlled by such individuals, but none have been sought by Gibraltar of other jurisdictions.

Personal choice grows

The total funds under management for Gibraltar’s seven private banks at the final quarter of 2016 was £7.4bn, compared to £6.4bn a year earlier, but in that time there has been a significant shift away from bank-led investment decisions to non-discretionary, client-made decisions – up 22% by value to reach £6.9bn.

There are five purely private banks in Gibraltar and two others with an element of retail banking, including Danish-owned Jyske Bank, which has been in the territory since 1987 after taking over A.L. Galliano Banker’s Limited, Gibraltar’s oldest private bank in private ownership that dated back to 1855.

Jyske’s original business was 60-70% with private clients, but it became “difficult after the 2009 Lehman Bros collapse”, recalls Christian Bjørløw, chief executive of Jyske Bank (Gibraltar). Five years ago, Jyske decided to become a full service bank, so that today private clients account for around 40% of business, with assets handled expanded to over £1m.  With a minimum of £150,000, “an increasing number of Gibraltar people are able to invest”, he notes.

Last year Bank J. Safra Sarasin (Gibraltar), which opened in 2001, took over the local branch of Credit Suisse as well as one in Monaco, acquisitions it describes as “an excellent strategic fit” that will allow it “to extend its reach in these attractive private banking jurisdictions”. This year saw Bank JSS (Gibraltar) establish, essentially the Credit Suisse business it took over in November, to provide wealth management services to private and institutional clients, and it is expected to re-launch the combined businesses this autumn.

Bank J. Safra Sarasin accepts deposits both from individual clients and other banking institutions, and said in November that it was “determined to further strengthen its position, as it believes in Gibraltar as an important financial centre”.

The Rock has not always been a successful place for Swiss bankers.  In 2013 EFG Bank closed its loss-making Gibraltar business (that it gained from Spanish-owned, Banco Atlantico), along with banks in France and Sweden in a move that cost up to CHF 11.7m (around £8m).

In 1987, other Spanish banks began private banking operations in Gibraltar, Banco de Bilbao and Banco Central, followed by BBVA Privanza International, and Santander jointly with Royal Bank of Scotland, but today none remain.

Barclays announced its withdrawal from Gibraltar after more than 100 years, first in retail banking by early-2015 and closed all of its operations locally by mid-2016 when it withdrew a small office dealing with large companies and very HNWIs, transferring that business to London and Jersey.

Its origins in Gibraltar, however, went back to June 1888 when as the Anglo-Egyptian Bank Limited it became the first non-Gibraltarian bank to open a branch.

Remaining confident

Lloyds Banking Group’s office in Gibraltar with 30 staff “provides a banking service to several thousand UK expatriate or international customers that reside in Europe” and for private banking they need to meet minimum eligibility criteria of a sole annual income of £50,000 or hold £25,000 to save or invest (or currency equivalents), or hold at least £100,000 to save or invest with the bank within six months.

Britain’s intended exit from the EU in 2019 has not discouraged private bankers.  Barnett says the merger of Kleinwort and Hambros was completed before the referendum vote in June 2016 and “our French parent was prepared to make an investment in the UK and its growth in the UK economy even if there was Brexit.

“We are confident that the UK still will remain the international centre for wealth management”, he asserts and the merger “is part of a long-term plan to expand our business in the UK and Anglo Saxon international jurisdictions” – the Channel Islands and Gibraltar. The combined operation has £16bn of assets and saw £2bn added in final 6 months of 2016, “demonstrating strong confidence in the business”, Barnett declares.

The prospect of Brexit for Turicum, a self-described ‘small to mid-sized bank’ (as measured by funds under management), is not seen as a particular problem, given its correspondent banking arrangements with Swiss, UK and Gibraltar banks.  However, Businger says: “It does present an ironic twist, as after Switzerland recorded a narrow binding referendum result in the early 1990’s to stay outside of the then European Economic Union, the bank’s founders decided to set up in Gibraltar [which is at present in the EU], and which was developing as a financial services centre”.

Turicum says it does not depend on external financing and “in order to protect the Bank and our clients’ wealth we do not engage in any risky banking activities”, including corporate and investment banking services, mortgages or commercial loans.

Staff numbers grew from 25 to 33 last year as a result of “continuing steady growth from what he describes as “a relatively small base of customers with an average investment level above €2m, mostly from Germany, France, England and Gibraltar”.  Bussinger reveals: “In 2015 our asset base rose by more than 30% and in 2016 it was a further 10% higher.”

The Bank, he admits, is “a very profitable enterprise” and Bussinger emphasises: “Gibraltar is our home and we are fully committed to the jurisdiction as we are not part of a bigger banking group that might decide to leave for internal political reasons.”

Launched in May 2015 as a State-owned retail bank, Gibraltar International Bank considers expanding into the private banking sector as a possibility, and subject to Board and shareholder approval.  “It will depend on the appetite of the market – we know there has been some movement in that market locally,” observes Lawrence Podesta, chief executive.  “We will need to see where we stand in a couple of years’ time and where Gibraltar stands, given Brexit”,

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In the first of a two-part report on progress of the jurisdiction’s banking sector, Ray Spencer finds availability of mortgages and to some extent other business finance has improved with the arrival of the government-owned Gibraltar International Bank

Moves to digital and internet transactions across the board are being fuelled by rising operational and financing costs that have put pressure on banking profits. In this report, we look at retail and full service banking, whilst in the following issue we look at how private investment and other banking on The Rock is expanding.
“The banking situation locally is healthy, with some competition, but also it is a difficult financial operating environment, because of negative interest rates in some of the main currencies”, explains Christian Bjørløw, chief executive in Gibraltar for 14 years of the Danish-owned Jyske Bank that handles some £1bn of assets locally and employs 100 staff.
“All of our currency exchange rates in Europe are with negative interest – currently minus 0.43% – and some corporate clients are paying more for this situation, although we take some of the hit”, he reveals, adding:  “There is no light at the end of the tunnel to see positive interest rates in the foreseeable future – it is not a problem for private clients for the time being, but for corporate clients it is an issue.  We can’t place their money on a 5-year basis, I have to pay them on demand, and even in Euros the 7-year Bond interest rate is negative.

Main income hit

Bjørløw points out: “These are areas where we make our main income.  It will hit the bottom line for all banks in Gibraltar, because we will have assets that are Euro-based, and even the base rate in Sterling has been reduced after the Brexit referendum.”
This stark warning comes at a time when both retail and private banks are showing signs of making progress locally, despite a significant reduction in the number of Gibraltar Financial Services Commission (GFSC) banking licences.  There were 21 banks ten years ago and 12 today, including foreign exchange specialist, Moneycorps, that opened locally last summer.
Some 30 years ago Jyske Bank took over the jurisdiction’s oldest bank, the family-owned retail Galliano Bank which was founded in 1855. Four years ago Jyske took the strategic decision to extend beyond private client business to become a full service bank.
Whereas private clients accounted for 60-70% of the total, today around 95% is local business split to 40% corporate, 40% private accounts and 20% in retail banking – current accounts, mortgages, etc.
Jyske’s expansion decision pre-dated by six months that taken by Barclays to withdraw from retail banking, leaving individuals and businesses with some 17,000 accounts to find an alternative home.
The initial fall-out from the surge of people seeking bank accounts was borne most acutely by the 116 staff at NatWest, which after a short while had to stop taking applications for new accounts and banking services due to the unprecedented demand in the personal and business sectors and the impact it was having on NatWest operations.
Now claiming to be the largest holder of banking deposits locally, NatWest has taken on some 5,000, mostly personal accounts from former Barclays customers.  Amanda Eccleston, NatWest [Gibraltar] country head since July, says only now is the bank considering lifting its applications pause on a staged basis.
“We are a local retail, corporate and commercial bank and do not provide services to customers in other EU member states, because we have no [financial services] passporting rights, being a branch of RBSI in Jersey, a non-EU country”, she points out.
Lloyds Banking Group with 30 staff has a reduced Gibraltar presence, but still services “several thousand UK expatriate or international customers in Europe with current and savings accounts, foreign exchange and investments advice services”.
Barclays is “in the process of winding down its physical presence within Gibraltar, but will continue to provide a relationship managed service to some of our local current Gibraltar clients from several divisions of the Barclays Group on a remote basis, meaning those clients that have bank accounts in other jurisdictions”, as a Group spokesman explains.
Its decision was part of much wider restructuring by the UK bank parent and led members of Gibraltar Bankers’ Association to support government delivery of a long-promised locally-owned retail bank, the Gibraltar International Bank (GIB), which opened in mid-May 2015 after just a year’s planning.
The initial idea was that there would be an automatic seamless transfer to GIB of the Barclays accounts, but IT issues caused delays and most migrated to other banks. “The corporate entities in particular, such as traders in Main Street, could not, understandably, wait a year for us to open”, Lawrence Podesta, GIB chief executive, says.  Even so, GIB opened with 60 staff and 3,500 mainly personal on-line accounts that has since grown to 8,600 accounts.

More proactive

For the past year, GIB has been more proactive.  “We now are more in line with what is expected of a retail bank and we have time to dedicate to clients and market ourselves to business.  We are encouraged by the results – the number and stature – with enquiries coming from top corporate entities in Gibraltar as well as individuals,” declares Podesta, who has experience of working in private and retail banking and originally trained with Barclays locally.
Deposit balances are above expectation at £300m, which gives GIB leeway for lending, an initial area of concern.  As Podesta reveals: “The lending book has grown at a steady pace, which is fine by us, because we still haven’t reached the 50% loan-to-deposit ratio.  We did, initially, cater for the government housing scheme projects; we committed to assist with mortgage lending for half of the overall housing schemes, about 450 flats involving some £22m in mortgages, and that was comfortably financed.”  But the bank has also provided another £27m in mortgages for other customers.
Eccleston concludes that NatWest still has high levels of concentration risk, because of a shortage of local mortgage providers. “We are running at a very high level. In the UK you would never have any one bank having a 40+% concentration risk, but we have in housing.” However, there are limited loan defaults: “Gibraltar is a well-performing jurisdiction in terms of the mortgage book and credit side.”

Easier home loans

Bjørløw submits: “Mortgage availability has eased; it is not difficult to get a mortgage.  There is no new huge development coming along, so most demand is coming from people moving on, but now only within Gibraltar.”  However, he agrees there is some concern at business loan availability.
“For a big project generally amongst Gibraltar banks there is a probably a shortage of funds and there is also the possibility of limits on lending for certain types of business (housing, for example) and even locations (individual developments) as a result of concentration risk for some banks at some times,” Bjørløw suggests.  “We have financed some small housing projects; we as a bank don’t want to get involved with a project that is only half finished, so we are quite conservative on credit risk.”
Being Danish-owned, Jyske says it has a different approach to business than typical British banks, which means 95% of decisions being taken locally rather than by teams external to the jurisdiction.
Using a network of 29 approved local intermediary introducers – accountants, lawyers and company managers – GIB has attracted accounts from mainly international clients not based in Gibraltar.
“Historically it has been a huge market and it gives an extra edge to the retail operation, even though we are here logically to service the local community of around 30,000 people –a considerable, but limited market”, observes Podesta, whose staffing has reached 78. “There is a necessity to engage in international business for the extended growth of the bank.”
Loan enquiries have come from the UK, “which we are looking at carefully, although it is a side-step to our main operation”, Podesta states, emphasising: “GIB will not engage in any loan proposition for Spain or elsewhere in Europe, because we would need to understand fully the complexities of a different regulatory environment.”

Cash use problematic

One of the biggest problems for local retail banks is that “Gibraltar is very much a cash-based society and many customers want to cash cheques – we are probably the only part of Europe that issues so many cheques and there is a cost to that”, relates Eccleston.
Until 2015, there was a local clearing system, but rising costs and improving operational efficiencies led to each bank arranging for its cheques to be processed on their behalf by a correspondent UK clearing bank, a process that takes seven days!
“All NatWest customers are being encouraged to use electronic means – Automatic Teller Machines (ATMs) if necessary, and also on-line banking and mobile apps.  For younger people, using cheques and cash is not the way things are done today”, she observes. “Going digital and using the internet is the way forward.”
There are 12  ATMs on The Rock.  As Bjørløw makes clear: “Cash handling and cash points are an enormous cost; Jyske has only two ATMs.  If I go to Denmark, I don’t use any cash and instead I use a VISA card or mobile app for payments.  I hope we soon will go more and more electronic for banking.”
GIB aims to be a digital bank, with ATMs in its banking hall for cash and cheques can also be deposited.  In April, the State-owned, but independently-run bank opened a cash centre in central Main Street with eight staff so businesses can deposit money and also arrange collection from shop premises.  With five ATMs in three locations, GIB is planning two more.  “Whilst not a significant revenue earner, provision of ATMs is a convenient service for clients,” Podesta acknowledges.
To ease things further, NatWest, Jyske and GIB agree there is scope in the territory for another retail bank, but consider it unlikely to happen.  Eccleston illustrates the issue: “One of the obstacles for newcomers is the Deposit Guarantee Scheme (DGS),which protects up to €100,000 per person on an aggregated basis, and the requirements for it.

Deposit guarantee obstacle

“In the UK if you are a member of the Financial Services compensation scheme, you are one of hundreds of banks, so your pre-funding in line with the EU Directive is minimal, but here in Gibraltar when you are one of few participants that is quite an obstacle in terms of set-up cost and pre-funding.”
Eleven authorised credit institutions contribute to the Gibraltar DGS that requires pre-funding to reach 0.8% of deposits by 3 July 2024 via nine annual contributions and GFSC’s Resolutions Unit reports: “We are on target.”
Costs have been hit in other areas too, Bjørløw emphasises: “We need more volume today to run a bank because of extra costs of compliance and regulation that have a huge impact on the whole business. In 2002 Jyske had one compliance officer in Gibraltar; today we have a department of ten people, with risk control and compliance capability.”
Despite rising costs in a competitive environment, the retail banks all say they remain committed to Gibraltar. GIB declared a £6m loss in its launch year, but plans for profitability by early 2019.
Podesta warns that EU Basle 3 regulations mean there is a need to keep a close watch on asset-to-loan and capital adequacy ratios. “The more successful we are, the more capital we have to put to one side as assets are capital weighted.  In all probability, there will come a time when we will have to ask the shareholder [the government] for more capital, not because the business has physically eroded, rather the contrary, and reserves would, by necessity and regulation, have to be increased.”

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A strong Gibraltar delegation returned from a short but intense mission to both Singapore and Hong Kong in July. The exercise was one of profiling Gibraltar financial services generally, but then also dealing with the specifics of the European regulatory framework which may affect both Singapore and Hong Kong based investment managers, and the options and solutions available to them through Gibraltar.
At a series of very well attended Gibraltar Government hosted technical sessions, the panel, who were made up of Gibraltar Funds and Investments Association (GFIA) representatives, as well as the Financial Services Commission, set the scene by setting out a series of very interesting EU statistics. The first speaker Adrian Hogg highlighted that although the population of the EU represents only 7% of the global population, it still represents 23.8% of global wealth. To put these statistics in perspective, it was also highlighted that China represents 19% of the global population but only 12.2% of Global wealth.
In addition to the above, it was also highlighted that the EU investor base in Hong Kong hedge funds account for approximately 18% of Assets Under Management (AUM), and 21% of Singapore AUM. In short, the message from the Gibraltar delegation was that the EU is a relevant market, and access to Europe a relevant matter to consider moving forward.
In my own part of the opening presentation, I highlighted that the position within Europe today is that the only way to distribute your fund are either through national private placement regimes, or through the pass-porting option granted by the Alternative Investment Fund Managers Directive (AIFMD). In previous trips to Asia we have often heard managers speaking about reliance on the concept of ‘reverse solicitation’ as a marketing strategy. The dangers of relying on this nebulous concept as a ‘strategy’ were highlighted in some depth, with the underlying principle being that it would not be possible to ‘solicit a solicitation’ and the importance of the jurisdiction-to-jurisdiction interpretation and guidance on what might constitute direct or indirect marketing in each. It is certainly the case of most practitioners that if managers based outside of the EU are not prepared to comply with the obligations of AIFMD, they are better advised to avoid Europe altogether than to rely on the no-mans land of reverse solicitation.

EU market through Gibraltar

After dealing with what would not work as a strategy for a manager based in Asia, we were also then able to deal with strategies that would actually allow access to the EU market, through Gibraltar.
In a pure AIFMD compliant context, a big focus of the first presentation was to highlight what I describe as the ‘build’ or ‘buy’ options for managers. The build option being that of a standalone establishment of a Gibraltar based AIFM, and the buy option being that of using a platform, or management company solution which would take the appointment as the manager’s appointed AIFM, but delegate the portfolio management function (potentially along with other non-core functions) back to Singapore or Hong Kong respectively. Under both build or buy options, the ability exists for Asia based managers to maintain their licensed and operating presence within their home countries, and have the Gibraltar AIFM delegate the core portfolio management service to them there, thereby obtaining the European footprint. In this context, the requirement for the delegation being on an objective basis, and the avoidance of any of the letter box provisions of AIFM were also discussed.
When we consider that it is envisaged that national private placement regimes are scheduled to come to an end in 2018, and that reverse solicitation is not a marketing strategy, we do envisage growth in the AIFM platform space and we are starting to see this growth across various fund jurisdictions in the EU, following very much the existing UCITS platform models that have existed historically. The Gibraltar proposition lies in being able to offer European access, in the same way as a solution from London, Luxembourg, Frankfurt or Paris, and this is a strong message in Hong Kong and Singapore where historical use of the British Virgin Islands and Cayman structure may start to change as the weight of compliance and transparency increases.
The Gibraltar Stock Exchange (GSX),  listing proposition was also placed before the audience gathered at both events with the core message being one of a Gibraltar listing’s visibility, and the global drive to disclosure and transparency. As well as dealing with the Listing process, GSX generated real interest on their proposed securitization offering planned for later this year. Here, the proposed creation of exchange traded instruments (ETI’s) would allow the securitization of alternative investments into ETI’s, which are completely free of issuer credit risk and linked directly to and backed by the underlying asset.
The ETI is intended to combine the advantage of a fund (the collateral from assets) within the flexibility in the design of a certificate (a derivative security issued by a bank). The ETI is a straight pass through instrument that delivers direct (delta one) performance of the underlying asset (in this case a fund). The critical point is that ETI’s although linked to the underlying performance of the fund, are not collective investment schemes. The ETI’s issued on a stock exchange can then be purchased by suitable investors through their broker relationship. They are not Alternative Investment Funds under AIFMD, but they are UCITS eligible assets and issued with an approved prospectus (and as such, suitable for public offering within the EU). Given that an ETI has no restriction on asset class, and that non-EU funds can also be securitized for listing on an EU exchange, there was a great deal of interest in this offering which GSX continues to develop with a group of experienced parties operating in this space.

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Everything seems to indicate that going forward, the financial sector will continue to be challenged by cybersecurity threats, despite the allocation of significant resources to this ongoing battle. The continuous challenge is brought about by the speed of technological change and the ever increasing level of sophistication of techniques used. Financial institutions currently find themselves attempting to home in on a moving target which substantially increases the risks posed.

The threat matrix is expanding

Threats are continuously evolving and the threat matrix is expanding. At the same time, banks and similar organisations are under pressure to enhance their product offering, normally requiring the integration of new technologies.

Balancing technological expansion with assurance on technological security is an extremely difficult task and a costly (but necessary) exercise. To further complicate matters, organisations also increasingly depend on third party-vendors and specialist product suites, having to rely on systems which are outside their control.

Reports suggest that attacks are becoming more frequent, sophisticated and widespread, targeting not only financial services but also other areas of any given jurisdiction. As far as the banking sector goes, this will include for example all deposit takers, payment services companies, credit card firms and providers of e-money services.

These attacks normally originate from different groups such as activists and units of organised crime and may arise from within the state or abroad. Most firms, irrespective of size and area, experience intrusion attempts. When successful this potentially leads to user account takeovers, identity theft, network disruptions and attempts to alter data integrity.

Security technology

Firms will be looking to protect themselves by ensuring a robust IT governance framework which will include security policies, relevant education and training, ongoing risk management, third-party assurance (by way of audit) and satisfactory monitoring and reporting. Additionally, financial institutions will look at implementing security technology in an attempt to be immune from attacks.

Such technology normally comes in the form of known software and hardware including anti-virus and spyware/malware detection software, firewalls, access security and intrusion prevention systems.

It is also extremely important that, where possible, data transferred is encrypted. Also of importance is that penetration testing is conducted by the firm itself. Many organisations do not give sufficient importance to this extremely important task.

To be prepared, organisations in the financial sector will need to focus on long-term planning, resources permitting. This will typically include an IT strategy, including budget attribution and project planning.

This is fundamental to ensuring that the balance between technological development and security assurance is fair. This will inevitably have a bearing on budget allocations which are on the increase. Additionally, the IT function will need to be an integral piece of risk management, providing valuable insight to developing the firm’s risk matrix.

Knowledge exchange platforms

As an industry, we need to cooperate and possibly engage via knowledge exchange platforms so that more effective risk mitigation strategies can be implemented. This would also assist smaller firms where resources may be more limited. Ideally, these knowledge platforms need to cross-borders where Gibraltar should attempt to participate in international networks, working together to protect the international community from such threats.

Additionally, the Government of Gibraltar will need to reinforce the importance of cyber security and encourage information sharing forums and specialised task force committees to focus on these issues.

The Gibraltar Banker’s Association takes this important subject very seriously and commits to work together with governments and regulators, both local and in home state of local subsidiaries/branches, to ensure that an appropriate framework and policies exist to mitigate the ongoing threat of cyber-attacks.

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