Originally published in HFM Week, Guernsey Special Report, May 2012
Patricia White of Legis Fund Services limited discusses how the fund industry in Guernsey is faring at a time when the eurozone economy remains fragile.
While the debt crisis continues to plague the eurozone there is a constant fear of the impact in the wider global economy. Concerns remain that the eurozone is in recession after GDP fell 0.3% in the final three months of 2011, with a further contraction anticipated in the first quarter of 2012. Manufacturing downturn is greater than expected and unemployment in the 17 countries adopting the euro has hit its highest since the currency began in 1999. Thankfully, the UK has dodged a double-dip recession for now, with the economy growing by 0.3% in the first three months of the year, and the manufacturing sector expanding at its fastest pace for 10 months in March.
By contrast, while the Guernsey fund industry showed a modest 1.6% increase in assets under management and administration in 2011, this reflects 30% growth over the two year period and 47% growth in the last four years since the end of 2007, out-performing competing jurisdictions and a commendable achievement in the current economic climate. Our ability to avoid the worst of the impact of the global recession is attributable in part to recognition of the essential requirement to position Guernsey as a top-tier jurisdiction.
Guernsey is recognised as a leader in global regulation and co-operation following positive assessments by the IMF and OECD; both organisations published reports commending the island's high standards of regulation and Guernsey is included in the OECD white list. Notwithstanding this the Guernsey Financial Services Commission (GFSC), while robust, has a reputation for its pragmatic and open-door approach placing it ahead of our competitors.
Obstacles for new business
The cost and implementation of changes in compliance and regulation can act as obstacles to new business flows, topical issues currently being AIFMD, FATCA, and Dodd Frank. The UK Bribery Act also came into force in July 2011 with unknown extraterritorial reach and severe penalties for non compliance. Those affected must demonstrate they have adequate procedures in place identifying bribery risks and ensuring procedures are in place to mitigate the risks identified.
Concerns regarding AIFMD, which initially threatened to significantly impact our fund industry, have been significantly allayed since the first draft of the directive. November's Level 2 regulations, concerning rules relating to third countries and de minimis calculations, resolved many of these concerns and Guernsey is well positioned for the final outcome by offering an equivalent regime.
Opportunities may also present themselves for Guernsey in terms of providing an alternative form of regulatory regime for those products which have no EU connections, bearing in mind that the industry cost of implementing the requirements of the AIFMD should not be underestimated. We have seen a positioning of fund managers seeing up their operations and funds (particularly private equity vehicles) in Guernsey in an endeavour to avoid any negative aspects of the final outcome of the legislation.
The draft FATCA regulations were released by the IRS in February this year and represent a complex set of rules designed with the objective of limiting tax evasion by US persons. Impacted organisations may need to adjust their existing operating model in order to avoid a punitive withholding tax of 30% on US investments and become compliant, as well as review their new business take-on procedures. To further exacerbate the challenge, the regulations will remain fluid up until and beyond the first deadline in June 2013.
The Dodd Frank Act prompts changes to the ways hedge funds must operate to better protect investors, affecting investment advisers with a place of business in the US and certain custodians. Those affected should have registered with the SEC by the February 2012 deadline and consideration must be given to technology, operations and infrastructure to meet the new regulatory requirements, which among other things requires the appointment of a compliance chief for each fund.
The importance of good corporate governance is underpinned in the aftermath of the Weavering scandal emanating from the Cayman Islands. _e publication of the Finance Sector Code of Corporate Governance by the GFSC, containing principles and guidance for adherence to good corporate governance, and requiring submission of an annual assurance statement to confirm the same, is welcome and provides assurance that Guernsey does not underestimate the importance of these principles.
With a growing number of conflicting cross-jurisdictional and cross-functional regulatory requirements, businesses need to take a more universal approach to compliance and risk management. As a well regulated jurisdiction, the increasing focus on compliance and regulation means Guernsey is well positioned compared to those adopting a lighter touch approach.
Extending its reach
The Guernsey fund industry now looks beyond traditional UK and eurozone markets, securing and further developing growth from non-traditional emerging markets. The versatility of Guernsey's fund regime and product types means that we have an attractive offering for jurisdictions such as Mena, India, China and Russia.
Guernsey's Registered Fund regime, available for open-ended and closed-ended funds, facilitates a three-day approval process which is a popular choice for promoters who can demonstrate an established track record, combining both a speedy approval process with the security of regulatory oversight. Authorised Qualifying Investor Funds also offers a three-day process, the most appropriate choice being affected by the requirements of the detailed disclosure in the offering documents.
Licensing of a GP can also be fast-tracked to a ten-day process. Competing jurisdictions can only achieve this turnaround time through their unregulated fund regimes.
We are seeing an increasing demand for listed funds, the perception being that the listing authority provides an additional layer of regulation and oversight as well as potential liquidity. LSE statistics show that for non-UK companies Guernsey is the jurisdiction of choice. There are significantly more Guernsey companies listed on the LSE main market and the SFM than any of our competitor finance centres. Playing host to the Channel Islands Stock Exchange, which is an internationally recognised Market Authority and FSA approved, further enhances our service offering. Its competitive pricing and responsive approach makes it an attractive alternative to other exchanges.
As a jurisdiction, we are seeing growth in funds of hedge funds, private equity business and alternative asset classes generally including infrastructure, Shariah compliant and green funds.
Guernsey has an exceptionally well-developed private equity infrastructure in terms of its regulatory environment and legislation, for both limited partnership law and company law. Tax laws facilitate organisational structuring through a tax neutral environment; no tax liability is payable in this jurisdiction. The Private Equity News/State Street CFO survey reports that more than 61% of participants indicated Guernsey as their preferred destination for private equity outsourcing and Guernsey was ranked as the highest placed jurisdiction in the FundDomiciles.com Stability Index 2011.
We have a track record of working with promoters and Shariah advisers to structure funds which comply with the fundamental principles of Islamic finance and recognise the importance of maintaining the Shariah-compliant status of the funds. Similarly, we understand the values which underpin green funds, whose investments are focused on sustainability and 'clean' technology or energy and which have evolved from the ethical funds that have been present in the investment market for some time. The flexibility of our fund regime also sees Guernsey gaining a reputation as a centre of excellence for more esoteric asset classes such as fine art, wine, timber, and rare and classic cars.
Overall, I remain cautiously optimistic for the remainder of the year. While the Guernsey funds industry continues to see growth, new fund launches continue to take longer to get to market as fund raising remains difficult. Investors take an extremely cautious approach to investment while economic uncertainty continues and markets will remain sensitive to any negative data emanating from the eurozone.
While the possibility of a significant upturn in the pace of growth for the remainder of 2012 is highly unlikely, the UK economy has avoided recession and growth is likely on some level. With Guernsey funds promoted or sponsored by leading institutions in more than 55 finance centres, and with over 50 years of proven financial services experience, an excellent track record, a flexible regulatory environment, good infrastructure and political stability, Guernsey is a highly respected domicile which I expect to fare well in this difficult economic climate and continue to stand strong.
Patricia White is managing director of Legis Fund Services Limited, a Chartered Accountant and a Chartered FCSI and has over 20 years experience in the offshore finance industry.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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