Protected cell companies (PCC) are becoming an increasingly popular tool for private wealth structuring and succession planning arrangements, writes Dominic Wheatley.
The flexible structures, which celebrated their 20th anniversary earlier this year, were originally developed in Guernsey for use in the island’s captive insurance sector, but have since gone on to be used as an alternative application for the structuring of many different types of products.
Other jurisdictions have changed the name in an attempt to differentiate, but effectively all cell company legislation globally has been based on that originally formulated in Guernsey.
Indeed, many in industry will be familiar with the use of PCCs in captive insurance or collective investment schemes, but they are increasingly being seen in a private wealth setting too.
From a Guernsey perspective we are seeing a high level of interest in the use of PCCs coming from those in Asia and other emerging markets and expect this demand to continue as more practitioners become alive to the possibilities offered by them alongside the more traditional trust structure and foundation.
PCCs enable assets and liabilities to be ring-fenced so that liabilities attaching to assets in one cell do not contaminate assets in the other cells. No matter how many cells it creates, a PCC is one company with one board of directors. However, the ownership of the cells – and therefore the underlying assets – can be divided up with cell shares being held by different individuals, or even different trusts or foundations, for the benefit of different family members or even charities or philanthropic causes.
Advocate Kerrie Le Tissier, Senior Associate in Collas Crill’s fiduciary practice group, is one of those witnessing the increase in demand and says the possibilities for PCCs are endless.
“PCCs offer clients a lot of flexibility. There are no restrictions on the number of cells that can be created, the value or type of assets that can be held in each cell or the number of cell owners in respect of each cell,” says Le Tissier.
With client requirements becoming increasingly complex, advisers and practitioners need to be able to explore a range of options to find the most suitable approach, especially in the current climate where clients want reassurance that the chosen structure will be robust and well regulated, but also sufficiently flexible.
In terms of the PCC, Guernsey is at an advantage because it was the first to adopt the cell company concept and has therefore developed a world-class infrastructure for its application, supported by a range of lawyers and accountants with the highest level of expertise and experience in utilising the structure.
“Clients often need a very bespoke solution to take into account factors such as the different risk profile attaching to the various assets, the level of involvement the client wants to have in respect of certain assets, the extent to which they want different family members to benefit from the underlying assets and the different succession laws and tax rules which might apply to different family members,” explains Le Tissier.
Similarly, fees, tax efficiency and confidentiality are also very important.
For example, with large and complex structures where there may be several family trusts with a number of underlying asset-holding companies, each with their own board of directors and possibly with different administrators, it does not take long for fees to soon add up. Consolidated reporting also becomes very complicated and it is difficult for any one person to say they are fully familiar with and understand the structure in its entirety.
Le Tissier says a PCC can solves these issues.
“The underlying companies could become cells in one PCC, with one board of directors, one administrator and one set of fees. Administration and reporting would become much more manageable, which can have significant savings in costs and reduce risk.”
Unsurprisingly, Le Tissier firmly believes the key features of the PCC make it ideal for use in the private wealth sector, particularly in structuring family wealth where the wealth is invested in a diverse range of asset classes.
Trust company Zedra has one of the oldest PCCs in its product suite – the ZPCC, which was established in 1999 and has been widely used since then, both in the UK and around the world. Director Mark Cleary also feels there is further life for the structure.
“Twenty years is not a long time in the grand scale of things, but it nonetheless remains incumbent on us to imagine what other untapped uses and opportunities there might be for PCCs yet to be thought of and how we in the finance industry might exploit these.
“Now it has come under a new parent, we are busily exploring the opportunities for the ZPCC in a more mature phase of its life cycle. Guernsey can offer a compelling blend of stability, institutional robustness and easy access to first-class professional services, track record and the rule of Law and respect for property rights.
“These circumstances provide all the essential nutrients to attract managers and investors.”
For Steve Butterworth, Director of Insurance at the Guernsey Financial Services Commission until 2003 and the man widely credited with developing Guernsey’s PCC concept, this would tally with how he foresaw the structure eventually being used, despite the original restrictions on their use being limited to only a couple of industries.
“I always thought that once the concept became internationally accepted, its use would become widespread across financial services and that has proven to be the case, but I am still surprised at some of the areas it is not more widely used, including by institutions for mergers, acquisitions and disposals,” says Butterworth.
“It is an ideal piece of legislation for a banking group, especially to ringfence assets and liabilities. As a result, there is still lots of development and diversification to come in the area of PCCs.”
An original version of this article was first published by Offshore Investment, July 2017.