Guernsey Finance Chief Executive Fiona Le Poidevin considers the impact of AIFMD and Guernsey's response to it.
So, it's finally here. Or is it? The 22 July 2013 'deadline' for EU and European Economic Area (EEA) member states to transpose the Alternative Investment Fund Managers Directive (AIFMD) into national law has now passed.
A new survey from the Alternative Investment Management Association (Aima) and Ernst & Young shows that 12 out of 31 countries have completed full legislative transposition within the deadline. However, the AIFMD does allow member states some discretion to provide a transitional period to allow the market to adjust to the Directive. The survey shows that countries such as Spain, Portugal and Belgium are only in the very early stages of drafting or have not finalised their required domestic legislation.
Guernsey is not in the EU (although it is in the European time zone) and therefore, is not required to implement AIFMD. However, with Europe still one of our biggest markets, a large proportion of business relates to the EU in some form. Yet, we also have a substantial amount of funds business which originates outside of Europe and does not touch the EU at all. Therefore, Guernsey is evolving its regime to ensure that we can continue to service both EU and non-EU business in the most effective way.
The first thing to say is that Guernsey alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) with no connection to the EU continue to be able to use the existing regulatory regime which is completely free from the requirements associated with the AIFMD.
Secondly, Guernsey's position as a 'third country' means that we have not had to introduce a fully equivalent AIFMD regime for our AIFMs and AIFs to maintain access to EU markets post 22 July. Those who want to be able to access Europe continue to be able to use National Private Placement (NPP) regimes, which it is expected will remain until 2018. Ahead of 22 July, the Guernsey Financial Services Commission (GFSC) signed bilateral co-operation agreements with 27 securities regulators from the EU and the EEA, including the UK, Germany and France. These agreements mean that Guernsey funds continue to be able to receive investments from appropriately qualified investors in these European countries through their NPP regimes post 22 July, subject to completion of the notification procedure of the relevant national securities supervisor.
However, the Directive does also provide the framework for establishing a full passporting regime and the European Commission is expected to implement this regime for non-EU AIFMs in July 2015. Guernsey intends to fully engage with the consultations on the third country passporting regime to ensure that our AIFMs will be ideally placed to take advantage of being able to market AIFs on a pan-European basis with a single authorisation, as passporting is currently envisaged to operate.
Indeed, the GFSC is expected to shortly issue a domestic consultation on a full AIFMD equivalent opt-in regime. It is expected that these opt-in rules will be introduced early in 2014 and they should be in operation well in time for the implementation of the passporting regime for third countries in July 2015. For those marketing into the EU, it is likely that the NPP route will continue to be favoured by many due to the depth and breadth of the requirements that fund managers will have to satisfy for the AIFMD. Indeed, it is expected that full-blown AIFMD compliance will only be sought if there are particular reasons to do so, for example for investor relations.
For those managers with elements of EU and non-EU business, the potentially onerous and costly compliance with AIFMD will mean that parallel structures are likely to be given serious consideration. It will be possible to break the non-EU business away into a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary. If on the other hand, it is necessary or otherwise desirable to comply with the AIFMD requirements, then you can do this in Guernsey too.
What we are trying to say is that a one size fits all approach does not suit everyone and Guernsey is able to provide a range of options. However, the real implications of the Directive are still evolving due to the fact that much of the detail is open to interpretation by member states.
A recent survey of European asset managers by fund software provider Multifunds showed that 77% of respondents were considering establishing AIFs for non-EU investors 'offshore' as a way to put them outside the scope of the Directive. However, this can only be achieved if there is sufficient substance offshore. This also applies to managers of AIFs for EU investors who are looking to avail of the continuing NPP regimes.
What is clear is that letterbox entities cannot merely claim to be managers and substance will be required in a jurisdiction where a manager is claiming to be domiciled.
Similarly, the extent to which activities such as portfolio and risk management can be outsourced must be considered and care must be taken to ensure that the real decision making powers lie with the entity that is claiming to be the manager.
Guernsey has a huge advantage as a fund domicile in the existing standards we already employ regarding oversight, and the substance that is already present in existing Guernsey-domiciled structures. For example, Guernsey already plays host to a number of major managers, such as Apax, BC Partners, Man Group, Mid Europa, Permira and Terra Firma which all have offices and staff in the island. In addition, Guernsey hosts a range of fund administrators, ranging from major international names to boutique, independent operations, coupled with a significant pool of qualified non-executive directors, who are experienced in providing management functions. The AIFMD requires depositories to provide extra oversight to the fund structure. Unlike many of its competitor jurisdictions, Guernsey already has a wealth of custody businesses well established on the island. They provide dealing and settlement, and also offer services over and above traditional custody services to encompass robust support for corporate governance, often performing a fiduciary role.
Yet, much of Guernsey's core business of closed-ended private equity and real estate funds will be able to access the AIFMD's lighter touch regime for non-financial assets that permits a wider range of entities, such as lawyers and registrars, to carry out custody functions, thus benefiting from cost and operational advantages of not requiring a formal custodian. Indeed, we are already seeing some Guernsey-based administrators setting up depository functions to provide a 'one-stop shop', especially for clients new to the requirement for a depository.
Of course, providing they can prove sufficient substance to their arrangements, one option might be for a fund to opt to be self-managed. However, it would be wrong to assume that all existing Guernsey funds will opt to be self-managed and, therefore, be non-EU managed. Some will want their European operation to be the AIFM and, therefore, be AIFMD authorised but managing a Guernsey fund.
To conclude, Guernsey's position as a third country, its regulatory regime and its infrastructure and expertise mean that as a domicile it ultimately offers optionality for the international fund community. The way in which it has dealt with the AIFMD demonstrates that Guernsey has recognised not only the importance of the EU market but also the truly global nature of its investor base.
* Co-operation agreements
At the time of writing, Guernsey has signed 27 co-operation agreements with the securities regulators from the following EU/EEA countries: Austria; Belgium; Bulgaria; Cyprus; Czech Republic; Denmark; Estonia; France; Finland; Germany; Greece; Hungary; Iceland; Ireland; Latvia; Liechtenstein; Lithuania; Luxembourg; Malta; Norway; Poland; Portugal; Romania; Slovak Republic; Sweden; The Netherlands; and the United Kingdom.
Originally published by HFMWeek, August 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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