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As part of our mini-series titled the 'South African Shorts', we speak to Cobus Kruger, Advisory Partner at Citadel to discuss why Guernsey is the jurisdiction of choice for South Africans in the investment funds and private wealth space.
Welcome to the Guernsey Finance podcast page.
Our podcasts bring you all the latest news and insight from Guernsey, the global finance specialist, as well as audio from some of our online events.
Rosie 0:04
Hello and welcome to the latest We Are Guernsey podcast where we bring you the latest developments from Guernsey's financial services industry. If you haven't listened to some of our previous podcasts already, you can do so on your preferred podcast platform or via the on demand page at weareguernsey.com. My name is Rosie Allsop I'm communications director here at we have Guernsey that's the brand under which Guernsey finance as an agency promotes the island of Guernsey's specialist financial services in its respective chosen markets. For those of you who aren't familiar with Guernsey, the island is a leading global finance center of substance stability and security committed to the cause of sustainable finance as a member of several United Nations environmental initiatives and having been proactive in developing sustainable products and services. To find out more about guernseys success in sustainable finance, you can tune into our sister podcast there Guernsey green finance Podcast. Today we're focusing on South Africa, and why Guernsey is the jurisdiction of choice for many South Africans in the investment funds and private wealth space. Because he has for many years enjoyed synergies with South Africa and continues to further develop that relationship. Guernsey has long been regarded as a leading financial services market for South Africa in investment funds, pensions and private wealth. And today I am delighted to welcome my guest, Cobie Kruger, who is an advisory partner at Citadel. Cobie, welcome to the podcast.
Cobie 1:44
Hi, Rosie, and thanks for the opportunity to be able to speak to you and the listeners.
Rosie 1:48
It's no problem at all. So I'd like to introduce you to our listeners. Can you tell us a little bit about yourself and how you ended up working at Citadel?
Cobie 1:59
Yeah, sure. So I've been in the financial services industry for a long time, more than 25 years, I started my career in fund management. And with the first realisation of exchange controls in South Africa, which was in the 90s got the opportunity to go to the UK and actually start an asset management business there for the Absa banking group. And so I spent 10 years in the UK and had the privilege of actually visiting your beautiful island on numerous occasion, including including the other, the other channel islands as well. And then came back to South Africa in 2009, where I really focused in on setting up international structures for life insurance businesses, although I did do quite a big project whilst I was in the UK with a South African life insurer. And that's sort of what I've been doing for a long time. And in the in the time that I was sort of structuring these investment solutions for South Africans specifically using insurance contracts. I built up quite a private client base. And so a couple of years ago, when I decided not to continue with the formal corporate life, I decided to formalize my private client practice with Citadel, but has since been getting involved in structuring some some international insurance contracts again. And so that's how we've basically been linked up through we are going to see and why we on this podcast today.
Rosie 3:50
You see, so Cobie, can you explain what an international life branch is and how it benefits policyholders?
Cobie 4:00
Sure, so, from a South African perspective, you know, international investments with the relaxation of exchange controls have become, you know, very mainstream actually. And this is this is investments where South Africans convert the money into hot currency, send it out of the country and then invest in it, or invest in various investment opportunities. But that creates potential pitfalls. Things like how do I transfer the asset from one generation to the next, the tax administration of such an investment, probate applications and all sorts of things comes comes into play, which could make it very difficult for selection Africans to have these sorts of international investments and what is actually transpired is that using an insurance contract and investment insurance contract If you can actually address a lot of the spectrum, but now, of course, the challenge is that South African life insurance, who are the only ones who are allowed to sell insurance type products in South Africa don't have foreign operations. And that's when the concept of creating a branch in a international financial center became a solution. So it's, it's a branch of a South African Life Insurance Company, it's not a separate legal entity. And why that is important is that, that then means that the investment is taxed and administered by the life insurance company, the life insurance company does all the heavy lifting, so to speak. And the end client enjoys a very pain free and administratively easy, efficient and convenient way of investing the money directly overseas. But in a solution that takes care of all the potential pitfalls. A classic one is the sort of intergenerational transfer. So how do I, a lot of people in South Africa, if you ask them, Why am I investing? Why are you investing the money overseas? It's, you know, it's for my kids, mostly for my kids potential international education. But then the next question is, but how are you going to transfer that investment from your own name to your child's name. And so that's where a life insurance contract becomes very useful, because you can, of course, nominated beneficiary, and by nominating a beneficiary, you get this very smooth transfer from one generation to the next, without the need for probate, a probate process or application of probate, which is winding up the estate, either in Guernsey or in South Africa. So it's a very smooth process. For clients to invest. There are many other advantages as well of investing or using these type of products. And in fact, we've just recently launched the book, which is called the Practical Guide to international investments, that actually explains all of this in a lot of detail. So, so I hope that answers your question.
Rosie 7:30
Yeah, very much. So how many South African firms currently have international life and international banking licenses in Guernsey, Cobie.
Cobie 7:41
So at the moment, they have for international, South African life companies with branch licenses in Guernsey, one of them have very much dormant, and that is as a result of corporate actions that took place over the last couple of years. But the good news is that there's actually two applications in with the GFSC at the moment for two new branches. So that will take the total up to six. And then from a banking perspective, they are two South African banks that have fully fledged operations in in Guernsey. So a very solid representation from South Africa, in Guernsey, and probably explains why you sometimes bump into South Africans in the pub when you're in Guernsey.
Rosie 8:33
There's a lot of South Africans in the pub. Now further to my question before Cobie, why should other South African firms be looking at international banking licenses and life offices? Can you explain a bit about the advantages and benefits of setting up in Guernsey?
Cobie 8:52
Yeah Rosie, I would say that, you know, the main reason, I suppose, is driven by client client demand. You know, we're living in a more and more globalized world, although COVID is is clearly thrown a spanner in that works a little bit, but the reality is that people don't invest by geographical borders anymore. And even more so in the case of South Africa, which is an emerging market, and where, you know, diversification outside of the borders of South Africa, both from a risk perspective, but also from an opportunity perspective, is a very simple basic and good investment philosophy. And so, you know, to cater for those needs. More and more South African firms need to set up international infrastructure to be able to to accommodate the clients. So that would I would say is, you know, is one of the main reasons why South African firms should look internationally. But then the next question is, you know, where. And so tax neutrality actually becomes quite an important consideration when you go overseas, not because of any sinister objective, but just from an administrative perspective, you don't necessarily want to be taxed more than once, and then have to go through the big administrative process of, of, you know, claiming refunds under double taxation agreements, and all those types of things. So investing via tax neutral jurisdiction becomes a very important tax planning tool. And, and that's why a jurisdiction like Guernsey is very relevant. And then of course, now, if you take it a step further, I mean, the EU, the United Kingdom, and South Africa has a very, very long history, as we all know. And as a result, the Channel Islands have a very long history with South Africa. So I think, you know, there's also a familiarity when it comes to, you know, an overseas jurisdiction. And Jersey, Guernsey, Jersey and Isle of Man, obviously, well known jurisdictions to the South African market, Guernsey, I would say more so because obviously, more mainstream South African brands have been, you know, have been active in that market. And then lastly, I would just say that, you know, when a South African client wants to invest their money overseas, they want to preferably deal with a brand that they know and trust. So if the South African investor can invest with a local brand that they know and trust with, they can go and knock on the door, but that company has the ability and the necessary infrastructure to deal with the international investments being that is sort of the topia, that's the perfect solution. You know, from the, from the investing in South Africa's perspective, so very much driven by, by client demand, I would I would summarize.
Rosie 12:20
Yeah, that makes a lot of sense. And so I, you know, I get what you're saying about the Channel Islands, Jersey, Guernsey, and also the Isle of Man as well being known in South Africa. But why, what do you think sets Guernsey apart from other jurisdictions?
Unknown Speaker 12:40
I would say, And hereby I'm not saying the other jurisdictions are not reputable, but I think Guernsey has, as a very reputable, and you actually alluded to that, in your introduction as a very reputable jurisdiction, has the necessary infrastructure has the right service providers, and people have good skill and knowledge. Of course, the fact that there's many South Africans help because you now can do in a foreign jurisdiction, but with people that actually understand the local environment as well, which is, which is a great plus. And then as I said, you know, I think the fact that mainstream, you know, South African brands have, have set up in Guernsey has helped to give the jurisdiction you know, a good, good reputation. And therefore made has made South African clients very comfortable. You know, with, with Guernsey as a jurisdiction, I would also maybe just add that I've, I've always found it very easy to do business, in Guernsey in my personal capacity as opposed to some other jurisdictions outside of the Channel Islands. So, I think Guernsey has done a lot there, and especially the regulated the GFSC has done a lot the to, to stimulate the positive business environment, and then sort of an open door policy. I've personally visited the GFSC on numerous occasions and I found the people they, you know, very open minded and willing to engage whilst you know, still ensuring that it's a well regulated environment where you know, whether all the rules and regulations are abide by.
Rosie 14:45
It's very nice of you to say, so in what why would the average South African benefit from from this product as opposed to a traditional retirement saving options?
Cobie 14:57
Oh, the key... good question. Of course, that it helps clients to invest in foreign or international currency and, and, and investment opportunities. As opposed to traditional retirement savings, although we have also got a very solid retirement international retirement plan option, which has been available for some time out of Guernsey, which is actually a significant move on from the old cure ops type structures. This product is more using a branch endowment type insurance contract is very flexible, you are not linked into it. Like, like it would be in a retirement product where you have a specific age by which, after which you can take the money out. So it's very flexible, it's liquid. And, you know, it can be monies, obviously, that has been lying in a bank account for some time or new monies, you can actually consolidate your international investment through a product like this, which is which is very positive. But I would say one of the big things is the ease of administration. So if you, for instance, want to invest in multiple investment opportunities, through a product like this, you get consolidated administration and consolidated reporting, so you can see your entire investment portfolio in one place. And then because the administration, both of the investments and the taxation is taken care of by the life of it, it really removes that burden from the individual. Do you have complicated tax returns, and so on and so forth. It's all done by the life insurance company. And of course, like in many countries, there are certain instances where institutions like for instance, a life office has a slightly better rate of taxation than the individual in their own right. So depending on your personal circumstances, you get the tax administration and a better tax rate. But it's overarching Lee, the ease of administration that makes these production popular. In fact, I can quote this number to you, we are anticipating that the net new flows into products like this, and granted, it's not all, Guernsey has the jurisdiction, but the majority would be congested jurisdiction, will be in excess of 30 billion rand, which is one and a half billion pounds worth of investments that will go into these type of products for the calendar year 2021. So it is really become a mainstream solution for South Africans.
Rosie 17:59
Very much. So Cobie, what would you say are the typical characteristics of a South African fellow expanding internationally?
Cobie 18:09
Yeah it's, I mean, obviously, I'm talking about it more from a financial services perspective. It's, it's very much driven, as I said earlier on by client demand, South Africans. You know, it would be a financial services company that has behind it with clients who are by default, becoming more globalized. And therefore, you know, that's the sort of company so it will be banks, insurance companies. That's the sort of characteristics of South African companies wanting to expand internationally. Having said that, though, what we have seen in the past, or companies that had big ambitions to become global brands. And I think with the exception of a very few, sadly, it's not been that successful. So those companies who thought that they could just go overseas and put their, you know, brand value the products and services, realize that it's not that straightforward. So I think nowadays, people have realized that and it's very much driven by client demand and offering from a financial services perspective clients, the infrastructure and capability to meet the global demands.
Rosie 19:37
Okay. And would you say it's a time consuming or onerous process?
Cobie 19:44
Yes, it definitely is. And I would, you know, there's a lot of things to consider. Of course, it will depend on what your objective is, as I just said, but yes, it is a time consuming process. It can be very onerous. especially from a regulatory perspective, because of course, you know, I'm talking again, specifically financial services. Once you set up in a jurisdiction like Guernsey, you must realize that you have to fully comply with Guernsey regulations, and South African regulations. And so what very often happens is they could be ambiguity between two sets of regulations, and therefore you then have to navigate that, to ensure that you can be compliant with both sets of sets of league regulations. So that's a very important part. And of course, in a, in a, you know, common reporting standards or CRS environment that has become even more importantly, South Africa, health force has a very developed, highly developed financial services sector, but they all some parts of regulation, because it's become so involved, that could potentially be lagging between, you know, what's happening here versus what's happening in the rest of the world. And, and that can potentially be a big challenge. And then I suppose, one of the other things that is always important to bear in mind this is that, you know, the South African currency currently is trading one to 20 against the pound. So you know, you when you're budgeting course, you know, setting up international operations, and you start looking at the cost of doing it, you know, employing lawyers and tax consultants and other consultants and various, you know, service providers, you really have to be very certain of your business case, that it's going to be be worth your while. So definitely a lot of detail, and hence why getting expertise, expert knowledge and experts, opinions and consultants involved is is a key success factor as far as,
Rosie 22:04
yeah, okay, I can see why you would say that, do you have to have high capital requirements to do it?
Cobie 22:12
Depending on what you want to do, you could have, but you don't necessarily so if I'm if I talk specifically, in reference to the branch requirements for South African life insurance companies. And just thinking about one of your previous questions, I think Guernsey has actually done a great job here in making it very accessible to South African companies by allowing them to have insurance business licenses to to conduct international insurance business. Under a branch structure, because if you think about it, because it's a branch and not a new legal entity, the branch actually draws on the capital pool, or balance sheet of the local South African Life Insurance Company and the local life insurance industry is very well regulated, on a par with solvency to regulations. And therefore, that, of course, gives the Guernsey regulator, a lot of comfort that the South African company is properly capitalized. And because this is a branch that is set up in Guernsey, it draws on the strength of that balance sheet. So from a pure investment by you what we refer to as a unit linked investment without guarantees without capital guarantees. It's actually very capital efficient. And as I said early on, I think that's where the GFSC has really distinguished themselves from, perhaps some other jurisdictions, especially onshore jurisdictions, to make it very possible, and very economically viable for South African life insurers to set up these types of businesses in the jurisdiction,
Rosie 24:18
okay. Thank you Cobie. Well that I'm afraid that's all we've got time for today. I'd like to say thanks very much for your time and your specialist insights. It's fascinating to hear about international life branches, and I can see why this kind of product so so attractive, and it's also always very nice to hear so many positive comments about our regulator as well. Now if you'd like to find out more about Guernsey and its specialist financial services sector head to our website, weareguernsey.com and you can listen to more podcasts of this nature by checking out the We Are Guernsey podcast, wherever you get your podcasts until then it's goodbye from Guernsey.
Transcribed by https://otter.ai