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UK consults on Protected Cell Companies…..12 years after Guernsey led the way Briefing Note Sunday 28 September marked the closing date for responses to HM Treasury’s consultation paper designed to introduce a Protected Cell Company (PCC) regime for UK Open-Ended Investment Companies (OEICs). The draft date on the amending statutory instrument is 2009, so it is possible that legislation could be in place by the end of 2009, requiring OEICs to be converted in the 12 months thereafter. However, far from a radical new approach this is simply following from where Guernsey led the way in 1997.
Background The current HM Treasury paper follows an initial consultation in summer 2007 on the same issue but which was not immediately followed up. Essentially, at present, sub-funds in umbrella OIECs in the UK each effectively have their own assets and are treated for almost all day to day purposes as separate entities but their liabilities are not ring-fenced. Therefore, in theory, if the liabilities of one sub-fund exceeded its assets then a creditor could pursue one or more other sub-funds in the umbrella to satisfy its debt. In practice, this has never proved to be an issue, even in the recent financial crisis but not being able to offer the ring-fencing of liabilities is perceived as a disadvantage when selling UK funds into other jurisdictions because this is available in locations such as Guernsey, for example, where the cell company concept was pioneered.
Origins Guernsey pioneered the cell company concept when in 1997 it introduced the Protected Cell Company (PCC). It was originally developed in response to the needs of the Island’s pre-eminent captive insurance industry but has gone on to be used as an alternative structure across a wide range of financial products and services, including funds and wealth management. The success of this innovation is illustrated by the fact that it has been replicated in various guises – it is also known as the Segregated Cell Company – by more than 30 jurisdictions around the globe.
Developments However, Guernsey is the jurisdiction with the greatest experience in utilising the concept. During the past decade it has built up a wealth of expertise in the cell company field. In addition, Guernsey has adopted the innovative Incorporated Cell Company (ICC) where each cell is its own separate legal entity. This distinct separation offers greater security in terms of the ring-fencing of liabilities and also provides extra flexibility in the use of the individual cells. The Island has through legislative advancements developed a regulatory infrastructure that enables a particularly wide employment of cell companies. For example, in Guernsey, cell companies can now be formed to conduct any business that would otherwise be undertaken through a conventional company. Guernsey also boasts provisions that give notable flexibility to cell company structuring arrangements, in particular: an ordinary company can convert to a PCC or ICC; a PCC can convert to an ICC; an ordinary company can convert into an Incorporated Cell (IC) and become part of an ICC; and an IC can leave the umbrella of the ICC and convert into an ordinary company. Further, Guernsey allows for inward and outward migration of companies. It is this environment which means Guernsey leads the way in providing many and creative uses of cell companies, including for investment funds, structured finance products, wealth management and insurance.
Summary Peter Niven, Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry, said: “It is interesting to see that HM Treasury is now considering introducing the PCC to the UK some 12 years after Guernsey pioneered the concept. This is yet another case where Guernsey has shown innovation and led the way in the face of scepticism only for those very doubters to follow us down the same road years later.”
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