January 2013

INSIDE THIS ISSUE

TRUSTS WITH FRENCH CONNECTIONS 1 • FOUNDATION AVAILABLE NOW IN BOTH JERSEY AND GUERNSEY 2

FATCA UPDATE 3 • UPDATE ON PENSIONS QROPS 4 • MARKET COMMENTARY 6

INTEREST & EXCHANGE RATE FORECAST 8 • TRIPS 2013 10 • CONTACT US 11

OFFSHORENEDGROUP TRUST LIMITED

Welcome to our new style newsletter which reflects the rebrand we undertook recently. Please note that our former

name Fairbairn Trust Company Limited is now Nedgroup Trust Limited which reflects our membership of the

Nedbank Private Wealth group. Apart from the name change and the new look, there have been no changes which

affect our relationship with settlors, beneficiaries or advisers.

WEALTH TAX

If a trust has a settlor, donor or beneficiary who is French Taxresident at 1 January the trustees have French Wealth Tax reporting obligations and the settlor, donor or beneficiaries (if the Settlor is dead) must include the value of the trust in theirannual Wealth Tax Return (ISF). These reporting requirements will also be triggered by a trust holding French assets other thaninvestment assets.

The trustees must submit an annual report prior to 15 June eachyear. The report is required to give name, address, date and placeof birth of the settlor, deemed settlor and beneficiaries, the nameand address of the trustees and the trust details of the main termsand conditions of the trust deed and any related deeds as well asassets held and their market value as at 1 January.

In addition, if any changes are made to a relevant trust includingdistributions, termination, establishment, addition/removal ofbeneficiaries, death of settlor, the trustees have one month inwhich to submit an additional report to the French tax authorities.This report is also required to give the name, address, date andplace of birth of the settlor, deemed settlor and beneficiaries, givethe name and address of the trustees and the trust, details of themain terms and conditions of the trust deed and related deeds, aswell as assets and asset value as at 1 January and full details ofthe event that caused the reporting requirement, and in the caseof a distribution or addition, details of the assets transferred.

The penalty for not filing the required reports is the higher of€10,000 or 5% of the trust corpus on 1 January of a given year.This penalty can be charged to either the trustees or therespective individual(s). If assets are not included in the settlor’sestate or if the trust has not been disclosed to the tax authoritiesby the trustee, a specific tax of 0.5% of the market value as at 1January is due. This specific tax is payable yearly by the trusteebut the settlors are jointly liable and the tax must be paid with the tax return.

GIFT AND INHERITANCE TAX

Gift and inheritance tax liability arises whenever assets aredistributed or the settlor dies. Trustees are responsible for thepayment of taxes when:

• the assets are globally transferred to the settlors descendants(45% tax)

• assets remain in trust; transfer to beneficiaries who are not thesettlors descendants

• where a trust was created after 11 May 2011 and the settlorwas French tax resident (60%)

Beneficiaries whether French or not, are jointly and severally liablefor the tax payment when the trustee is liable for the tax due orthe trustee is in a non-cooperative state or territory.

Serious consideration needs to be given by any settlor/donor orbeneficiaries who are considering moving to France.

TRUSTS WITH FRENCH CONNECTIONS By Nathan Lihou

JANUARY 2013 PAGE 2

For a number of years Guernsey has been considering theintroduction of a Foundations Law to complement its fiduciaryofferings and to act as an alternative to trusts. It is said thatGuernsey was the first of the Crown Dependencies to consider theimplementation of foundations but the last to produce thelegislation, perhaps searching to produce a best of breed law.After much drafting and consultation, on 25 July 2012 the Statesof Deliberation, part of Guernsey’s Government, approved “TheFoundations (Guernsey) Law 2012” which came into force on 2January 2013, after approval by the Privy Council.

A foundation is often considered as being half way between a trustand a company, with similar characteristics to that of a companyhaving a separate legal personality and a management boardwhich is know as the Foundation Council. However, it is alsosimilar to a trust in that it has no shares, members or share capitaland the assets are held for the benefit of others or for a definedpurpose. Unlike a trust there is a register of foundations. However,a foundation, a trust or a company are all very separate vehicleshaving different purposes which work well in different scenarios.

What is a foundation? The Guernsey Registry has the followingdescription. “There is no single legal definition of a foundation,however, it may be described as a legal entity which is createdwhen a person provides assets for a specific purpose. Thefoundation holds the assets for the purposes set out in itsconstitutive documents and is administered according tocontractual rather than fiduciary principles”.

Unlike a trust, where the trustee has the legal but not thebeneficial ownership, with a foundation there is no separation oflegal and beneficial ownership, the foundation owns the assetsand manages them in accordance with its Constitution and Rules.A foundation may be considered an alternative for trusts and iswell suited to hold assets for succession planning particularly forfamilies who are from civil law backgrounds and are notcomfortable with the concept of a trust.

A first for foundations is the ability, within Guernsey law, to limit abeneficiaries access to foundation information. The law allows forenfranchised and disenfranchised beneficiaries. The enfranchisedbeneficiary is entitled to a copy of the constitution, the records andaccounts and may apply to the Court to change the purposes ofthe foundation or even revoke or dissolve. A disenfranchisedbeneficiary may not be entitled to any such privileges. Such afeature may be particularly useful in planning for second and thirdgenerations to protect against spendthrift beneficiaries or suchinstances where it may be unproductive to divulge the full extentof a beneficiaries potential entitlement. Such disenfranchisedbeneficiaries may, subject to the terms of the foundation, becomeenfranchised upon, for example, attaining a certain age.

The main components of a foundation are as follows:-

The Founder – A Guernsey foundation must have a founder whowill define the purpose of the foundation, be instrumental in theformation of the constitution and provide the initial capital. The founder will also sign as the founder in the constitution by signing the document. The founder has the duty of appointing the initial councilors and any guardian, they are also tasked withregistration of the foundation. A founder may be a beneficiary and a council member.

A Guardian – it is not compulsory to have a guardian of aGuernsey foundation unless there are disenfranchisedbeneficiaries or if the foundation has no beneficiaries. Theguardian will enforce the purpose of the foundation.

The Register – Certain parts of the foundation are publiclyavailable and this includes the name and registered number of thefoundation, the name and addresses of the council membersappointed to act, the name and address of the guardian (ifappointed) and the details of the registered office.

The Council – A Guernsey foundation will be managed by a councilappointed by the founder and shall consist of at least twocouncilors, unless the constitution permits otherwise. If either thecouncilor or the guardian is a Guernsey licensed fiduciary then thefoundation will be subject to regulations in accordance with theGuernsey Financial Services Commission. If the Council members orguardian (if appointed) are not licensed fiduciaries then thefoundation will require a Guernsey resident agent to hold thefoundations records. Such records must be held locally in Guernsey.

continued overleaf

FOUNDATIONS AVAILABLE NOW IN BOTH JERSEY AND GUERNSEY By Geoff Trebert

continued

The Constitution and Rules – This is the core of the foundation. Thedocument consists of two parts, the charter and the rules. The chartercontains the name and purpose of the foundation, a description of theinitial capital and details of any duration, if applicable. The rules setout how the foundation should be managed, the functions of thecouncil members and any guardian. It also provides such details ashow any beneficiary may be added, removed or may benefit.

The Beneficiaries – A Guernsey foundation allows for beneficiariesto be classes or named beneficiaries exactly as a trust. Thefoundation also has the ability to state if beneficiaries should beenfranchised or disenfranchised. An enfranchised beneficiary willbe entitled to a copy of the constitution documentation, the recordsand accounts but a disenfranchised beneficiary has no right to thisdocumentation. A disenfranchised beneficiary may becomeenfranchised upon a certain date or activity or never at all.

A foundation must be registered with the Registrar and will onlycome into being after doing so. To register a foundation theRegistrar must be provided with the charter, the names andaddresses of those proposed to act as council members orguardian and their consent, details of the registered office and the proposed name of the foundation.

The new Guernsey legislation may well prove a compellingalternative for trusts where the settlor is not familiar orcomfortable with the concept of a trust. They have wide andvaried uses in succession planning, property or investment holding and as business holding vehicles.

Nedgroup Trust Limited is able to provide foundations under Guernseyand Jersey law both tailored to meet your specific requirements andwe will be happy to discuss your requirements further.

JANUARY 2013 PAGE 3

FATCA UPDATE By Nathan Lihou

There have been a number of developments concerning this USlegislation since our last client newsletter. The two of primaryinterest are the moving back of the reporting deadlines by 12months and the implementation of reciprocal agreements betweenthe US Government and other nations.

The Foreign Account Tax Compliance Act (FATCA) requires allforeign financial institutions (FFIs) and non-financial foreign entities(NFFEs), which includes Nedgroup Trust Limited, to identify andreport information about US account holders or members, or face anew 30% US withholding tax on not only payments of US-sourceincome but also gross proceeds from US investments in stocks andsecurities. The US Authorities have stated that the aim of FATCA isto limit US tax abuse, not raise revenue. FATCA is a law that appliesacross the globe and is contentious because of its broadapplication, and the burdens and costs that it will impose on FFIsand NFFEs, as well as its conflict with local laws.

On 8 February 2012 the US Authorities issued regulationsregarding the implementation of FATCA, these are intended toreduce the cost and time of implementing FATCA without affectingthe provision of information.

Certain governments have already entered into Inter GovernmentalAgreements (IGA) with the US, these include the United Kingdom,France and Denmark. IGAs establish a framework for countries tocollect and automatically report information on a reciprocal basis. Itis a groundbreaking development in international efforts to expandthe exchange of information and tax transparency. An IGA willreduce administrative and cost burdens for FFIs to comply withFATCA. But FFIs will still have to implement procedures to identifyand categorise entity account holders and to identify and report USaccount holders to the FFI’s home country tax authority. An IGA isintended to eliminate local law conflicts and enable FFIs to complywith FATCA by gathering and reporting the information requiredunder FATCA to their local tax authorities, as mandated by locallaw. Guernsey is in the process of negotiating an IGA with the US.

Under an IGA, Nedgroup Trust Limited would satisfy the reportingrequirements of FATCA if they were to collect the informationrequired under FATCA and report the information to the GuernseyAuthorities for automatic exchange with the US. The benefits ofthis alternative approach are:

JANUARY 2013 PAGE 4

QROPS were particularly attractive to those people wishing to movetheir UK pensions offshore, without triggering a hefty UK tax chargeand were mainly driven to avoid a UK tax recovery charge which isnot payable in Guernsey. Then suddenly in April of last year, HMRCchanged the rules after a consultation at the end of 2011.

THE NEW NON-DISCRIMINATION RULES

With effect from 6 April 2012 HMRC introduced the RegisteredPension Schemes and Recognised Overseas Pension Schemes(Miscellaneous Amendments) Regulations 2012. These included aprovision, known as the ‘non-discrimination’ rule. This stated thatan offshore pension could not treat local residents and non-residents differently.

Guernsey fell foul of this new rule because only local residentspaid Guernsey tax (at 20%) on their pensions, whereas a non-resident of Guernsey could receive their pensions tax-free. HMRCtherefore announced that Guernsey pensions no longer qualifiedas QROPS.

CHANGES TO GUERNSEY LEGISLATION

Guernsey then tried to change its own pension legislation tocomply with the new rules, by introducing a new Section 157EGuernsey scheme. The intention was to have a special pensionscheme that did not discriminate between residents and non-residents of Guernsey. However, again HMRC were unimpressed.In May 2012, Regulations were introduced to confirm that the newSection 157E Guernsey scheme could only be a QROPS if it issolely open to Guernsey residents. It would not be possible toopen the scheme to non-residents of Guernsey.

If you had looked at the list of QROPS (on HMRC’s website) before6 April 2012, you would have seen hundreds of Guernsey QROPS.If you look at the same list now, you will see a lot less, whichpresumably are only the ones that are open solely to Guernseyresidents. We had already taken a decision to delist and create a

new scheme to protect members from any additional reporting orpotential retrospective taxes on listed QROPS.

EFFECT OF THIS CHANGE

So what do these changes mean? Well, first there is no need topanic. HMRC have confirmed that the changes introduced in 2012are not retrospective. Whereas Singapore offshore pensions wereretrospectively removed from the list of approved QROPS, thechange to Guernsey schemes has no effect on transfers madeprior to the change of rules. This means there is no problem, froma UK perspective, with any transfers made to a Guernsey QROPSprior to the change of rules.

However a former QROPS cannot receive any further transfersfrom UK pensions. If funds were to be transferred now from a UKpension, to a former QROPS, then this would be an unauthorisedtransfer and tax of 55% would be due on the amount transferred.

A former QROPS will now be classed as a “relevant non-UKPension scheme” (RNUPS) and, although it is not a QROPS, thescheme is still subject to UK rules. For example, any limit in thescheme rules as to the amount the member can take as a lumpsum will still apply. Normally that limit is a maximum of 30% of thepension fund, with the remaining 70% having to be used toprovide an income. This will still be the case, even though thescheme is no longer a QROPS, so members can’t take all theirfunds as a lump sum just because their scheme has been ‘de-listed’.

Also, there is no change to the income tax position on a pensionpaid from a former QROPS. If the member is non-UK resident, noUK tax will be due (but local tax may well be payable). If themember has moved back to the UK, then income tax will be due onthe income he or she receives from the offshore pension, althoughthere is a special rule so that only 90% of the income is subject totax (or the remittance basis can apply if relevant).

continued overleaf

AN UPDATE ON QROPS PENSIONS By Nathan Lihou

continued

• Nedgroup Trust Limited would not have to enter individualagreements with the IRS

• Nedgroup Trust Limited would report US account-holderinformation to the Guernsey authorities, under domestic legislation

• FATCA withholding on payments to non-participating FFIs wouldbe eliminated; and

• the closing of non compliant accounts and the obligations towithhold on ‘passthru’ payments to others IGA countries wouldbe eliminated.

In the broader context, the IGA establishes a framework forcountries to obtain financial information from other countries on anautomatic exchange of information basis (pursuant to anagreement to exchange information) that far transcends thecurrent efforts of the OECD Global Forum to exchange informationon request to achieve global tax transparency. It will be interestingto see how developments unfold in the future.

Nedgroup Trust Limited will, during 2013, be establishing the US statusof all account holders and members, therefore if any US indica havebeen identified you may be asked to confirm your, or other parties’, US status in advance of the revised implementation deadlines.

continued

OTHER RESTRICTIONS

There may also still be other restrictions on the pension, eventhough it is no longer a QROPS. First, if the pension is anInvestment-Regulated Pension Scheme” (IRPS), then theprohibition on investing in ‘taxable property’ applies without anytime limit. An IRPS is any scheme where the member or a relatedperson can (directly or indirectly) direct, influence or advise onhow his fund is invested (Finance Act 2004, Schedule 29A).Taxable property is residential property and high value chattels egmotor cars, art, jewellery, wine.

So care is still needed with the investments of a pension that is aformer QROPS. The safest approach is to say that if the scheme isan IRPS, it should never invest in taxable property.

Similarly, care is needed if the member wishes to transfer hisfunds from the former QROPS to another scheme. A transfer to aUK pension or to a pension that still qualifies as a QROPS wouldbe fine. This might be useful if the member does still wish tocontribute to the pension or wishes to transfer further UK pensionfunds offshore.

On the other hand, a transfer to a scheme that is not a QROPS ora UK registered scheme will trigger UK tax charges unless themember has been non-UK resident for five full tax years.

REPORTING RULES

However, even though these restrictions may apply, the offshorepension trustees may have no obligation to report either theinvestment in taxable property or the pension transfer to HMRC.This is because the scheme no longer falls within the QROPSreporting requirements. Similarly, the new 10 year reportingperiod for QROPS does not apply to an ex-QROPS. This is howeverunder review and we have always honoured reporting so as not tobe tainted with "pension busting"

Be cautious. If the Plan does make an onward transfer, especiallywhere the receiving scheme allows benefits to be taken in a moreflexible manner, care will be needed if the transfer could result inthe 30% maximum lump sum rule being breached.

Specific advice should be obtained before any transfer from aformer QROPS to another scheme.

INHERITANCE TAX ISSUES

There are specific exemptions from inheritance tax (‘IHT’) for UKpensions, so that no IHT is due when the member transfers moneyto the pension or when the member dies. Similarly, the special IHTcharges for trusts (every 10 years and whenever capital ‘exits’ thetrust) do not apply to UK pensions.

These exemptions also apply to any offshore pension that is a‘Qualifying Non-UK Pension Scheme’ (QNUPS). The definition ofQNUPS is found in the Inheritance Tax (Qualifying Non-UK PensionScheme) Regulations 2010.

An offshore pension that is no longer a QROPS may well still be aQNUPS. Whilst the 2010 QNUPS Regulations followed a very similarformat to the original QROPS rules, the 2012 changes (which de-listed Guernsey QROPS) did not apply to the definition of a QNUPS.

It is, of course, possible that HMRC may in the future seek toimpose further criteria for an offshore scheme to qualify as aQNUPS, for example to set limits on lump sum payments or tomeet the ‘non-discrimination’ requirement imposed by the 2012Regulations. So far no such changes have been proposed.

CONCLUSION

The recent changes mean that Guernsey is no longer able to setup QROPS to receive UK pension transfers, unless the member isactually moving to live in Guernsey. However there is no need topanic, as the de-listing of Guernsey QROPS was not retrospective.

Whilst this means no further UK pension funds can be transferred,other UK rules do still apply to a former QROPS, such as the limit on the pension lump sum or the restrictions on investing intaxable property. A former QROPS should also still qualify for theIHT exemption.

JANUARY 2013 PAGE 5

JANUARY 2013 PAGE 6

2012 REVIEW

2012 proved to be much kinder to investors than many hadpredicted at the outset. Coming into the year, investor sentimenthad been sapped by a combination of poor 2011 returns, worriesabout the unfolding European sovereign debt crisis (mostespecially with respect to Greece), and anaemic global economicgrowth. However, the tone markedly improved through the firstquarter, as the European Central Bank injected close to one trillioneuros of liquidity into the banking system through its successfulLong Term Refinancing Operation (LTRO), and also data releasesbegan to point to better than expected economic growth, mostnotably in the United States.

Whilst the improvement was welcome, it did not last, and, as the second quarter progressed, investors became increasingly concerned about the possibility of a Greek euro exit, growing strains within the Spanish banking system, and a surprise softening of economic growth data, especially in Europe and China.

The third quarter was a period when the global economy slowedmarkedly, with most key regions and countries delivering a series ofsofter than expected data. However, events in Europe were themain focus for investors’ concerns, as the sovereign debt crisisintensified. Against this background, the President of the EuropeanCentral Bank (Mario Draghi) made a very important speech at theend of July which proved to be a significant inflexion point,completely changing the mood of markets for the rest of the year.Whilst attending a conference in London, Draghi sought to reassuremarkets about the ECB’s commitment to shoring up the euro,saying that “...the ECB is ready to do whatever it takes to preservethe euro....and believe me, it will be enough”. Even though marketswere obliged to wait until early September to be told the exactdetails of what Draghi and the ECB were planning, the statementeffectively signalled that the ECB was ready to seriously re-engagein fighting the crisis, and, as such, served to reverse the marketfalls seen in May and June. When Draghi finally did provide thedetails of a bond purchase plan that he dubbed “Outright MonetaryTransactions” (OMT), financial markets liked what they heard, andyields on Spanish and Italian bonds declined sharply, whilst equitiesmoved higher. Soon after the ECB statement, the Federal Reservereinforced the positive momentum by announcing another round ofquantitative easing (QE3), committing to a US$40 billion monthlyincrease in the money supply through a rolling purchasingprogramme of mortgage backed securities.

Politics dominated the final quarter of the year, with the US andJapanese elections in November and December respectively, andthe running negotiations between the Republicans and Democrats

over what to do with respect to the so called US Fiscal Cliff(whereby automatic tax increases and spending cuts would kick-inon January 1st 2013, in order to reduce the US deficit). Whilst theUS election proved to be close to a non-event, with no materialchanges, the Japanese election led to a significant change ofgovernment, as the LDP won on a mandate to alter economicpolicy, and to use increased quantitative easing to more directlyattack the deflationary pressures that have so undermined Japanin recent years. On the economic front, news flow also improved alittle over the period, with the publication of better than expectedUS housing, employment and consumption figures, along with ageneral improvement in Chinese data. This all set the scene forquite a strong finish to the year, with markets becomingincreasingly convinced about the credibility of the ECB’s “europlan”, whilst also taking reassurance from the soothinganaesthetic provided by quantitative easing.

Reviewing the year as a whole, “riskier assets” performedextremely well, whilst returns for “safe haven assets” weregenerally quite muted. Against this background, equities were

continued overleaf

MARKET COMMENTARY By Andrew Yeadon, Nedgroup Investments

JANUARY 2013PAGE 7

continued

strong, with the MSCI AC World Index returning +16.1%, whenmeasured in US dollars. The regions that performed the best overthe year were largely the more economically sensitive ones thathad performed the worst in 2011, such as Asia ex Japan(+22.4%), Europe ex UK (+21.3%) and the Emerging Markets(+18.2%). The “risk-on” trade was also evident at the sector level,where cyclicals outperformed defensives by quite a margin. Assuch, the best performing areas were Financials (+29.0%) andConsumer Discretionary (+24.0%), whilst some of the weakersectors included Utilities (+3.0%) and Telecoms (+8.8%). In termsof style, Growth stocks (+17.2%) marginally outperformed Value(+16.2%), whilst higher risk smaller companies (+18.9%)outpaced larger companies (+16.1%).

The more positive tone also carried across into the fixed incomemarkets, where the best returns were seen amongst riskiercorporate/high yield bonds and emerging market debt, whilst moresecure government bonds issued by “creditworthy nations”delivered rather less. Overall, the JP Morgan World GovernmentBond Index returned a modest +4.2%, whilst the Merrill LynchGlobal Corporate Bond Index gained +10.8%, the Merrill LynchGlobal High Yield Index delivered +18.9%, and the JP MorganGlobal Emerging Market Bond Index rose +15.0%.

Fortunes in the commodities asset class were more mixed, andrestrained. Over the year, the Dow Jones-UBS Commodities Indexfell by -1.1%. Positive sub-sectors included gold (+6.1%), whichmainly gained from fears that continued central bank money

printing could spark inflation, and agricultural commodities(+4.0%), the performance of which reflected poor harvests causedby abnormal weather patterns around the world. In other areas,the crude oil sub-sector posted a loss of -11.8%, whilst industrialmetals delivered a modest +0.7%

In terms of currencies, among the majors, the Japanese yen wasvery weak (-11.9%) against the US dollar, which was itself softagainst most other currencies, falling by -1.8% versus the euro, -2.5% relative to the Swiss franc, and -4.1% against the Britishpound. Meanwhile, emerging market currencies saw a mixedpicture, with the Mexican peso appreciating by +6.5% against theUS dollar, whilst the Brazilian real and South African rand fellagainst the dollar by -10.0% and -5.0% respectively.

Notes: All statistics are quoted in USD unless otherwise stated

2013 OUTLOOK

In big picture terms, we expect the general economic backdrop forthe coming year to be not too dissimilar to what we have seen in2012. Like most economists, we anticipate that real growth willbe positive, but modest, at around 2.5%. Drilling down a bit, wewould look for US growth to be a bit slower, as the economyadjusts to some degree of fiscal tightening, although this dragshould be offset by a pickup in Chinese growth, and a modestimprovement in European activity. On other key issues, we expectinflation everywhere to stay at around current levels, and we wouldnot anticipate any of the major central banks shifting their stanceon official interest rates during the year (even though they maywell be starting to talk about policy shifts by the year end).

Overall, even though the shorter term growth outlook is far fromsparkling, we believe that economic conditions will at least bereasonably stable through 2013. We are encouraged that progresshas been made on the European sovereign debt crisis, both by theECB, and also by some of the key political leaders, and whilst theEuropean debt crisis has certainly not gone away, at least theEuropean institutions appear to be getting a better handle on whatneeds to be done to work towards a resolution.

Turning to valuations, with most industry and country expectedprice to earnings ratios lying between 10 and 12 times, in ourview equities remain attractively valued, both in an absolute sense,and also when compared to other asset classes. At the other endof the spectrum, we continue to view government bonds withconsiderable suspicion, believing them to be a distorted, andwholly overvalued asset class, that is best avoided.

Overall, given our views on the economic outlook and valuations,we are constructive about the prospects for 2013, and we believethat equity markets in particular, have a good chance of rising tohigher levels as we move through the year.

JANUARY 2013 PAGE 8

JANUARY 2013

By Neil De Garis, Director, Treasury and Investor Solutions,RBS International

UNITED KINGDOM: 2012 was a year of no growth and morepolicy easing. In 2013, we expect the opposite: no policy easing andmore (but not much) growth. However, we are learning to expect theunexpected when it comes to the UK economy, so it's worth dwellingon a couple of the key uncertainties. On the outlook for growth,there is a minefield of challenges: companies are cautious aboutinvestment; consumer finances are still under pressure; and there isanother five years of fiscal austerity to contend with. However westill think the European debt crisis is the biggest risk, given itsimpact on confidence, exports and financial markets.

On the outlook for monetary policy, the key question is how thecommittee would respond to any signs of renewed weakness. Arate cut seems highly unlikely and the MPC appears to be losingfaith in quantitative easing. As a result, we could see otherunconventional policies on the table. For example: giving moreexplicit guidance about the outlook for future policy or introducinga new target for monetary policy based on nominal GDP growth.Those changes will probably get more airtime in the summer,when Mark Carney succeeds Mervyn King as Governor.

UNITED STATES: The hoped-for deal to avoid the fiscal cliffarrived just in time, but that is where the celebrations finished.Income tax rises on middle class households were cancelled,keeping $212bn of demand still in the consumer sector, but payrolltaxes will still leave 77% of households worse off. The deal includedonly one spending provision, to keep paying unemployment benefitsto those who have been out of work for more than a year. This wasenough for Congress to agree to kick the “sequester” of automaticdefence and entitlement cuts down the road to early March andavoid sending the US into an imminent recession.

The deal disappointed those who were hoping for a grand bargain.Fed Chairman Ben Bernanke called for such a deal when he askedlawmakers to address not only the cliff, but also the debt ceilingand the long term budget deficit in his last news conference of2012. How the US deals with the fall-out from this debacle willshape its prospects for 2013 and beyond. We have learned thatgovernments typically respond to crises by doing just enough toavert disaster, but not much more. Consequently we expect anysubsequent spending deal in March to be late, partial, and fail toaddress the long term budgetary challenges. What was a cliff willprobably end up as a series of rocky drops.

With that in mind, we expect the Fed will be keeping the QE tapsfirmly open for the rest of this year as it compensates for the

uncertainties in fiscal policy. That doesn’t mean the US will be alaggard in 2013 however, the labour market performed well inDecember as yet another month of job growth saw 155k morepositions created. This means that 2012 ended with 1.8m morejobs than it started (or an even more spectacular 2.4m if youprefer the survey of households). Even so, that’s only budged theunemployment rate from 8.5% to 7.8%. Unless there is anacceleration of job creation we think it will take until the end ofthis year for the Fed to see the “substantial improvement” it islooking for to halt its latest QE programme.

INTEREST RATE FORECAST (%)

Source: Thomson DataStream, RBS Group Economics

EXCHANGE RATE OUTLOOK

Source: Thomson DataStream, RBS Group Economics

EUROZONE: The European Central Bank (ECB) left interest ratesunchanged at 0.75% at its January meeting. President Draghinoted recent improvements in financial conditions, butacknowledged that the economy will continue to face toughchallenges in 2013. Austerity across the region is weighing oneconomic growth in both peripheral and core countries.November’s unemployment rate of 11.8% reached yet another

continued overleaf

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2008 2009 2010 2011 2012 2013 2014 2015 2016

US Funds Rate

Euro Refi Rate

UK Bank Rate

Forecast

1.45

1.50

1.55

1.60

1.65

2011 2012 2013 2014 2015

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35$ per £ (LHS) Euro per £ (RHS)

Forecast

INTEREST & EXCHANGE RATE FORECAST

JANUARY 2013 PAGE 9

EXCHANGE RATES (END OF PERIOD) INTEREST RATES (%, END OF PERIOD)

$ PER £ $ PER £ € PER £ EURO REFI RATE US FUNDS RATE UK BANK RATE

2013 Q1

Q2

Q3

Q4

2014 Q1

Q2

Q3

Q4

2015 Q1

Q2

Q3

Q4

RBS GROUP ECONOMICS INTEREST AND EXCHANGE RATE FORECASTS

1.59 1.27 1.25 0.50 0.25 0.50

1.57 1.25 1.26 0.50 0.25 0.50

1.57 1.23 1.28 0.50 0.25 0.50

1.56 1.20 1.30 0.50 0.25 0.50

0.50 0.25 0.50

1.56 1.19 1.31 0.50 0.25 0.50

1.55 1.17 1.32 0.50 0.25 0.50

1.54 1.17 1.32 0.50 0.25 0.50

1.53 1.17 1.31 0.50 0.25 0.50

0.50 0.25 0.50

1.53 1.18 1.30 0.50 0.25 0.50

1.54 1.20 1.28 0.50 0.25 0.50

1.54 1.21 1.27 0.50 0.25 0.50

1.54 1.21 1.27 0.50 0.25 0.50

First expected interest rate hike: Q4 2016 Q1 2016 Q4 2016

continued

euro-era high. We expect the Eurozone to continue to “muddlethrough” its crisis in 2013. Politics will add further drama as bothItaly and Germany are holding elections this year. Policy-wise weexpect painfully slow progress on implementing the Europeanbanking union and allowing the European Stability Mechanism torecapitalise banks directly. Both of these measures are necessaryto break the vicious circle of bank and sovereign stress.

EXCHANGE RATES

Let’s start the New Year with a review of the last. Sterlingappreciated against the euro over the first half of 2012, withGBP/EUR peaking at 1.29 as the Eurozone crisis intensified. Butthe pound’s progress was checked and partly reversed as ECBPresident Draghi pledged to do “whatever it takes” to keep thesingle currency intact. GBP/EUR closed the year just marginally

higher than it started it, at 1.23. Sterling has broadly movedsideways against the dollar, trading between 1.53 – 1.63 over theyear. GBP/USD edged to the higher end of this band in late 2012as fiscal cliff negotiations went to the wire.

Looking ahead, developments in the Eurozone debt crisis will be asimportant as ever. European Commission President Barrossodeclared that the “existential threat against the euro has essentiallybeen overcome”. We beg to differ. Accordingly we are forecasting aweaker euro in 2013. Choosing the precise timing of the nextEurozone flare up is difficult, but we expect GBP/EUR to return to mid2012 highs as we move through the year. Against the dollar the storyis more subtle. A stronger recovery in the US and ongoing uncertaintyin the global economy should support the dollar. This will however betempered by frustratingly slow progress on US debt problems and apersistently loose monetary policy stance. We therefore expectGBP/USD to drift lower towards the middle of the 1.53 – 1.63 band.

The Royal Bank of Scotland International Limited (RBS International). Registered Office: P.O. Box 64, Royal Bank House, 71 Bath Street, St. Helier, Jersey JE4 8PJ. Regulated by the Jersey FinancialServices Commission. Guernsey business address: P.O. Box 62, Royal Bank Place, 1 Glategny Esplanade, St. Peter Port, Guernsey, GY1 4BQ. Regulated by the Guernsey Financial ServicesCommission and licensed under the Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended, the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002,and the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. Isle of Man business address: Royal Bank House, 2 Victoria Street, Douglas, Isle of Man IM99 1NJ. Licensed by theFinancial Supervision Commission of the Isle of Man and registered with the Insurance and Pensions Authority in respect of general business. Our services are not offered to any person in anyjurisdiction where their advertisement, offer or sale is restricted or prohibited by law or regulation or where we are not appropriately licensed. This article is intended for information purposes only. It is not an offer or solicitation to buy or sell any products or services. The information in this document, including the opinions expressed, is indicative, constitutes our judgement as of the dateindicated and is subject to change without notice. It is intended for recipient’s sole use on the basis that the recipient will make an independent evaluation of the content and seek independentfinancial advice. We make no representations or warranties with respect to the information and specifically disclaim all liability for any use the recipient makes of the information.

JANUARY 2013 PAGE 10

TRIPS 2013 MONTH LOCATION PERSON VISITING

January Dubai and Far East Elanco Kanagasabapathy

February South Africa Nathan Lihou

March London Geoff TrebertZimbabwe Jill Osmond

April South Africa Jill OsmondLondon Geoff Trebert

May South Africa Geoff TrebertLondon Geoff Trebert

June Russia Sharon Cleal or David Christopher

London Geoff Trebert

July South Africa Geoff Trebert

August South Africa Jill Osmond

September South Africa Sue CorbetLondon Geoff Trebert

October South Africa Geoff Trebert

November London Geoff TrebertSouth Africa Marcus Prevel

December London Geoff Trebert

JANUARY 2013 PAGE 11

NEDGROUP TRUST LIMITED PO Box 192 Fairbairn House Rohais St Peter Port Guernsey Channel Islands GY1 3LT Tel +44 (0) 1481 710895 Fax +44 (0) 1481 710789nedgrouptrust@nedbankprivatewealth.com www.nedgrouptrust.com www.nedbankprivatewealth.com

Nedgroup Trust Limited is licensed by the Guernsey Financial Service Commission under the Regulation of Fiduciaries Administration Businesses and Company Directors, etc. (Bailiwickof Guernsey) Law, 2000 to carry out Fiduciary Duties and Company Administration. Company Registration No. 23460.

Nedbank Private Wealth is a registered trade name of Nedbank Private Wealth Limited. Nedbank Private Wealth Limited is not licensed to take deposits under the Banking Supervision(Bailiwick of Guernsey) Law, 1994 and it is not a member of the Guernsey Banking Deposit Compensation Scheme.

CONTACT US

JILL OSMONDClient Relationship Manager

Tel: +44 (0) 1481 706194

Email: jill.osmond@nedbankprivatewealth.com

SHARON CLEALTrust Manager

Tel: +44 (0) 1481 706178

Email: sharon.cleal@nedbankprivatewealth.com

ANDREW LODGEManaging Director

Email: andrew.lodge@nedbankprivatewealth.com

NATHAN LIHOUChief Operating Officer

Tel: + 44 (0) 1481 706174

Email: nathan.lihou@nedbankprivatewealth.com

DAVID CHRISTOPHERFinance Director

Tel: + 44 (0) 1481 706144

Email: david.christopher@nedbankprivatewealth.com

GEOFF TREBERTBusiness Development Manager

Tel: + 44 (0) 1481 706150

Email: geoff.trebert@nedbankprivatewealth.com

MARCUS PREVELSenior Trust Manager

Tel: + 44 (0) 1481 706107

Email: marcus.prevel@nedbankprivatewealth.com

SUE CORBETSenior Trust Manager

Tel: + 44 (0) 1481 706129

Email: sue.corbet@nedbankprivatewealth.com

NEDGROUP TRUST LIMITED

PO Box 192 Fairbairn House Rohais St Peter Port Guernsey GY1 3LT

Tel: +44 (0) 1481 710895Fax: +44 (0) 1481 710789

Web: www.nedgrouptrust.com