Originally published in HFM Week, Guernsey Special Report, June 2010
Paul Wilkes and Wayne Atkinson of Collas Day echo that the close relationship between the GFSC and the fund industry help Guernsey maintain its high standing as a hedge fund domicile.
Though the hedge fund industry is, it seems, making an impressive recovery from the recent financial crisis, the lessons learnt from those dark days, which not only saw a dramatic fall in returns but also the collapse of Lehman Brothers and the Madoff scandal, are unlikely to be soon forgotten. As such, today the focus on liquidity, transparency and regulation is higher than ever before and it is for this reason that Guernsey is fast emerging as the jurisdiction of choice in an ever-changing hedge fund sector.
"Prior to recent events, many investors and promoters favoured the Caribbean domiciles, which took a lighter approach to regulation; that, however, has now changed dramatically," says Paul Wilkes, a senior associate at Guernsey law firm Collas Day. "Today, the appeal of the Channel Islands' model of robust but practical regulation is greater than ever."
This wide-scale change in attitudes has seen a number of high-profile funds leave said Caribbean jurisdictions and opt instead to redomicile in Guernsey.
"Traditionally hedge funds had largely opted for the Caribbean model and as a result Guernsey has only held a small market share of the hedge fund industry," he continues. "However, dependent on the final outcome of the EU Alternative Investment Fund Managers (AIFM) Directive, though of course, it is very likely that Guernsey may well gain a much bigger share of that market, the possibility is greater than anyone would have anticipated."
However, despite this growing interest in the domicile, there is still very much a focus on quality over quantity, Wayne Atkinson, also a senior associate at Collas Day, is keen to point out.
"This is one thing the regulator and industry have both always been very clear on," he asserts. "We don't want Guernsey to take a high-volume, low-cost approach to funds and be part of a 'race to the bottom', so to speak; that is, to allow the redomiciliation of a huge numbers of funds which aren't properly overseen. We want a good, sustainable industry and today, we are at an advantage because that is now what the rest of the world wants as well."
According to Atkinson, finding that delicate balance between regulation that is strong, but also flexible, has been key to the continued success of the domicile. "Guernsey has always been known for striking what is quite a difficult balance between having robust regulation but also providing funds and fund managers with flexibility to do what they need to do to turn a profit," he says.
What's more, the fact that Guernsey's regulatory approach prefigured the changing industry attitude – as opposing to arising in response to it – is one way in which the island stands apart from other jurisdictions.
"Essentially, Guernsey is in an excellent position to respond to the changing expectations of the fund industry because it already was in an excellent position when everything started to change," explains Atkinson.
"At the moment, there is a well-publicised global drive towards increasing regulation and increasing transparency and monitoring," he continues. "Not only does Guernsey have a long history of sound regulation but it also has a strong regulatory base to build on in order to meet new and constantly changing expectations."
According to Atkinson, a close relationship between the island's regulatory body, the Guernsey Financial Services Commission (GFSC), and the fund industry is also vital to its growing prominence as a leading centre for hedge funds.
"There is a consistently excellent dialogue between the regulator and the industry," he says. "It recently published a draft Code on Corporate Governance which received a tremendous response from the industry, something that I think clearly demonstrates the high level of general awareness of the importance of appropriate and adequate regulation."
The draft code aims to provide guidance to directors, not as to what decisions they should be making, but rather how they should be making those decisions with a view to making sure investors are well protected, as well as ensuring that the board is properly composed and kept up to speed with industry developments.
"The idea is essentially to make sure that a fund has a strong independent board that is able to provide the over-sight that both managers and investors want or need," says Atkinson. "We also currently have under consultation changes to the Protection of Investor law, which provide the GFSC with a formal role in approving a fund's directors and the overall composition of the board."
The combination of these different layers of regulation means that Guernsey provides investors with a triple level of protection – managers who look after the investors' best interests, directors who make sure that the managers are doing so, and the GFSC, ensuring that directors are fulfilling their role adequately. "It's a very strong regime and one that is being built very carefully and drawing upon a lot of industry input," says Atkinson.
Both Atkinson and Wilkes stress that, despite the growing popularity of Guernsey, the GFSC is far from becoming complacent in its approach to regulation. "Guernsey has always been adept at ensuring that its regulation is kept up-to-date," says Atkinson. "For example, at the beginning of this year, the Licensees (Conduct of Business) Rules 2009 came into effect, which relate to service providers of investment funds which are licensed by the GFSC, amongst other entities, and highlights a number of issues such as conflict of interest disclosure and fair dealing."
This, says Wilkes, is not a new focus but rather, an update of an area which was indeed already well regulated. "It wasn't so much the creation of regulation that wasn't there before; it is simply an act of clarifying, improving and building upon," he affirms.
A question of confidence
However, while Guernsey is clearly benefiting from the changing attitudes that have resulted from the events of recent years, like the hedge fund industry as a whole, low investor confidence still presents a challenge for future growth.
"Confidence at the moment is still relatively low for new structures and as such, these are being launched at a less frequent rate than perhaps they were a year or two ago, as well as raising slightly less money than they were at that time," says Wilkes. "There are positive signs, of course, but the recovery is likely to be a slow one. New funds are key to the continued success of any domicile and so we are hopeful that confidence will continue to improve as jurisdictions like Guernsey continue to respond to investor needs."
Atkinson also points to the aforementioned AIFM Directive as both a potential challenge and a potential opportunity for Guernsey. "Clearly the Directive is going to affect everyone in the fund industry, on a global scale, but what the main challenge for Guernsey will be is to take full advantage of whatever regime comes in and maintain its position notwithstanding that. There will inevitably be a period of adaptation, but I think Guernsey is well placed to do that."
Currently operating solely in Guernsey, Collas Day has, over the years, developed substantial knowledge of the local market. That said, the firm is very much an outward looking one, with staff from all over the world each bringing the firm their own experience and expertise from various global jurisdictions. "For example, we have established an exchange programme with a Luxembourg law firm with which we have close ties, which sees us 'swap' lawyers for a three to six month period to allow staff to gain vital experience of other jurisdictions," says Wilkes.
And while the firm is keeping a close eye on burgeoning opportunities outside of Guernsey – in the rapidly developing Far East, for example – they are, at the moment, very happy for Guernsey to remain as their key focus.
"We acknowledge, of course, that a number of entrants in the market have a global presence, but while this may be beneficial from a marketing point of view, in terms of service delivery, for someone launching a fund in a new jurisdiction, it doesn't really matter if the law firm they are working with has offices in several jurisdictions or just one," asserts Wilkes. "What matters is that the lawyers that they are working with are good at what they do – and this is something that we at Collas Day can confidently say is true."
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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