Sinéad Leddy, Technical Director at Guernsey Finance, examines how the current European landscape is affecting the funds sector in the island.
HFMWeek (HFM): What are the biggest issues facing not only Guernsey's funds industry, but the funds sector as a whole?
Sinéad Leddy (SL): Without question it's the regulation and legislation coming down the pipeline. This includes the US's Foreign Account Tax Compliance Act (Fatca), measures from the Organisation of Economic Cooperation and Development (OECD), such as the Common Reporting Standard (CRS) and the Base Erosion and Profit Shifting (Beps) project, and the Markets in Financial Instruments Directive (Mifid) and Alternative Investment Fund Managers Directive (AIFMD) from Europe.
It was this combination of new regulation and legislation which prompted us to host a technical masterclass in London in January to demonstrate the progressive way in which Guernsey has responded to all these developments.
HFM: What were some of the key 'take homes' from that masterclass?
SL: The AIFMD was the biggest debating point because despite the initial 'deadline' for full legislative transposition of the AIFMD being back in July 2013, there has been a real inconsistency in approach from EU and EEA national regulators in how they are implementing it.
The transitional year ended on 22 July 2014 and a report from KPMG showed that at that time only 23 of the 31 EU and EEA member states had implemented full legislative transposition of the AIFMD. As such, even European fund managers cannot distribute funds into some EU/EEA member states due to the inconsistency of approach between national regulators. In this climate, it is no wonder that non-EU fund managers believe that the AIFMD is too burdensome, with some, particularly the US market, citing it as creating 'fortress Europe' and therefore choosing not to market funds into Europe.
HFM: What has been Guernsey's solution to this uncertainty?
SL: Guernsey is not in the EU (although it is in the European time zone). 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.
As such, the island has introduced a dual regulatory regime so that it is possible to continue to distribute Guernsey funds into both EU and non-EU countries: the existing regime remains for those investors and managers not requiring an AIFMD fund, including those using EU National Private Placement (NPP) regimes and those marketing to non-EU investors; and there is an opt-in regime which is fully AIFMD-compliant.
Guernsey's opt-in equivalent regime, which has been in place since January 2014, is appropriate for funds requiring full AIFMD compliance. However, Guernsey's position as a third country means our managers and funds who want to access Europe continue to be able to use NPP regimes.
We continue to hear positive feedback from promoters and their advisers that Guernsey's regulatory environment is straightforward and, more importantly, things can progress in a timely manner. The turn-around times in Guernsey are low compared with our competitor territories where delayed applications can cause issues when bringing a new product to market.
HFM: There is much debate surrounding the future of NPP and third-country passporting. What are your thoughts?
SL: Many managers have continued to use NPP regimes due to the reduced burden in comparison with the AIFMD and they are working well. Figures from the GFSC show that at the end of January 2015, 46 Guernsey AIFMs had used Guernsey's NPP regime to market AIFs into 15 European countries. Indeed, it is understood that several Cayman Islands domiciled funds are being migrated to Guernsey to take advantage of the effectiveness of our route for distribution into EU countries using NPP regimes.
The statistics show that NPP from Guernsey is being used to target the key countries into which promoters wish to market. A fund typically markets in between two to four countries and NPP is the ideal approach for this model.
The European Securities and Markets Authority (Esma) has been consulting on the current and future implementation of the AIFMD with regard to extending the passport to third countries and Guernsey has been closely involved in this process.
For those marketing into Europe, the NPP route will be favoured by many due to the depth and breadth of requirements that fund managers will have to satisfy under full AIFMD. Indeed, it is expected that full-blown AIFMD compliance will only be sought if there are particular commercial reasons to do so.
Guernsey's attraction is that it can provide a European platform but one which is not actually in the EU and therefore can offer a variety of options. For example, it makes commercial sense for a fund manager marketing almost exclusively to Europe to have a fully AIFMD compliant platform.
However, this does not have to be based in a mainland European domicile and, indeed, it could be a Guernsey platform because the island has also introduced a fully equivalent, opt-in AIFMD route to market.
HFM: What should fund managers be wary of in the current climate?
SL: Managers should look carefully at whether the pan- European passports being offered are relevant to their investor base given that it is likely to be increasingly geographically diverse. European Directives – such as the AIFMD but also the Undertakings for Collective Investment in Transferable Securities (Ucits) Directive – cater for European (retail) investors but add to compliance obligations and costs. As such, if you do not need Ucits/AIFMD or only need limited access to them for certain investors, then it is possible to break the non-EU business away into a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.
Conversely, if a manager has a platform in a mainland European domicile then it will have to comply fully with the AIFMD even if there is a large proportion of non-EU investors. European mainland platforms do not offer the ability to separate the reporting obligations away from non-EU investors, as with a Guernsey platform.
In addition, managers and funds with no connection to the EU continue to be able to use regulatory regimes which are completely free from the requirements associated with the AIFMD and as such, will have significant operational and cost benefits. For example, Investec Asset Management recently redomiciled a $1.2bn fund focused solely on non-EU investors from Ireland to Guernsey to take advantage of our dual regime response to the AIFMD.
HFM: What substance is Guernsey able to demonstrate and offer in a post-AIFMD world?
SL: A huge advantage for us as a fund domicile is the existing standards we already employ regarding oversight and the substance which is already present in existing Guernsey domiciled structures. There are more than 50 fund managers, administrators and custodians servicing assets valued at more than $300bn.
Guernsey already plays host to a number of major asset managers, such as Apax, BC Partners, Credit Suisse, Investec, JP Morgan, Man Group, Mid Europa, Permira and Terra Firma which all have offices and staff in the island. There is a range of fund administrators too, from major international names such as Citco, Northern Trust and State Street to boutique, independent operations, coupled with a significant pool of qualified non-executive directors who are experienced in providing management functions.
Quality of service is evidenced by the fact that Guernsey providers administer or manage nearly 250 open-ended funds which are domiciled in other jurisdictions, typically the Cayman Islands, where there may be local substance challenges.
Unlike many competitor jurisdictions, Guernsey also already has well-established custody businesses. They are increasingly being complemented by administrators who are setting up depositary functions to service private equity and real estate clients new to the requirement for a depositary under the AIFMD. However, it should be noted that those taking advantage of NPP regimes are able to access a lighter touch regime for non-financial assets compared to that which would be required under the full blown AIFMD.
An original version of this article was published in HFM Week, Guernsey supplement, April 2015.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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