With investors and managers alike faced with considerable choice when it comes to location, Kevin Gilligan of Louvre Fund Management, discusses the shared trends and opportunities found in Guernsey and Singapore
The establishment of Louvre Advisory Services (Pte) in Singapore reflects the development of a stronger relationship between Guernsey and Singapore. Each has much to offer the other and there are distinct parallels in the approach to regulation by both. This common interest is reflected in the visits being paid to Singapore by Guernsey Finance, the promotional agency for the island's finance industry and, for example, in the opening of an office in Singapore by Collas Crill, one of the top law firms in the Channel Islands.
In Singapore, the Securities Industry Act of 1986 was a key stage in the development of better regulation; at about the same time (1987) Guernsey enacted the Protection of Investors Law. Both laws have undergone substantial revision since that time, as both centres have learnt from experience. From the beginning, however, Guernsey's emphasis has been more on the development of an offshore fund industry, while Singapore has concentrated more on its importance of its stock market to the region. Indeed, Guernsey has its own successful stock exchange, the Channel Islands Stock Exchange, set up in 1998, which has handled more than 4,000 listings since inception. The total value of funds established or administered in Guernsey now stands at over $400bn, according to Guernsey Financial Services Commission. Given Guernsey's relatively small size – a population of 65,000 and a land area of only 25 square miles – it is worth asking what Guernsey is doing right.
It is difficult enough to choose the right investment field in these uncertain times, but it is just as difficult to choose where to base a fund and what structure to use. Key developments in recent years have given emphasis to premier offshore centres, such as Guernsey, which offer an excellent balance between cost and regulation, while also being at the forefront of fund innovation.
We have noticed in recent years that regulation can actually be seen as an attraction for fund promoters. The 'regulation-lite' funds in some centres have learned to their cost that flexible investment rules mean unbalanced portfolios, that limited controls are often accompanied by limited powers to deal with fraud or malpractice and, more important still, that investors are beginning to realise the merits of good regulation and demanding this as a condition of participation. In a climate where raising new money is as difficult as it has ever been, security is winning out over expediency.
REGULATION AND INNOVATION?
You might think that regulation and innovation were incompatible creatures. Surely regulators are only interested in stifling creativity, since it appears to be the enemy of investment security? However, most regulators have realised that what is required is to offer a range of tightly controlled products aimed at mass-market investors at one end, and lightly regulated products, aimed exclusively at the professional investor, at the other. The first key to making this work is that there are high standards at all levels, enforced through the service providers under the regulator's direct control. The second is to offer flexible corporate structures within this framework, using structures such as protected cell companies (PCCs) and limited partnerships.
Guernsey, home base for the Louvre Group, is an excellent example of this approach. As a Crown Dependency, it has a special relationship with the UK, but it is still an independent jurisdiction, making its own laws on taxation and regulation of the financial services industry. It has used this flexibility wisely by establishing the widely respected Guernsey Financial Services Commission as regulator of the industry.
While the regulator's primary concern, of course, is investor protection, the industry is keen to develop new products and to avoid an excessive burden of regulation. This seeming conflict has been well resolved by routine consultation, ensuring that regulation is pragmatic, and by joint working parties on the development of legislation. While there has thus been a steady tightening up of compliance, there have also been a number of modernizing laws as well as the development of new regulatory approaches such as the registered fund(a fast track form of approval). This adds to Guernsey's record of innovation, including the PCC, limited partnership law and law on intellectual property.
None of this is to deny the undoubted popularity of other fund centres such as the Cayman Islands and the British Virgin Islands (BVI). However, Guernsey still has a role to play. While the relative lack of regulation in these centres is attractive in many ways, there are practical problems in administering a fund in these locations, a problem made worse by time zone differences. Administration in Guernsey is one way to solve these problems, with an acceptable time zone difference and the benefit of high regulatory standards – these so-called 'non-Guernsey schemes' must still have approval from the Guernsey regulator.
Our own experience at Louvre is that many clients are now actively seeking to re-domicile Cayman and BVI funds to the island. This is surely the best assurance that regulation in Guernsey is as much a benefit as a burden. Coupling this with a realistic pricing structure, it is clear why Guernsey is proving very competitive as a fund domicile.
EU FUNDS AND THE AIFM DIRECTIVE
Offshore investors have typically avoided the EU as a fund jurisdiction. The merits of tighter regulation within a Ucits fund have tended to be outweighed by other factors. The key negative is that Ucits have limited investment powers. The end result has been the growth of non-authorised funds, which might conveniently be described as hedge funds, and can only be made available to a limited pool of investors.
Following the financial crisis of 2008, the EU set itself the task of regulating hedge funds. This appeared to be driven by a conviction that such funds were responsible for the crisis, while there is sparse evidence that such funds did other than bring the crisis to a head. There followed much debate around the proposed Alternative Investment Fund Managers Directive (AIFMD).
The end result reflects extensive industry consultation and is likely to result in a common EU passport for alternative investment fund managers and, more significantly, a passport for non-EU funds that meet the same standards. Guernsey is already familiar with these issues, having had UK-recognised fund status for its 'Class A' funds for some years. The final outcome of this consultation is eagerly awaited.
SINGAPORE AND OFFSHORE FUNDS
The Securities and Futures Act recognises that schemes constituted outside Singapore can quite properly be marketed within Singapore subject to appropriate safeguards. There is an ascending scale of requirements as one moves from institutional investors through to retail investors. Singapore recognises a concept of equivalence, in much the same way that the UK already does and the EU intends to do. Guernsey's track record of firm but flexible regulation should make it a preferred centre for Singapore business.
Conversely, Louvre has seen an increase in demand for using Singapore as a fund domicile in order to take advantage of its extensive tax treaty arrangements, particularly its double taxation agreement with India.
A DEPENDABLE CHOICE
For fund promoters, Guernsey is an attractive choice as a centre for funds investing into world markets. The range of funds which have been attracted is notable, with private equity and hedge funds a particular success story.
So attractive has Guernsey proved to this sector that several household names in the industry such as Terra Firma and BlueCrest have relocated their main offices to the island. The key word for the investor is choice.
Choice of place of incorporation, choice of regulatory framework, choice of style of fund, choice of investment policy, choice of geographical focus. In my experience, Guernsey has a very strong claim on investors seeking to invest internationally; key factors such as high professional standards, flexible legislation and professional expertise prevail in the island, but, I would also add first-class personal service, quick response times and, much as in Hong Kong, a can-do mentality.
Originally published in HFM Week
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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