Darren Bacon and Caroline Chan of Mourant Ozannes explore Guernsey's financial landscape.
Experience, expertise and solid regulation are just some of the reasons why Guernsey's reputation as a major investment funds domicile continues to grow. Figures from Guernsey Finance show that funds under management and administration in Guernsey stand at £227.6bn (December 2015). These funds cover multiple asset classes and types, including closed-ended and open-ended fund structures, hedge funds, real estate and infrastructure.
The island is also currently the global leader for non-UK London Stock Exchange (LSE) listings, acting as a gateway to capital markets. As a European off shore jurisdiction with a flexible but solid regulatory regime, the Guernsey market lends itself to the establishment of hedge funds and provides a more accessible, European time zone alternative to the traditional Cayman Islands structure.
What else sets Guernsey apart?
Guernsey's flexible approach towards open-ended and closed-ended funds makes the jurisdiction very attractive to set up a vast array of alternative investment funds including hedge and private equity funds. The regulator, the Guernsey Financial Services Commission (GFSC), has a fast response time enabling firms to register quickly. It takes a sensible approach to investment restrictions, opening the doors for a diverse range of fund products to establish themselves in the jurisdiction.
Guernsey's broad expertise and service provider credentials make it well suited to service a number of investment vehicles including limited partnerships, unit trusts, protected cell companies (PCCs) and incorporated cell companies (ICCs). The island is also home to some of the leading global service providers covering law, corporate governance, administration, accounting, valuation and registrar services. These organisations, including Mourant Ozannes, have a long history on the island, meaning that they are well-placed to meet the challenging requirements of financial institutions and service complex structures which may need to adapt to regulatory challenges.
The GFSC is an experienced and pragmatic regulator. It sets high standards but ensures that firms remain competitive, a feat that is not always achieved by other regulatory bodies. The GFSC's response to the AIFMD is testament to this pragmatism. Although not in the EU or part of the EEA, Guernsey has implemented its own AIFMD equivalent regime.
Under this dual regulatory regime, it is possible to continue to distribute Guernsey funds into both EU and non-EU jurisdictions: the existing regime remains for those not requiring an AIFMD fund, including those using national private placement regimes and those marketing to non-EU investors; and there is an opt-in regime which is fully AIFMD compliant.
Firms may utilise the national private placement regimes on offer in the 28 EU member states and adhere to the rules laid down by AIFMD. The national private placement route is currently being favoured by many fund managers who do not undertake pan-EU marketing of their funds. Alternatively, they can simply solicit non-EU investments and absolve themselves from the onerous compliance obligations laid down in the directive. In particular, Guernsey fund structures will provide a cheaper "out of scope" option for marketing into non-EU jurisdictions, including the important markets of the US, Asia Pacific, the Middle East, Latin America and other emerging markets, which EU jurisdictions will not be able to provide.
The European Commission is going to determine whether national private placement can continue, or whether the passport will be extended to non-EU managers of non-EU funds; however, Guernsey is a strong candidate to be a beneficiary of the pan-EU marketing passport, which allows unimpeded distribution rights across the EU. Guernsey's regulatory regime has been at the forefront of attaining compliance and equivalence with the AIFMD, and indeed the European Securities and Markets Authority (Esma) has already announced its recommendation to grant Guernsey such a passport. As and when the passporting regime is implemented, Guernsey managers and funds should be ideally placed to take advantage of the pan-EU marketing opportunities. In the meantime, Guernsey offers a dual regulatory regime for the continued distribution of funds into both EU and non-EU jurisdictions.
All open-ended funds in Guernsey are required to appoint a Guernsey-regulated custodian. The GFSC has, however, relaxed its rules for hedge funds, deeming such relaxation to be appropriate in the case of funds targeting institutional and/or expert individuals. An example of this relaxed approach is that a reputable prime broker may be appointed as the 'designated' custodian and the GFSC will not require the prime broker to take on formal duties of oversight over the fund manager. The GFSC has also introduced a registered fund regime which offers a streamlined approval process for both open and closed-ended funds. It is the responsibility of the licensed Guernsey fund administrator to conduct due diligence on the fund promoter and the fund structure and to provide certain warranties to the GFSC that the proposed fund satisfies the criteria for authorisation. Providing the fund administrator confirms to the GFSC that the criteria are met, the GFSC will grant the required approval within three working days. These changes significantly accelerate the regulatory approval process.
Guernsey continues to lead the way among off shore jurisdictions regarding the exchange of information and was one of the first to sign an Intergovernmental Agreement (IGA) with the US authorities as mandated under the Foreign Account Tax Compliance Act (Fatca). The UK launched its own variant of Fatca with the Crown Dependencies and Overseas Territories, again, something Guernsey has been fully cooperating with. This determination to attain tax compliance makes Guernsey exceptionally well-placed to adhere to the rules laid out by the Organisation for Economic Cooperation and Development's (OECD) Common Reporting Standard (CRS). Even the yet-to-be-determined Base Erosion and Profit Shifting (Beps), another OECD initiative, should not overly concern Guernsey. At the heart of Beps is the requirement that firms using lower tax jurisdictions have a substantive presence in those jurisdictions. This is already a requirement in Guernsey.
Guernsey has demonstrated that it is a competitive, well-regulated and experienced fund domicile. Its regulator is market-friendly and pragmatic, its service provider community is world-leading and it has a political environment which supports the industry and innovation. Recent prospects for the industry have been very positive, with a number of significant new investment fund launches and other transactions.
Fintech continues to attract investor interest and peer-to-peer lending, in particular, appears to be gaining significant momentum. The London listed funds sector remains active and activity may increase further following the outcome of the UK's EU Referendum. There is great potential in Guernsey's new manager led product which provides a very attractive vehicle for fund managers needing substance in the island. The island has repeatedly demonstrated its robustness, continues to attract best of breed talent and recent growth shows no sign of slowing down.
An original version of this article was first published in HFMWeek's 2016 Guernsey report, June 2016.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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