Originally published in PE Manager, November 2012
Fiona Le Poidevin, Chief Executive of Guernsey Finance, explores how the dark days of the financial crisis have given rise to a new focus on improved standard.
The repercussions of the global economic crisis are continuing to be felt around the world and have brought with them an increased focus on regulation, tax transparency and corporate governance in relation to financial services. The funds industry has been at the forefront of these actions, which should come as no surprise when factoring in the high-profile fallout from scandals such as Madoff – an example of some of the worst practices within the sector, but one that was by no means alone. These damaging episodes brought about a demand from investors and promoters for quality service provision, strong corporate governance and robust regulation.
The European Commission has of course responded with the Alternative Investment Fund Managers Directive (AIFMD) to regulate the EU funds industry. The directive, which entered into force in July 2011 and has to be transposed into EU Member States' national laws by July 2013, aims to create a comprehensive and effective regulatory and supervisory framework for investments in hedge, private equity and property funds. In October this year, Holland became the first country to implement AIFMD when the Dutch parliament approved the necessary legislation. Other countries are expected to follow suit shortly.
Guernsey, seen as a 'third country' for the purposes of the EU single market, has been fully engaged regarding AIFMD. It is anticipated that in both the immediate and long-term, Guernsey will continue to be able to service structures with a connection to Europe, while the Island's position outside the EU will enable it to offer an appropriate regime for funds not touching that marketplace. Positive engagement in relation to new pieces of financial legislation is something to which Guernsey has repeatedly adhered. This means it has not taken much for us to adapt to new and challenging environment, while also maintaining our flexibility.
Indeed, last year saw the International Monetary Fund (IMF) publish six evaluation reports which recognise and commend Guernsey's high standards of financial regulation, supervision and stability along with its robust criminal justice framework.
The Guernsey Financial Services Commission (GFSC) is known for its robust yet pragmatic approach to regulation. For example, "fast track" routes have been introduced which allow for the speedy launch of funds targeted at professional investors and yet, those investors also have the security of knowing that all
Guernsey funds are regulated. In addition, the GFSC ensures that funds follow the appropriate local or international codes of corporate governance and the fact that the Island has a pool of experienced and well
qualified non-executive directors reassures investors and promoters that Guernsey service providers are working to the highest standards.
Guernsey's strength is borne out by the fact that the Island's providers are often asked to service schemes domiciled in another jurisdiction, such as the Cayman Islands. Statistics from the Guernsey Financial Services Commission (GFSC) show that for the year to June 2012, the Island's service providers entered
into 42 new contracts to provide either management, administration or custody services to non-Guernsey schemes. Many Cayman funds are also currently administered in Dublin and so the advent of AIFMD may see increasing numbers of promoters considering a jurisdiction, such as Guernsey, which is likely to be able to offer an alternative regime.
It is also not unheard of for promoters to be so satisfied with their experience of the Island through the "non-Guernsey" route that they decide to re-domicile their funds to Guernsey. Certainly, this provides more weight and substance from a tax perspective as the majority of services are provided from the jurisdiction in which the fund is domiciled.
There are some 50 fund managers, administrators and custodians in the Island whose primary business relates to Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. Guernsey's fund expertise is illustrated by the fact that the value of funds under management and administration reached £271 billion (€333 billion; $434 billion) at the end of June 2012 – up 60 percent on three years ago, with private equity comprising more than £80 billion. Our preeminent position in the private equity space was confirmed by a Private Equity News and
State Street survey, in which 61 percent of chief financial officers who responded said the Island was their preferred destination for private equity outsourcing.
The Island's reputation as a leading private equity funds domicile is also highlighted by the fact that promoters of Guernsey-based funds include major names such as Apax, Better Capital, Cinven, Coller Capital, EQT, Permira and Terra Firma. Many have established their own operations in Guernsey and some, such as Terra Firma, have made Guernsey their headquarters, which provides further evidence of the mind and management being in the Island.
In addition, the Island's strong reputation means that Guernsey entities can be listed on the London Stock Exchange (LSE), Euronext Amsterdam, the local Channel Islands Stock Exchange (CISX) and the Hong Kong Stock Exchange (HKEx), among others. Data direct from the LSE to the end of December 2011 shows that Guernsey remains home to more non-UK entities listed on its markets than any other jurisdiction globally.
Of course, the financial crisis has also brought about a renewed focus on tax transparency. The OECD's Global Forum on Transparency & Exchange of Information for Tax Purposes (Global Forum) has been the driving force and multilateral framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000.
The OECD and also the G20 reacted to the financial crisis by demanding adherence to prudential standards and co-operation amongst jurisdictions in relation to information exchanges. Guernsey was among the first set of jurisdictions placed on the OECD/G20 'whitelist' in 2009 and subsequent Global Forum reports have continued to recognise the Island as within the top tier of jurisdictions meeting international standards and thereby helping to protect global stability. To date, Guernsey has signed Tax Information Exchange Agreements with 37 jurisdictions and 14 Double Taxation Arrangements. More recently, the US has launched its Foreign Account Tax Compliance Act (FATCA). Guernsey's Government announced in October this year its intention to negotiate an individual agreement which will follow the model intergovernmental agreement published by the US Government on 26 July 2012. This will be similar in form to the 'Model I' type agreement that the UK has already signed with the USA. In doing so, Guernsey will be providing certainty for its financial services industry going forward. In addition, in September this year, Guernsey's zero-10 corporate tax regime was given a clean bill of health by the EU. This means that all financial services products for our international client base will continue to be taxed at a zero rate. Indeed, managers and promoters have the certainty of knowing that our tax exempt regime for collective investment schemes also remains in place as a part of a regime which has been approved by the EU.
In the post-crisis environment, investors are demanding higher standards and therefore promoters need to be able to make sure that they can meet these expectations. Guernsey's long standing expertise and infrastructure, combined with its robust regulation, strong corporate governance, tax neutrality and response to AIFMD means that it is ideally placed to be the fund domicile of the future.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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