Digital Update: Guernsey and the Isle of Man

Date: 25 May 2022

Silvia Ricciardi

With a specific focus on Guernsey and the Isle of Man, talking about the benefits deriving from AI and Automation, ESG and sustainable solutions in the fintech industry as well as the impact of digital loans, Citywealth delivers a roundup of digital trends to advise the fintech market.

Digital updates are constantly around the corner in the wealth management sector. With a specific focus on two among the most prolific offshore jurisdictions, Guernsey and the Isle of Man, and talking about key areas, such as the benefits deriving from AI and Automation, ESG and sustainable solutions in the fintech industry as well as the impact of digital loans, Citywealth analyses developments in the digital world delivering a roundup of digital trends to advise the fintech and private client market.

AI and Automation: pros and cons

Organisations are realising the fundamental importance of AI and Automation, which can take care of problems better, faster and at scale. Looking at the benefits of solutions which adopt AI and Automation, Sasha Kazantseva-Miller, Deputy of the States of Guernsey, points out that “Guernsey is a small island jurisdiction with a stable population. There is a continuous incentive for businesses to use technology to deliver services better, faster and cheaper. Developments around AI are important for our finance sector to continue delivering better financial services to our global clients.”

“Artificial Intelligence and associated business process automation has a number of applications within the Financial Sector. Obviously, looking for patterns in large amounts or across diverse sources of data is a problem that the Financial Services industry has been facing for a long time,” says Lyle Wraxall, Chief Executive – Digital Isle of Man, who goes on explaining why AI associated with big data analytics is not something that concerns just big organisations. “Assessing credit ratings and looking for patterns of fraud within payments are just two examples where this has evolved into the use of ‘Big Data’ where the sheer volume of data contributing to a decision requires the use of technology just to keep up. The sources of data are also becoming more diverse and the systems that are utilised are coming from more connected suppliers and becoming more affordable, particularly when used in the cloud. This means that big data analytics, and the associated AI, are no longer just in the confines of very large organisations.”

Investment management is one of the key areas where AI can make a difference, as stated by Sasha: “Some specific examples of AI can be seen in investment and risk management and fraud prevention. AI enables access to an increasing and increasingly more sophisticated data around investment strategies, performance and monitoring. Fraud prevention in banking and digital payments is critical to the success of any business in the field.”

Process Automation is another field where the use of technology can consistently help decrease errors and costs while increasing speed of delivery and quality. Lyle adds that “Process Automation has a direct relation with the end customer. If you think of the number of systems, like insurance, where you can build your own quote or deal with a claim totally online, with the processes and assessments that sit behind making decisions, everything is based purely on information supplied online and supplemented from other sources. This can benefit the customer experience significantly, allowing the opportunity for tailoring the customer experience, whilst at the same time making internal workflows more efficient, and thereby potentially saving costs. This has become the model adopted by new retail digital banks, such as Revolut and Mondo in the UK, and digital business banks such as Capital International in the Isle of Man.” But there are downsides as well, especially when dealing with large amounts of data, in fact Lyle mentions that “this does raise various issues of how data is handled, shared, and used and ensuring that data is used for relevant purposes. It also brings up the ‘computer says no…’ scenario of how you remediate a situation where the AI or Automation produces an incorrect result. In particular, this can cause problems when it creates an ongoing effect, such as putting a financial black mark against the customer’s name, which is then shared with other parties.

This has been a problem with Credit Agencies for many years: the difference now is that there are many diverse systems connecting, a reliance on the cold hard facts presented by automated systems and a vast increase in connectivity and hence the speed with which data can be distributed. All this amplifies any issues and increases the need for controls to protect consumers. Here in the Isle of Man we always have to consider the providence of data, how it is handled and consider the way that more general data is now starting to be viewed as a valuable, but personally owned commodity. The use of data needs to be approved by the person or entity to which it pertains, even if this is new data generated by AI consolidating data from numerous sources. Protection needs to extend above and beyond the foundations laid out by GDPR, and also take into account the possibility of remuneration for data usage. Following on from this are the principles of how to unwind automated processes and data when something goes wrong. Without thinking about these things fully we run the risk of losing the trust of the data owners to use AI and Automation to meet common benefit from both sides of the equation.”

ESG-focused fintech

A general growing focus on ESG and sustainable solutions has been registered worldwide in all sectors. More than a third of leading Islamic Finance professionals expect dramatic growth in the number of investment funds combining ESG and Shariah compliance over the next two years, as revealed by a research conducted by IslamicMarkets.com. As the focus on ethical investing becomes more prominent, half of retail investors intend to move some of their funds, including pensions, into ESG in 2022, as shown by new research from behavioural finance experts Oxford Risk and new research from European ETF provider Tabula reveals European fund managers, wealth managers, private banks and family offices are increasingly focusing on ESG ETFs. And the Fintech industry is not exempt. So what about ESG-focused fintech related to offshore jurisdictions?

Sasha, States of Guernsey, explains that “there is a massive focus on orienting fintech to meet ESG goals. There is a proliferation of technology platforms that collect, analyse, rate and monitor ESG data to guide investment strategies. There is a steadily growing field of investment products and platforms that give assurance about investment into ESG orientated businesses – this is covered under an increasing array of taxonomy relating to impact investment, green finance and net-zero investments. Guernsey has its own kite-mark fund regimes called the Guernsey Green Fund regime and the upcoming Natural Capital Fund regime. In addition, there is a focus on global financial inclusion initiatives that promote fairness and access of financial services to everyone in any community.”

Lyle, Digital Isle of Man, underlines that “Environmental, Social & Governance (ESG) are measures that can be applied to any business or function, and we are acutely aware of this in the Isle of Man as the whole Island holds UNESCO Biosphere status. As a new and technologically focussed industry, Fintech has been at the forefront of embracing ESG. New Fintech companies are embedding technology which incorporate the principles of ESG and make that visible and auditable. Take for example Ant Forest in China, an App which encourages customers to make carbon positive purchase decisions when using Alipay, records those decisions, awards points and allows them to be used to plant actual trees. Meniga does a similar thing in the UK but based on retrospectively assessing payments from bank statements and giving you a carbon assessment. These are good examples of how Fintech technology can become an enabler and auditor of the ethical activities eluded to by ESG. There can be more direct uses, for example Carbon Zero, a Credit Card Issuer based in the US, who does not seek to change spending behaviour, but simply spends the fees it collects on carbon offsetting. From a governance perspective, investors are seeking to ensure the ESG credentials of their investments and this is being enabled in a diverse set of ways, from investment platforms right through to consideration of corporate documents and principles that enshrine certain activities and values into the constitution of corporations. Benefit Corps (B-Corps) were born out of this need in the US and have been adopted elsewhere (such as Innocent in the UK). In the Isle of Man, we have worked with creating B-Corp compliant templates from existing company structures. The next logical iteration of this is how to enshrine this into digital shares and registrations and, therefore, manage corporate actions in a digital manner.”

Digital and syndicated loans

On March 16, 2022 industry-backed fintech Versana was one of the latest companies to aspire to positively impact the private market in syndicated loans through digital technology. “Versana’s founding members are JP Morgan, Citi, Bank of America and Credit Suisse who have all operated Syndicated Loans independently though their existing relationships with Wealth Clients and other institutions. They already estimate the existing Syndicated loans market at $5T,” explains Lyle, who adds more details about Versana’s role and its digital impact. “What Versana does is establish a platform which seeks to break down this siloed approach and create a greater pool of participants. This is then to be extended to an even wider base of intermediaries and other introducing parties. This allows the sharing of KYC and portfolio information across the participants in a similar manner to a crowdfunding platform, but across a range of collectors of that information. It also makes the distribution of performance information easier.” So, how is Fintech impacting the present scenario? According to Lyle “the use of Fintech from this perspective is not really creating a new product, it is making the current process more efficient, open and accessible, using technology to support that. The challenges really come when you expose Syndicated Loans to less sophisticated investors, because there is a responsibility to ensure that participants can easily see the risk and can endure any associated losses. When putting all this into a Digital Loans context, the Digital Platform can give much better ongoing visibility of how a loan is performing but the ideal of Digital Loans is that the relationship between being the loan holder (or partial loan holder) and the security needs to be clear and locked in so that recovery of debt when a loan defaults is legally straightforward. Again, we see significant work in ensuring the legal frameworks keep up with a coordinated digital reality.”

Sasha dwells upon the importance of technology for a smooth lending process. “Syndicated loans have been around for a long-time and are a common financing tool. Using technology to make the process of lending, including syndicated lending, is all about making it quicker, more transparent, and better value for money. This mirrors the drive for fintech innovations in all aspects of financial services, including other lending services like trade finance.”

Top Three Trends in digital assets in 2022/2023? Our experts think that…

… we are going to see more regulation, including in international finance centres like Guernsey. Regulation is a positive development for the industry as it will bring more assurance to investors and provide the needed stepping stone for institutional investment. With or without further regulation there will be a continued expansion of crypto funds and investment into crypto assets despite the recent shake-ups of the sector;

the explosion of the NFT market for art collectibles demonstrates the early application of tokens in specific sectors and metaverses. There is likely to be further diversification of assets that underline tokens both virtual and physical. These assets will become more integrated in the global finance system and there is going to be a proliferation of intermediary platforms that allow crypto and more traditional finance to meet through integrated client and investment solutions;

as the industry grows, leading to increased education and skills, there will be improved awareness about ‘ponzinomics’ behind many crypto schemes, which is likely to reduce the propensity for large scale frauds, although small scale scheme may still proliferate.

  Sasha Kazantseva-Miller

… at the moment there appears to be a lot of focus on Stablecoins, with central banks like the Bank of England setting up task forces to investigate a central currency. Here in the Isle of Man, Blackfridge has become the first GBP pegged Stablecoin business to be licensed in the British Isles and it will soon launch its Stablecoin product. However, recent events elsewhere in the world with the Terra/Luna “Stablecoin” (where the assets of the Stablecoin were unstable crypto assets) have demonstrated that not all Stable Coin offerings are created equal. It seems regulations are required to define what true asset backing really means and ensure the protection truly exists;

the second area I would see developing is that of Digital Equity in private companies. If linked directly to crowdfunding platforms and company registries, this could open up capital to SMEs and also support the Governance side of ESG;

the final one is around the storing, ownership attribution and transferability of Digital Assets. It has started with NFTs, but this needs to mature into areas that allow you to hold all sorts of non-tangible assets in a secure digital form. All of these have a common base in Blockchain as an enabling technology, the use of which for diverse applications is something we have seen progressively emerge over a number of years through propositions presented through our Blockchain Office.

   Lyle Wraxall

Michael Crosbie, Blackfridge, will talk about their Stablecoin on 7th June 2022 at the Citywealth Crypto Club.

Citywealth spoke to James Maloney, Partner at Farrer & Co who advises charities and philanthropists on their giving, and Amy Blackwell, Partner at Acorn Capital Advisers who assists families with their philanthropy and impact strategy. We get their thoughts on the sustainability issues affecting families in this new environment in the video Sustainable Finance.