Knowledge

The Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 (the "LCF"), which came into force on 1 July 2023, introduced new licensing requirements for, among other things, activities previously only requiring registration. These include lending or providing guarantees by way of business by Guernsey bodies or, by any bodies established elsewhere, in or from Guernsey.

On the face of it, Guernsey entities that provide interest-bearing loans or guarantees as part of an investment structure might be caught by this new requirement and need to obtain a licence from the Guernsey Financial Services Commission (the "Commission"). However, the LCF includes certain exemptions to the licensing requirement, including for collective investment schemes registered or authorised in Guernsey.

In addition, the LCF permits the Commission to exempt certain types of business from the licensing requirement. The Commission has already granted a number of block exemptions including those that may be applicable to the majority of common investment structures established in Guernsey. The Commission has also confirmed that it is open to specific exemption applications where a lender does not fit within one of the existing exemptions or disapplications.

Requirement for licensing under Part III of the LCF

Part III of the LCF prohibits any person from carrying on "financial firm business" in or from within the Bailiwick of Guernsey – or any Guernsey entity anywhere in the world – without a licence issued by the Commission (a " Licence"), subject to certain exemptions and disapplications.

For the purposes of Part III of the LCF, "financial firm business" includes, among other things, any form of lending or the provision of credit, including financing commercial transactions and providing financial guarantees or commitments, when carried on by way of business. An activity is deemed to be carried on "by way of business" if that person received any income, fee, emolument or other consideration in money or money's worth for doing so.

Therefore, Guernsey entities that provide interest-bearing loans or guarantees as part of an investment structure might be caught by this new requirement and need to obtain a Licence from the Commission. As part of the application and following the grant of a Licence, the controllers of the licensee (including its directors and significant shareholders) would be subject to the Commission's fit and proper requirements and any changes would require the Commission`s prior confirmation of no objection.

However, applicable exemptions and disapplications mean that, in many cases, a Guernsey company forming part of an investment structure may not be required to obtain a Licence.

Relevant exemptions and disapplications

First, Part III of the LCF exempts lenders from the licensing requirement where certain criteria apply, including, among others, where the total turnover of the relevant financial firm business does not exceed £50,000 per annum; the business in question does not exceed 5% of the total turnover of the lender and the lending is ancillary, and directly related to the main activity of the lender. As the thresholds are so low and all of the limbs must be met, in practice, these exemptions are rarely applicable to investment structures.

More significantly, all collective investment schemes authorised or registered by the Commission are exempt, along with any companies licensed under the other Guernsey regulatory laws.

In addition, the LCF empowers the Commission to disapply the requirement to obtain a Licence where it considers appropriate and it has exercised this power in respect of a number of cases that are potentially relevant to Guernsey lenders within investment structures. For example, the licensing requirement has been disapplied in respect of:

• bodies lending to their registered directors, registered partners, registered shareholders, or beneficial owners;
• bodies administered by companies licensed under one of the other Guernsey regulatory laws, where either the lending is ancillary to the main activity of the entity offering the credit facilities; or it is one component of an investment, group, or holding structure of which the entity which extends the credit forms a part (where the primary purpose of such a structure is to hold underlying assets, act as a corporate group, or make one or more investments into underlying assets, by equity or by debt, but the primary purpose is not to act as a lender to unconnected third parties);
• individuals, who are investors, who carry out lending to administered entities, where either the lending is ancillary to the main activity of the individual offering the credit facilities, or it is one component of an investment, group, or holding structure of which the individual which extends the credit forms a part (where the primary purpose of such a structure is to hold underlying assets, act as a corporate group, or make one or more investments into underlying assets, by equity or by debt, but the primary purpose is not to act as a lender to unconnected third parties);
• bodies lending internally, within the group structure to which they belong, where the lending entity has an established place of business in the Bailiwick of Guernsey; and,
• bodies with an established place of business in the Bailiwick of Guernsey lending to other bodies with an established place of business in the Bailiwick of Guernsey.

There are also disapplications for bodies owned by related family members.

Finally, the Commission is open to specific applications for exemption where none of the existing categories of exemption or disapplication apply.

Accordingly, in circumstances where it may appear that an entity forming part of an investment structure requires a Licence, it is always worth considering whether any of the exemptions or disapplication apply and, if not, whether it is worth requesting the Commission to exercise its discretion and create a new disapplication for this type of lender.