Christopher Jehan, chairman of the Guernsey Investment Fund Association's technical committee, spoke to Jenna Gadhavi of Clear Path Analysis on Guernsey's approach to regulation in the funds industry.
Jenna Gadhavi: What has been Guernsey's approach to the regulation of the fund sector historically and how has this helped the fund sector develop and grow?
Christopher Jehan: In regards to the actual regulation that the regulator has put in place under the Protection of Investors law, apart from the open-ended "A" scheme rules (which are the quality funds broadly equivalent to UCITS) the rules actually allow for a great amount of flexibility in the investment restrictions applicable to a fund.
This means that the role of the regulator is largely ensuring that the investment and liquidity restrictions that are applied to a fund are appropriate to the classes of assets being invested into. It comes down to the risk warnings and ensuring that these are properly disclosed, so effectively a fund group is able to open up most asset classes for investment so long as the risks are properly disclosed. This is a very important part of the flexibility that is afforded to fund companies when setting up funds in Guernsey together with the pragmatic approach to regulation that is applied as well as the short turnaround times for applications for existing promoters launching new funds in Guernsey.
For example if there is a new fund launched within an existing protected cell company structure you can say that broadly speaking within four weeks that new fund will be approved, although this time scale will often be beaten. When compared to a lot of other regulators it allows for a much shorter lead in time to launch new products. In addition where certain parts of regulations may not fit a product perfectly (like having ten business days for release of a contract note from the trade date if this didn't fit the pricing cycle for the fund) then a derogation from that specific rule can be applied for which affords a greater amount of flexibility.
Jenna: Where does Guernsey stand with regards to UCITS?
Christopher: As a non-EU jurisdiction Guernsey cannot offer UCITS because that is specifically restricted to the EU jurisdictions. On the positive side this means that none of our funds are hampered by the increasing amount of regulation that is coming into UCITS as we have seen it move from UCITS IV to UCITS V and so on. Guernsey does have a funds type that is broadly equivalent to a UCITS which would be the open-ended "A" scheme funds and there are actually two separate sets of "A" scheme fund rules; the 2002 rules which broadly mirror UCITS I and the 2008 rules which broadly mirror UCITS III. Currently there are no plans to look at coming up with an equivalent to the UCITS IV or further.
Whilst we do not benefit from a UCITS passport there are certain jurisdictions within the EU such as the U.K, Ireland, Netherlands and Belgium that allow for distribution of Guernsey "A" scheme funds into those jurisdictions. Those aren't just restricted to EU countries because other non-EU countries such as Switzerland, Hong Kong, Australia, South Africa and Japan have also recognised Guernsey "A" scheme funds for sale so that whilst we cannot benefit from that passport there are still distribution possibilities for those fund types from Guernsey.
Jenna: In regards to AIFMD how has Guernsey responded so far?
Christopher: Initially a working party was formed between representatives of the industry, regulator and the government. This determined the direction that we wanted to go in dealing with the third country provision of AIFMD. As part of this we have introduced an AIFMD parallel regime here and as part of this we have signed a memorandum of understanding with 27 out of 31 EU and European Economic Area jurisdictions and the four outstanding continue to be followed up. As a third country Guernsey can only currently offer funds for sale under articles 42 and 43 rather than benefitting from full passporting. Under article 42 this is broadly in line with the national private placement regimes that were previously in place, however there are some enhancements within the various EU jurisdictions to those rules therefore effectively putting into place a new registration regime.
Guernsey has brought in two sets of rules, AIFMD marketing rules which apply to the article 42 and 43 registrations and equivalent AIFMD rules which will come more into play when we are able to do full passporting when permitted by the EU in either 2015 or 2016. Both of these sets of rules under AIFMD implement easier opt in rules and a licensee or promoter can apply to have these rules applied to their license only in respect of certain funds so can choose which funds will have these conditions applied to or not.
Jenna: Can you explain more on Guernsey's dual rate regime and what some of the implications are?
Christopher: Funds that a Guernsey manager or licensee sets up can be ones that they wish to sell to the EU and EEA jurisdictions, which currently would be under the private placement article 42 route and the AIFMD marketing rules would also apply. Alternatively, if a fund company isn't looking to sell these funds into Europe and perhaps is looking instead to sell into Africa, Asia, and South America or are single investor funds then the decision can be made to not bring these funds within scope of these new AIFMD rules.
Effectively we offer a route to selling into Europe or the option to stay completely outside which means that the reporting requirements currently required under the article 42 registration route would only apply to those funds that a company chooses to sell into Europe, which gives greater flexibility and more options for fund promoters. At a later date when we have access to the passporting coming in for third countries and until private placement is abolished in 2018 or later we can go beyond a dual regime and offer a three tier regime; funds that are completely out of scope, funds that are in scope but companies are choosing to private place under article 42 or equivalent full passporting.
Jenna: How will this impact the domiciling of funds or principle management entities?
Christopher: At the moment most of this is theoretical as we have yet to see the long term impact in order to see what the trend is. I believe that Guernsey will see increased applications for funds specifically for those wanting to sell to non-EU jurisdictions or purely into the EU by reverse solicitation as effectively we offer a cheaper route to launching those funds than offshore or tax neutral fund jurisdictions within the EU. Where there are easy routes towards selling funds under private placement into the EU we can see an increase here because again companies would only have to comply with the reporting requirements under article 42 and not the full range of requirements.
It is very easy now to register a Guernsey fund for sale under the AIFMD private placement route into the U.K. so if a company is looking to only sell an offshore fund into the U.K. Guernsey would make a cheaper and more cost effective route to that. If you look at the management companies themselves there are a few companies that have started making moves towards Guernsey to show the substance to make Guernsey the recognised alternative investment fund manager or AIFM. At the moment we haven't seen anything of the same scope as Brevan Howard moving their principle operations to Jersey. Such companies can take advantage of having substance in a purely offshore jurisdiction outside of the EU and therefore have the option as to whether or not to have their funds out of scope of the AIFMD.
Jenna: Is there likely to be growth in parallel or feeder to funds in Guernsey as mergers seek to hive off part of their business which do not require UCITS and AIFMD?
Christopher: Yes certainly for parallel funds it makes sense as when you look at the cost of complying with the regulation on a percentage basis within an EU jurisdiction that is now clearly higher than for a jurisdiction like Guernsey. So if you want to limit the expense you would look to have a EU UCITS or AIFMD based product to sell into the EU, which would make sense as it would fully benefit from the passporting. If, however, you launched a parallel structure in Guernsey for sale in the rest of the world then what this offers a lower percentage charge from a management company point of view which can benefit the management company in ensuring that they are running their operations on the most cost effective basis.
For feeder funds it would depend on the direction of the feeder. If you had a Guernsey based fund feeding into a Luxembourg fund, because the Luxembourg fund has to comply with AIFMD the situation that you are then in is that you have a Guernsey fund structure feeding into a structure which has to comply fully and meet the full costs. However if you had a Guernsey fund that was either in scope or in the article 42 private placement space and an EU fund that was feeding into that Guernsey fund it would make more fiscal sense as then there would be lower costs applied to the whole and only the European portion specifically would suffer the higher charging. From a UCITS point of view this would make a lot less sense from a feeder structure because of the restrictions on a UCITS fund investing in non-UCITS funds.
Jenna: What do you see to be the main attractions of Guernsey's regulatory environment for funds?
Christopher: Flexibility is the key to Guernsey regulatory environment for the funds. We do have an approachable and pragmatic regulator and it is easy enough to get an appointment to sit down and talk about a proposed new fund or structure prior to starting most of the work behind that and submitting for regulatory approval. The fact that we have regimes for both authorised and registered funds, the latter being much lighter touch literally just an approval and most of the supervision is down to the custodian as opposed to the regulator.
The distinction between various types of open-ended fund regulation means that you have got the very strict regulation applied to the "A" scheme (near-UCITS) type funds versus the qualified investor (or "Q") scheme and the "B" scheme funds where there is a great degree of flexibility from investment restrictions. Added onto this the possibility for derogation from some of the rules where it may be difficult to apply those specific rules to the funds type and asset classes being invested into gives that greater degree of flexibility. The fact that the Guernsey AIFMD marketing and equivalence rules both are applied as an overlay on top of the existing fund rules means we haven't had to bring in a whole new raft of regulation but instead have put in place what is an additional opt in layer.
The fact that these rules can be applied as conditions specific to individual funds means that a manager does not have to comply with all of those rules for all of the funds that they manage but just the specific in scope funds. We offer flexibility unlike any jurisdictions within the EU in that there is an option as to whether or not a fund can be in or out of scope of AIFMD and this is going to be key from a cost driving point of view in the future.
Originally published in Clear Path Analysis' Re-domiciling and co-domiciling for fund managers 2014 report, January 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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