Guernsey: Funds - Is Europe On A Road To Nowhere?

Last Updated: 23 May 2013
Article by Patricia White

Most Read Contributor in Guernsey, September 2018

With the Eurozone still struggling to recover, Patricia White, of Legis Fund Services, outlines how Guernsey continues to grow.

Economic sustainability in the Eurozone continues to affect the lives of millions of people on the continent. As uncertainty continues, and the wounds threaten to deepen for the single currency, the pain is being felt in the UK as well.

The European Commission stated in February that its economic and business confidence indicator in the 17 countries using the euro had improved for the fourth straight month, as industrial orders rose. However, the European economy appears to be slowing further; recent private-sector data raises the possibility of the recession deepening, while the crisis in Cyprus further undermines faith in the future of currency union.

The UK's towering debt problem threatens to result in a ratings downgrade by Fitch from its AAA status following the Budget. National debt continues to rise and budget forecasts see it topping £1.6trn by 2017-18 while economic growth is weaker than expected, in part linked to European growth trends.

By contrast, Guernsey boasts a GDP growth rate of 3% for 2012. The Guernsey fund industry showed an increase of 5.9% in assets under management and administration, totalling £276.8m at the end of 2012. This is a commendable achievement in the current economic climate. Since the start of the financial crisis at the end of 2007, this represents an overall increase of 38%. Interestingly, the value of non-Guernsey schemes shows an increase of 110% during the same period, perhaps reflecting recognition of the essential requirement to position fund administration in a top tier jurisdiction such as Guernsey.

Guernsey is recognised as a leader in global regulation and co-operation following positive assessments by the IMF and OECD. The Guernsey Financial Services Commission, while robust, also has a reputation for its pragmatic and open-door approach.

With a growing number of conflicting cross-jurisdictional and cross-functional regulatory requirements, businesses need to take a more universal approach to compliance and risk management in a well-regulated jurisdiction. In this regard Guernsey is well positioned compared to those adopting a lighter touch approach.

The plethora of international regulation adopted in recent years is costly and can conceivably act as an obstacle to new business flows – the current topical issues being the Alternative Investment and Fund Manager Directive (AIFMD), Foreign Account Tax Compliance Act (Fatca), and the UK Fatca-style intergovernmental agreement. Despite concerns regarding the AIFMD, which have been significantly allayed since the first draft of the directive, no other post-financial crisis legislation has caused more concern. Level 1 compromise text for the AIFMD was realised in October 2010 which, while introducing the directive for EU AIFMs as of 2013 and third country AIFMs as of 2015, also allowed the latter to continue marketing themselves in the EU under national private placement rules until 2018. Despite such positive news, the AIFMD has continued to cause problems as the EU and all affected parties have gone back and forth on the small print. Although technical implementation issues persist, the directive must be introduced into EU member states domestic national legislation before the live date of July 2013.

Guernsey intends to operate dual regimes from July 2013. At a basic level this will enable distribution of Guernsey products into both EU and non-EU countries via normal marketing routes, including EU national private placement regimes where they remain available. Guernsey is also examining the possibility of operating a Guernsey "opt in" AIFM regime, in order to access (on a bilateral basis) EU member states that align their private placement rules with the AIFMD. In addition, Guernsey will be engaged in future consultations in relation to how third country "passporting status" will operate from July 2015. The US Fatca regulations to be phased in as of 2014 represent a complex set of rules aimed at limiting tax evasion by US persons. Those affected are currently adjusting their operating models and new business take-on procedures to become compliant, in order to avoid a punitive withholding tax of 30% on US investments. This places a huge burden on funds and their administrators.

In addition to the US Fatca regulations, together with Jersey, the Isle of Man and Cayman Islands, Guernsey is in the process of finalising an agreement with the UK government to enhance its existing tax information exchange arrangements. In the UK the Finance Bill 2013 will include legislation to implement the UK-US Fatca agreement, and UK regulations will be issued shortly. While the details of the agreement have not been published, it is understood that it follows closely the agreement with the US.

In agreeing to this enhanced reporting, Guernsey considers it will safeguard and further enhance its international position as an established finance centre. The package consists of three requirements including enhanced reporting from late 2006, which is consistent with the global movement on information exchange; a revised double tax agreement; and alternative 'non-domicile' reporting requirements.

The Guernsey fund industry now looks beyond its traditional UK and Eurozone markets, securing and further developing growth from emerging markets. The versatility of Guernsey's fund regime and product types means that we have an attractive offering for jurisdictions such as Mena, India and China.

Guernsey's Registered Fund regime, available for open-ended and closed-ended funds, facilitates a three-day approval process, which is a popular choice for promoters who can demonstrate an established track record, combining a speedy approval process with the security of regulatory oversight.

The Authorised Qualifying Investor Fund also offers a three-day process, the most appropriate choice being affected by the requirements of the detailed disclosure in the offering documents. Licensing of a GP can also be fast-tracked to a 10-day process. Competing jurisdictions can only achieve this turnaround time through their unregulated fund regimes. London Stock Exchange (LSE) statistics show that Guernsey remains the jurisdiction of choice for non-UK companies. There are significantly more Guernsey companies listed on the LSE main market and the Specialist Fund Market than any of the major economic sectors of the US, Russia, India etc. or our competitor finance centres such as Jersey, Cayman Islands and the Isle of Man. Playing host to the Channel Islands Stock Exchange, which is an internationally recognized Market Authority and FSA approved, further enhances our service offering.

As a jurisdiction, Guernsey is seeing growth in private equity business and alternative asset classes including infrastructure, Shariah compliant and green funds (Guernsey having now secured the rights to use its territorial waters for energy development). The flexibility of our fund regime also sees Guernsey gaining a reputation as a centre of excellence for more esoteric asset classes such as fine art, wine, timber, and rare and classic cars. Guernsey has an exceptionally well-developed private equity infrastructure in terms of its regulatory environment and legislation for both limited partnership law and company law. Recent surveys report the majority of participants indicate Guernsey as their preferred destination for private equity outsourcing and Guernsey is ranked as one of the highest placed jurisdictions on the FundDomiciles.com Stability Index while it continues to move up in the ranking of the latest Global Financial Centres Index.

With Guernsey funds promoted or sponsored by leading institutions in more than 55 finance centres, over 50 years of proven financial services experience, an excellent track record, a flexible regulatory environment, good infrastructure and political stability, Guernsey remains a highly respected jurisdiction.

Overall, the outlook remains cautiously optimistic for the remainder of the year. While the possibility of a significant upturn in the pace of growth for the remainder of 2013 is slim, the Guernsey funds industry continues to grow. Although this is not at the levels seen before the financial crisis, and new fund launches are taking longer than traditionally seen as fund raising remains difficult, Guernsey's financial services sector has proven to date it can weather the peaks and troughs. While Europe appears to be on a road to nowhere, for the time being Guernsey's cup remains half full.

Originally published in HFMWeek's 2013 Guernsey Special Report, May 2013.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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