Originally published in HFM Week, 6 October 2010
Over half a century of fund management experience has given Guernsey a formidable reputation among its fellow jurisdictions. Roger Le Tissier of Ogier and Stuart Mauger of RBC provide HFMWeek with an overview of how Guernsey plans to remain an attractive proposition.
HFM Week (HFM): How is Guernsey changing as a hedge fund jurisdiction?
Roger Le Tissier (RLT): Guernsey has developed over the past five decades to become a leading jurisdiction for investment funds business. Latest statistics show that the net asset value of total funds under management and administration grew by £26.8bn ($42.6bn) (13.6%) over the quarter to 30 June 2010, to £224.2bn ($356.4bn).
The success of this industry in Guernsey is largely due to the robust, modern legislation and regulation that is in place. The Guernsey Financial Services Commission, which was established in 1987, operates within statutory powers regulating the local finance industry and ensures Guernsey remains one of the best pragmatically regulated jurisdictions and complies with international standards of practice. Guernsey does not offer unregulated fund structures. There are two types of fund: the authorised fund and the registered fund. These provide a flexible framework for hedge funds and enable investment managers to structure funds that meet their requirements.
Stuart Mauger (SM): Guernsey has a long-standing reputation of being a business-friendly jurisdiction, and in recent years the investment business has been more focused on the alternatives arena, which includes hedge funds and fund of hedge funds (FoHF). With this focus, Guernsey has been able to create its own niche and provide a real alternative to the traditional model of a Cayman-domiciled fund, with management and administration outsourced. This traditional model has been subject to review by investors/promoters, and Guernsey has witnessed several managers re-domiciling products or physically locating to Guernsey as a result.
The quality pool of professional non-executive directors and the continuing development of the Channel Islands Stock Exchange (CISX) have also enabled Guernsey to be seen as an alternative jurisdiction in which to conduct business, especially as it is only a 45-minute flight away from London. With the existing strength of the Guernsey finance industry, which already has a first-class reputation from its skills and knowledge, the island is able to offer a full suite of financial services that can see real growth in its market share in the hedge fund arena. RBC's financial strength, commitment and reputation in Guernsey are equally well placed to grow its services to this evolving hedge fund industry.
HFM: What are your concerns and how will Guernsey cope with the ramifications of the AIFM Directive?
RLT: While it is still unclear exactly what form the Directive will ultimately take, what is certain is that there will be a Directive. I believe Guernsey is well placed to meet the requirements of the Directive once it is implemented. Guernsey has had a long-standing commitment to comply with information exchange, transparency and international standards on regulation. As a result, Guernsey was included on the OECD White List and also found to have acceptable financial standards in the Foot report on Crown Dependencies.
The finance centre here has not been complacent in reacting to the AIFM Directive's progress. Guernsey has been working very hard through government, local industry bodies and the local regulators to engage with London and Brussels to promote a better understanding of our regulatory regime with the objective of the best possible outcome for the Guernsey. We are not alone in our lobbying – other jurisdictions and associations such as the BVCA and EVCA have also taken steps to ensure their voices are heard. Guernsey already has appropriate regulation in place which will be accepted within Europe.
SM: There is still uncertainty over the AIFM Directive and the island's government and regulators continue to take all steps to ensure Guernsey continues to remain a leading international fund centre. It is anticipated that the Channel Islands will attain regulatory equivalence, thereby enabling both Guernsey and Jersey funds access to the EU markets. At the time of press, the EU Parliament appears inclined towards a passport scheme where non-EU countries can gain equivalence for their fund's distribution into Europe. This proposal is focused on a robust private placement regime, exchange of information and provision of systemic risk oversight. Guernsey will be in a strong position to achieve this should this be required.
HFM: with the increasing popularity of onshore and Ucits III products, how will Guernsey remain relevant?
RLT: Guernsey has always shown it is able to react quickly to changes in the markets and the requirements of investment managers. Recent examples include the introduction of registered funds, the launch of the CISX and the innovative protected cell company. The ability to innovate and provide excellent standards in all services will always be relevant.
SM: Guernsey is already considered to be in the top tier of fund jurisdictions, and the industry, its regulators and its government will certainly do what is necessary to retain its reputation as a leading international finance centre. The onshore/offshore debate is likely to continue, and Guernsey will continue to face scrutiny from the competitive jurisdictions (such as UK and EU) and also international oversight (FATF, OEDC, G20).
Guernsey will face these reviews head-on and continue to earn its right to be a leading international finance centre. Guernsey will continue to play to its strengths and work with other finance centres, such as Dublin or Luxembourg, to ensure there is a level playing field for everyone to work on. It is likely Guernsey will remain a specialised jurisdiction for the non-retail arena of the fund industry, as the retail sector is better placed in areas where there is less pressure on capacity from service providers.
HFM: How do you provide a cutting-edge service for your funds?
RLT: In Guernsey, we are fortunate to have five Ogier Group partners with 20 or more years' experience, including time spent with leading London law firms or in other jurisdictions. This is a very strong offering in the Guernsey legal market and ensures we are well placed to advise on the establishment and operation of investment funds of all types in Guernsey. This expertise particularly came to the fore in the past two years when we were called upon to act on a number of complex and challenging fund restructurings following the economic crisis. We are also the leading sponsor of listings on the CISX and have acted for funds listed on numerous stock exchanges such as the London Stock Exchange, AIM, Euronext, NYSE and The Irish, Swedish and Toronto Stock Exchanges.
The team also regularly advises on structures which are listed on other European and non-European exchanges. At Ogier, we recruit lawyers of the highest calibre and invest in the training and development of our staff across the board. The quality and professionalism of our people is a key component of Ogier's success as a legal services provider for funds.
SM: RBC's corporate and institutional business provides a holistic solution to the fund business, including administration, custody and banking solutions. Other traditional banking services are provided including interest bearing accounts, fixed-term deposits, forward foreign exchange, bridge financing and treasury management. Professionals from the banking, credit, trust, fund accounting and custody units meet potential fund sponsors or segregated account managers at an early stage, which enables us to understanding their business needs and thereby adding value through a true partnership. Our partnership approach is highly respected by our clients, a tangible culture which we believe sets us apart from our competitors.
HFM: how will Guernsey develop as a hedge fund centre over the next three years?
RLT: A record high of assets under management this year, coupled with a noticeable confidence returning to the markets, points to an optimistic future for Guernsey. Most service providers here are reporting increased activity, particularly for closed-ended Guernsey funds. We have also seen a number of new firms establishing themselves in the island, such as BlueCrest Capital Management, a leading European hedge fund manager; and alternative and hedge fund administrator BNY Mellon, who join hedge fund players like FRM, Dexion Capital and Man Investments, which are already well-established in Guernsey.
Other new entrants to Guernsey include Shore Capital and JP Morgan, with others anticipated to follow. In the next three years, Guernsey must remain competitive while introducing the necessary regulatory measures expected of a first-class financial centre. So far in 2010, The Licensees (Conduct of Business) Rules 2009 and the Licensees (Capital Adequacy) Rules 2010 have been introduced, and amendments to the Limited Partnership Law and Companies Law are in the pipeline. The collective offering of high-quality service providers for the establishment, management, administration and custody of Guernsey schemes will help maintain Guernsey's competitive edge. Guernsey Finance, the island's promotional agency, has already established an office in Shanghai and, in conjunction with local industry, is actively promoting the island's services in a number of regions. While some challenges remain on the radar for Guernsey and offshore centres generally, we still anticipate the next three years will see the funds industry in Guernsey continue to grow.
SM: It is anticipated that the future will see more corporate governance and compliance in the hedge fund arena. Guernsey already has an excellent reputation for this compliance culture and keeping the bar high can only help Guernsey in the future. Its 'white list label' will also help to ensure that fund promoters can consider this jurisdiction. As a whole, Guernsey will continue to be considered a premier financial centre and it is anticipated that the island will continue to develop and increase the number of tax information exchange agreements.
The Guernsey regulator will also be key to future development and its reputation as being a leader and innovator will, in all probability, continue as legislation evolves to ensure Guernsey remains an attractive jurisdiction from which to conduct fund business. The strength and quality of Guernsey's infrastructure will also ensure that fund industry as a whole will develop. As a long-term financial services provider in the Channel Islands, RBC Wealth Management will also be at the fore and we will continue to develop our reputation as a niche service provider in terms of custody, fund administration and ancillary banking services.
HFM: Where do you expect new business to come from? What are the emerging trends?
RLT: Guernsey is well known for its regulated funds regime in a broad range of areas and has already seen activity with new structures being established this year and more in the pipeline. Traditionally, the main business flows come from Europe, in particular London, however continuing efforts in the Middle East and Far East present a real opportunity for Guernsey.
In May this year we transferred Marcus Leese, a Guernsey partner, to our Hong Kong office to head up a new Channel Islands practice in Asia. This is the first time a Guernsey advocate has operated in the region and we are already seeing increased interest in Guernsey structures from Asia-based clients following this move. Guernsey is less well known than other jurisdictions in the Middle East, but is beginning to make inroads into this market.
A growing knowledge and awareness in Guernsey of individual requirements of Middle Eastern clients, particularly with respect to Islamic finance, is helping Guernsey to compete in the region. A recent example is the establishment of the World Shariah Funds PCC Limited, where Ogier acted as Guernsey counsel. This class B Guernsey collective investment scheme is a Shariah-compliant investment fund which also complies with the requirements of the Ucits Directive and is one of the first Shariah-compliant funds established in Guernsey.
SM: In the medium term, as investor sentiment re-habilitates, raising capital for new fund products may continue to be challenging. New business for RBC Wealth Management is likely to come from existing and potential client promoters reviewing and consolidating service providers and the continued growth of segregated accounts. RBC Wealth Management has won mandates from competitors and has gained business from other jurisdictions. We believe the trend will continue for jurisdictions, such as Guernsey, to remain focused on the more esoteric and niche fund structures, including hedge funds, with perhaps more traditional long-only retail products seeking Ucits III / IV relocating to EU countries such as Dublin or Luxembourg.
There could also be a growth trend for non-EU countries to develop further business models, and areas such as South Africa or Latin America are areas of growth. Japanese pension funds still favour a trust structure, and the 'feeder / master' structures will likely continue, with perhaps a move to Guernsey from the traditional Cayman domicile. China will also feature in any long-term growth plans and it is widely anticipated that Asian fund management centres, such as Hong Kong or Singapore and their hinterland, will feature in providing fund solutions. There is no reason why Guernsey should not form part of an operating model in this growing arena. Our model of being a niche tailored service provider has proved the test of time and is likely to continue.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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