The offshore world is not immune from the trend towards consolidation. In fact, it is very much a part of the trend, to the extent that the “top tier” bank brands participate in offshore banking.

Recent announcements of possible mergers between mega-sized international banks remind us that the move towards consolidation in the financial services industry is far from over. In fact, it is still the exception where banks have a significant amount of business outside of their home country. The “next wave” of bank mergers will clearly be towards increasing cross-border banking activity.

The offshore world, of course, is not immune from this trend. In fact, it is very much a part of the trend, to the extent that the “top tier” bank brands participate in offshore banking.

Increasingly, however the bulge bracket banks have become less important in the offshore trust services industry. While Barclays, Lloyds and Coutts are still names that command respect in the offshore world, when it comes to trustee services, their predominance has shrunk in recent years as compared to trust companies that have grown out of law firms and accounting practices.

The reasons for this are numerous. Conscious of their risk management and profit margins, banks have increasingly decided to exit the trust business or restrict their offering to assets which they have more comfort and control over.

Recent MBOs of the Anglo Irish and ING Trust businesses may be the first signs of banks moving to greater degrees of outsourcing for trustee services. While there are exceptions (Royal Bank of Canada in particular comes to mind) many banks have begun to realise that trust services fit better into a professional practice business model than as a banking product.

Until recently, the trust industry has been an unregulated activity in most jurisdictions and therefore the reliable historical tracking of the number of trust companies is not easy to do.

If we take Jersey as an illustration of the trend towards consolidation, there are currently 184 trust company business licences in the island according to the Jersey Financial Services Commission which has regulated and reviewed trust companies since 2000. Before regulation came into being, anecdotally there were perhaps twice that many trust companies in Jersey. What is behind the contraction? I would suggest four main factors; government regulation, systems development, taxation policy and litigation.

Government Regulation
Regulations have imposed the need for considerable compliance resources, documentation and training requirements on trust service providers such that the cost of doing business has increased considerably and the minimum “critical mass” required to support the servicing infrastructure has arguably doubled in the past decade.

Compliance requirements can run to 5 per cent or more of a company’s cost base where it would have been less than 2 per cent a decade ago. Prior to the regulatory requirements, it was not unusual to have “mom and pop” shops of less than five staff. Today the costs of carrying the most basic of reporting and compliance processes make it necessary to cover those base costs with a considerably larger book of business.

The “four eyes” principle in itself wipes out the possibility of running (and more importantly starting) a company that is a “one-man band”. While the increase of government regulation has most certainly created costs that have squeezed out the lower end clients and service providers, it certainly has had the desired effect of increasing the professional standards in the trust industry.

Systems Development
The trust industry has been historically a paper intensive, low-tech business that has high labour costs. However, while the industry still has high cost/income ratios as compared to other financial services, the development of systems has made some progress on this.

Accounting and database systems have allowed the size of trust operations to expand and to gain some “leverage” over the scarce resource of technical expertise. In addition, the development of IT systems and more sophisticated communications systems has made the coordination of service delivery more effective from multiple locations.

The result has been that trust service providers no longer need to have full service operations on each island where they wanted to have “storefront” exposure. It was not unusual a decade ago for the same organisation to have full-scale operations in Jersey, Guernsey and the Isle of Man (similarly in Cayman, Bahamas and Bermuda) but with improved capability to “hub” operations in a single location and to service “front offices” in other locations the multi-jurisdictional management of trust groups has been transformed.

Taxation Policy
The tightening of government policy over the tax effective use of trusts in countries such as the UK, US and Canada has lead to the restriction of the legitimate tax avoidance uses for trusts. Perhaps more importantly, amnesties in Italy, South Africa and elsewhere for non-declared funds has had a considerable impact on the outflow of funds from offshore locations to onshore. Once again, this has had a contracting effect on offshore operators, particularly if these were dealing with smaller, unstructured, private client business.

Litigation
While the first three horsemen have been taking their swipes at the industry in turn for the past decade, the fourth horseman, litigation, has in my opinion just begun to saddle up. The effect could be wide and dramatic.

Insurers tell me that many companies are, in their opinion, under-insured with insurance coverage of £5 million or less - some entirely uninsured where insurance is not required by law in their jurisdiction.

Successful claims in excess of the insured amount possibly could, at a swoop, threaten the very existence of the trust company. Insurance premiums are an additional expense that needs to be factored into the basic operating costs of the company in order to determine the critical book of business that will make it viable. Claims made against the policy, even where not life-threatening to the trust company in the first instance may well result in dramatic premium increases such that continued operations become considerably less profitable.

In this period of consolidation lies considerable opportunity. A re-ordering of the participants in the trust industry is underway. Some will die, some will lose heart, some will survive, some will shift strategy, some will prosper. The dominant players of the future have yet to be determined.