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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.
Brandon Ashplant
Hello and welcome to the Guernsey Finance podcast where we bring you interviews with leaders from the global finance industry as well as news and developments from Guernsey's financial services sector. My name is Brandon Ashplant and I am Head of Technical here at Guernsey Finance. For those who don't know, Guernsey is a leading global finance centre renowned for its economic substance, political stability and asset security. The island is a committed leader in the global sustainable finance movement.
To find out more about Guernsey's success in sustainable finance, tune into our sister podcast, the Sustainable Finance Guernsey podcast. We are delighted to kick off 2024 alongside today's guests, Matthew Bell, board director and joint head of public policy practice at Frontier Economics, and Robert Woodhard, consultant at Frontier Economics.
Holding a Master of Philosophy in Economics from the University of Cambridge, Matthew's previous experience includes providing detailed economic advice to the most senior levels of government in the UK, including to the Prime Minister. After a spell as CEO of the Committee on Climate Change, Matthew returned to Frontier Economics where he focuses on all areas of policy, including healthcare, education, climate change and technology, as well as trade, to name but a few.
Robert also holds a Master of Philosophy in Economics from the University of Cambridge. He has worked at Frontier for seven years and his specialist area is assessing the business case for government policy options with a particular focus on Guernsey and Jersey. Matthew and Robert have led the Guernsey Finance and States of Guernsey commissioned Report titled The Value of Guernsey Financial Services to the UK Economy, which explores the quantitative and qualitative value of Guernsey to the UK economy in key strategic areas, including net zero and infrastructure across UK regions.
In this episode we'll be discussing the report and its key findings. So, without further ado, welcome Matthew and Robert.
Matthew Bell
Thank you very much for the invitation, it is a pleasure to be here.
Robert Woodhard
Yes, thanks for having us.
Brandon Ashplant
Great to have you on. So, let's jump straight into it I guess. So Matthew, as I mentioned then in the preamble, yourself and Robert and colleagues at Frontier have been undertaking this research project for much of the past year to understand the true value of Guernsey's financial services industry to the UK economy. A key finding that opens the report is that Guernsey channels £57 billion into the UK. You know, this is a fascinating thing and especially I think when you set it in the context, which is that, you know, this sum has been increasing year on year and at a time when foreign direct investment, FDI, is actually falling. The numbers of going down over time. So how important is it for the UK to maintain this investment flow from Guernsey?
Matthew Bell
Well, indeed, as you said, £57 billion of UK assets held in Guernsey. It's a very important, significant amount. It's supporting investment from overseas into the UK, channeled through Guernsey, creating jobs and growth. It's important partly because of what that funding is used for. It's used in infrastructure projects or financing businesses through private equity, through property investments that make up that 57 billion of capital. But also, as you said, it's important in terms of the wider context for the UK's inward investment, which has fallen every year from 2016 to 2021, while funding through Guernsey has actually been growing at about 14% per year since 2020.
Brandon Ashplant
And just to follow up on that, Rob, what might be the tangible potential implications of a potential slowdown or reduction in these sort of net capital flows coming from Guernsey into the UK?
Robert Woodhard
Yeah, absolutely. So I think, as Matthew said, £57 billion of ongoing investment in UK assets. And obviously, that's a large amount. That's an ongoing investment flow. There are significant benefits from that to the UK economy. So Matthew talked a little bit already about some of the assets that are invested in, so UK infrastructure projects and property, private equity, those are really important areas and clearly, you know, if there are follow-on benefits from investment in those areas to the extent that the investment from Guernsey is reduced in any way, I think you would expect to see potentially fewer investment in those assets if the UK was unable to recoup the Guernsey investment from alternative sources. And potentially that there would be a foregoing of some of the benefits of investment in those assets for the UK economy.
Brandon Ashplant
The report also identifies substantial social value in Guernsey's investment into the UK, estimated to be around three to four billion pounds per annum. Where have you seen the most benefit to these social returns in the UK? So, I guess what are the particular benefits that you've observed and reported on in the paper?
Robert Woodhard
Yeah, so social value, I think it might be worth just quickly saying what we mean by social benefits and social value. So, I think here we're really talking about benefits and value terms that are over and above, you know, the benefits through business turnover or business profit that happen as a result of these investments from Guernsey into UK assets. So if you think about again, I think it's helpful to think in terms of the asset types that are being invested in by Guernsey. So if you focus in maybe on infrastructure, which is one of the three key asset types, you know, clearly if you think about a new rail line as an infrastructure project that would be invested in, that could lead to, you know, quicker journey times for passengers, whether it's for leisure, whether it's for traveling to work, there would be benefits to those individuals and to the wider economy from the quickening of journey times. That has value. That has a social value and there are other examples as well. I think that the best tangible example that I could give is really one of our case studies. So there is a fund, the Next Energy Solar Fund, that's domiciled in Guernsey. It's actually a Guernsey Green Fund. It's been accredited by the GFSC. That invests in solar plants all across the UK. Now, clearly investing in solar power, that as a low carbon technology, that's a really important part of the transition towards net zero for the UK economy. And as we all know, there's significant social benefit from making that transition.
Brandon Ashplant
Yeah, definitely. And Matthew, another interesting finding from the report is that whilst there are sort of large sums of capital projected into the city of London, in particular, as one might assume anyway, there is also a huge amount of investment going into the sort of regional hubs of the UK. So, you know, the Northeast, Northwest, Scotland, Wales, Northern Ireland, so forth. Can you tell me a bit about the report's findings here in terms of the role that Guernsey plays in sort of ensuring investment into Britain's wider regions beyond the city?
Matthew Bell
Yes. Well, if you think about the types of assets that Guernsey is channeling finance towards, the infrastructure we've been talking about, the property that we've been talking about, those types of assets exist all across the UK. And the funding is also likewise likely to be distributed across the UK into all of those regions. The Next Energy Solar Fund that Rob mentioned invests in solar capacity and those investments are spread around every nation of the UK and indeed every region within England. And so we see funding that is channeled far afield and well beyond the sort of traditional, if you will, finance sectors and supporting what are often wider government policy efforts to level up to make sure that the incomes around the country are all growing at a pace that's consistent with bringing everybody up to a high standard of living.
Brandon Ashplant
Yeah, definitely. And Rob, there is a broad range of investment across not only, of course, the UK geographically, as we just discussed there, but also the sectors invested in and supported. The report identifies Guernsey's sort of specialised financial services as adding significant value to the UK or to UK businesses by enabling them to control costs. Can you talk about this and the report's findings here as well?
Rober Woodhard
Yes. So I think you mentioned a couple of things there. So I think there's the investment across sectors and then separately, there is Guernsey financial services reducing the costs or helping to reduce the costs of UK businesses. So I think if you take the first one, investment across sectors, I think again, it's helpful to look through the lens of the asset types that are being invested into in the UK.
So if you take private equity, which is one of the top three asset types, again, clearly that investment will take place across sectors. So if you invest in private equity, that will be used by businesses across a range of different sectors. And then again, infrastructure, you know, while that could be classified as an investment in the transport sector, if you think about who benefits from that improved infrastructure, that will be individuals, people, businesses, and they will operate again across a range of different sectors. So yeah, the investment into UK assets, that's benefiting a whole range of different sectors across the UK economy. And then separately, talking about the cost savings for UK businesses. So this is something that we saw quite clearly, I think, coming out of the interviews that we had with businesses based in Guernsey, but then also end clients using Guernsey businesses that were based in the UK. And something that we heard was essentially the role that Guernsey financial services businesses often play in the context of international value chains is really a specialised services provider. They are providing niche specialised services at low cost and a high quality that essentially often leads to cost savings for businesses that are lower cost than what they could get from alternative sources.
Brandon Ashplant
Interesting and Matthew following on from this I suppose the paper finds that close to £90 million per annum is saved by 40% of FTSE 100 companies through Guernsey captive insurance vehicles. Of course, this comes at a time when there has been a multitude of sort of global events, economic events that have sent shockwaves through the markets, which have directly affected, of course, you know, the consumer, especially in the UK with the cost-of-living crisis that is reported on quite commonly now. How have UK companies made use of Guernsey's insurance industry to manage more sort of specialised risk?
Matthew Bell
Yes, well, Guernsey provides some specialist insurance services, it makes it easier to set up special purpose vehicles, captive insurance structures for a range of businesses, including of course, UK based businesses. A total of about £3.6 billion in insurance services were provided to the end of 2022 to UK businesses, which is about one and a half percent of the UK insurance sector. Whereas if you look at Guernsey’s GDP, it’s only about 0.1% of the UK. So the demand for that specialist insurance provided by Guernsey far outstrips its broader economics at a weight, as you would suggest. And that helps to protect many of the UK's largest companies from unusual risks, for example, risks related to terrorism maybe or others. And Guernsey is at the forefront of innovation in insurance products within its strong regulatory framework. So Guernsey's ability to innovate quickly in this space enables UK companies to procure insurance that wouldn't otherwise be available or would only be available at a higher cost to them.
Brandon Ashplant
And I'm interested to ask you next, Matthew, about this because of course your background, as I mentioned in the sort of intro is related to the green and sustainable space. The report also sort of makes clear Guernsey's role as a leading global centre of green and sustainable finance, of course with several sort of world firsts which listeners no doubt will remember and recognise, including the launch of the first carbon kite mark in the Guernsey Green Fund regime which currently holds assets of £5.5 billion. Large sums of capital from these flows bolster renewable infrastructure investment and support of course the UK government's net zero aims. For example the Next Energy Solar fund which is Guernsey Green Fund accredited operates 91 solar farms across the whole of the UK. And again, that goes sort of back to the point about the regions. And I know you've got a nice map in the paper that sort of clearly outlines that. How important is Guernsey as a conduit for this sort of investment into UK sustainable infrastructure and supporting the the policy goals of the British government?
Matthew Bell
Yeah, those goals importantly include the legal obligation to hit net zero by 2050, and that will require new investments in a whole range of areas from offshore wind to electric vehicle charging infrastructure, low carbon buildings, aviation, and many others. And financing those investments will be critical to achieving vent zero. And it involves getting investments to the right places for newer, lower emission technologies that we're going to need for better insulating our homes and businesses and a range of other areas that meeting that 2050 objective will require. And Guernsey's flexible financing models mean it has proven to be nimble and responsive to those new investment opportunities. That innovation, for example, means that the Guernsey-based funds accounted for 30% of IPOs on the London Stock Exchange's initial public offerings in AIM, special funds, premium segments over the last 10 years. And that kind of investment and financing will be important in making sure that we can continue on the path as the UK towards net zero. Separately as you were saying, Guernsey has been leading on aspects of sustainable finance regulation on the international stage, accrediting whether investments made are genuinely sustainable is also an important way to incentivise net zero funding. And Guernsey developed its own green funds regime that you mentioned, providing investor confidence and investor access to investments that will allow and facilitate that path towards net zero. So, all of those things hopefully help a very challenging UK target.
Brandon Ashplant
And I guess you mentioned that the challenging aspect to that or to those targets, I should say, just to follow up there, if the UK's ties with Guernsey were to sort of be severed here and so faulter the work being done in that area, how could this potentially impact the UK's plans to reach net zero by 2050?
Matthew Bell
Well, one of the things that we look at in the paper is of that original, that £57 billion of funds that we spoke about at the top of the programme, if something were to happen that would, as you say, sever those ties, endanger those funds, would that funding return in some other way to the UK? And yes, some of it might be rerouted through other destinations, but we find that a very significant amount of that would never find its way back to the UK and that would be funding that's not available for the types of low carbon infrastructure, whether it's low carbon energy generation or new homes and business buildings or other things, funds that will be needed between now and 2050 in order to achieve net zero.
Brandon Ashplant
Yeah. And the ability to connect the UK with markets further afield such as the EU and US has been a long-standing benefit of the relationship between the UK and Guernsey over several years now, particularly in a post Brexit world where the internationalist success of the UK economy is more important than ever before arguably. How important are these links through Guernsey for UK-based investors?
Matthew Bell
Indeed, so sort of looking to the other side now we've been discussing investment inflows to the UK but as you say UK investors also benefit from the connectivity provided by Guernsey into overseas investment opportunities. Guernsey is relatively well connected to the US market to other markets and other jurisdictions including China. We've estimated the benefits to UK investors through market access provided by Guernsey and Guernsey funds generate in the region of about £7 billion per annum to UK investors in returns from their overseas investments channeled through Guernsey. And that connectivity is vital to earning those returns, which obviously then also translate into tax revenue for the UK Treasury and spending in the British economy. Also has the wider benefits, I alluded earlier to the high proportion of IPOs on the London stock exchanges, AIM funds over the last 10 years, so it revitalises other parts of the UK economy as well as generating those returns.
Brandon Ashplant
Brilliant. And just to finish, Rob, we haven't got time to mention all the findings, but some of the other key points, I guess, that stand out that we haven't yet mentioned are, of course, the £11 billion of pensions assets under management is domiciled in Guernsey, which generates up to £30 million per annum for UK professional services firms and investment managers including in the regional hubs beyond the city as we talked to earlier. Also that the island is of course a centre of investment management which sees Guernsey's investment holding a higher proportion of sterling assets than other investment managers, consequently engaging significant business flows into the UK firms and in turn generating fees, jobs, revenue, growth and so on. And revenue that once of course taxed can be used for public good on the side of the government so that's a point there. Just to end, what is your key takeaway from this report and what is something that everyone should remember?
Robert Woodhard
Yeah, so I think absolutely you're right, there's a whole lot more in the report across all aspects of Guernsey financial services sector. I think the main headline is genuinely the first thing that we talked about. So, £57 billion of ongoing investment is being channeled into UK assets through Guernsey. That's a large sum but it's also going into use cases, UK assets in infrastructure, property, private equity that are really important to the UK economy and there's significant social value that's being generated as a result of that investment.
Brandon Ashplant
Brilliant. Well, thank you very much for your time today both.
Robert Woodhard
Thank you.
Matthew Bell
Thanks very much. Pleasure to speak to you.
Brandon Ashplant
It was great to discuss some key findings from the latest Frontier Economics report, notably the opportunities and benefits of the symbiotic relationship between Guernsey and the UK as sort of two pillars, if you like, of the British family. Thanks also to you for listening. If you enjoyed this discussion, we have a backlog of interviews on the Guernsey Finance podcast channel. You can check them out by searching for Guernsey Finance on your preferred podcast platform. We also have links to Matthew, Robert and Frontier Economics in our show notes.
To find out more about Guernsey and its specialist financial services sector, head over to our website, guernseyfinance.com. We look forward to welcoming you back onto the podcast soon, but until then, it's goodbye from Guernsey.