Originally published in HFM Week, Guernsey Special Report, May 2012
Robert Varley of Babbé explains why Guernsey is in a better position than most offshore jurisdictions to comply with regulatory changes.
As I write these words, the view from my office window has changed from dark, positively ominous clouds to a clear blue sky and bright sunshine. It might be a little early to claim this is a metaphor for the global funds industry but, at the very least, Guernsey appears to have enjoyed – and offered to participants in the funds market – some shelter from recent storms.
The past 12 months have been characterised by a series of tumultuous problems afflicting the entire industry. But the fact that Guernsey has continued to grow in terms of funds under management and administration, when some other funds domiciles remain in decline, demonstrates the strength of Guernsey as a funds domicile. In particular, most of the challenges over the past 12 months have proven to represent opportunities as far as Guernsey is concerned.
Responding to challenges
Looking at some of the challenges that have arisen over the past 12 months it is possible to see a pattern that has favoured sensibly regulated jurisdictions such as Guernsey. The ongoing dialogue between the funds industry on the one hand, and the EU on the other, regarding the Alternative Investment Fund Managers (AIFM) Directive, and the subsequent Level 2 proposals, has continued to provide more than its fair share of headaches and exasperation.
However, notwithstanding the general disappointment at the initial Level 2 proposals, the general mood in the market appears to be unchanged; it is clear the European Commission intends to engage with Guernsey (and Jersey, with whom Guernsey has joined forces in its discussions with the Commission) in a positive manner. For its part, Guernsey is perhaps better positioned than some other offshore centres to comply with the new regime from 2018 onwards.
Perhaps the dominant theme of the past 12 months, as it was over the previous few years, has been a general lack of investor confidence and relative scarcity of capital. This has meant that capital providers have had a much stronger position vis-a-vis investment managers than in the past; it has also meant that managers feel obliged to look for ways in which they can offer a more attractive overall package to investors.
Aside from the commercial terms attaching to an offering, managers have in particular looked at the regulatory environment. It is clear that institutional investors and many high-net-worth-individuals (HNWIs) now take comfort in a regulated environment, provided the regulator still allows sufficient flexibility to pursue attractive investment strategies.
The Guernsey Class B Regulations have proven to be very helpful in this regard, allowing funds to be marketed to a range of institutions, while providing considerable flexibility as to the nature of the fund's assets. It helps that while the GFSC's approval is required for a fund which proposes to operate as a Class B fund, the team at the commission who deal with these applications has demonstrated a level of proactivity and commercial nous which puts them well ahead of most regulators. The Guernsey-registered fund regime, which is highly analogous to Cayman's administered funds regime, has been very popular too.
On a similar note, the ability to offer a listed fund product remains a strong selling point and a number of managers have taken advantage of the strong reputation of the Channel Islands Stock Exchange (CISX) with this in mind. The CISX offers similar advantages to a listing in London, although at a lower cost and with greater speed and flexibility of response.
The impact of US regulatory initiatives does not offer any advantages or disadvantages peculiar to Guernsey-domiciled funds. The likely effect of the Foreign Account Tax Compliance Act (FATCA) appears to be simply to add another cost of doing business to the industry as a whole; most Guernsey service providers who are potentially affected by the Act are already putting in place the mechanisms to secure compliance.
While there might have been some initial reservations about incurring this expense, the all-pervasive nature of the legislation suggests that few will consider it safe to ignore it. Similarly, the Dodd-Frank Act, which will have a significant effect on participants based in the US, does not now look likely to cause misery to Guernsey funds. The Volcker Rule is expected by some to have a beneficial effect, as money currently held on a proprietary basis by US investment banks will need to be accommodated somewhere when those banks divest themselves of their proprietary trading activities; this is expected to benefit the funds industry as a whole.
Perhaps one of the hotter topics in Guernsey is the on-going scrutiny of non-executive directors for funds. While a high-profile Cayman Islands non-executive director suggested in the Financial Times that there is nothing wrong with having 650 directorships, the Guernsey Financial Services Commission takes a rather different view and has, for some years, been trying to ensure the number of directorships held by any individual is sufficiently small as to allow him or her to provide proper oversight of the fund's executive management.
The Commission has – wisely in my view – avoided trying to set out an exact number, since the demands of any given directorship, and the ability of any given individual to meet them, are likely to vary considerably; as a rule of thumb, a modern non-executive director of a Guernsey-domiciled investment fund should be looking to the nonexecutive directors of FTSE 100 companies as inspiration and not to a GP in a medical practice.
It would be facile to pretend Guernsey is not immune to allegations of directors failing to adequately perform their duties – this is a global phenomenon and over the last year or so Babbé have been asked to advise on a number of Guernsey cases where such allegations have been made or might potentially be made. However, Guernsey does seem to be ahead of the curve in pushing towards a more value-added model for non-executive directors.
As benefits an island that is mostly comprised of granite, it is the unchanging elements which give Guernsey its strength. The regulatory regime continues to avoid radical change, although the Class B Regulations, which have most relevance to open-ended funds, are being overhauled at present. The registered funds regime, which allows a fast track towards regulation, remains popular. Political stability and tax neutrality remain solid.
The ultimate strength of the island, though, remains the quality of its people. The funds practices of the Guernsey law firms continue to enjoy steady growth and it would be surprising if we saw the kind of wholesale defections and staff reductions which have convulsed the legal practices of some other jurisdictions in recent times. The range and depth of experience of the administration, accounting, custody, banking and directorship service providers to the funds industry in the island remain hard to beat, and it is upon these solid foundations that we can expect to see further steady growth and development over the coming year.
Robert Varley joined Babbé in early 2011 having previously been managing partner, and regional head of private equity for a large Cayman Islands law firm's Dubai office. He is recognised as a leading private funds practitioner, having worked on a variety of hedge funds, private equity, real estate and various Shariah-compliant funds. He has practised in the Caribbean, Middle East and Far East as well as London and the Channel Islands.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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