Stuart Lawson, head of regulatory change and market
development at Northern Trust in Guernsey says the introduction of
AIFMD has resulted in asset servicing undergoing significant
Asset servicing is witnessing significant and sustained change.
New European fund regulation with The Alternative Investment Fund
Manager Directive (AIFMD) a key example, enhanced tax reporting
triggered by the United States' Foreign Account Tax Compliance
Act (FATCA), and the ongoing drive to de-risk banks are all
converging in 2014.
Individually, they present fund administrators and custodians
with major technology and process changes. Combined they require an
unprecedented development programme. How are offshore service
Offer a choice
By definition, offshore centres are established outside
mainstream financial centres such as London or Luxembourg and so
present fund managers with different options. AIFMD is a good
example. Fund managers may choose to remain outside Europe and
establish in a third country such as the Channel Islands or the
Cayman Islands with the aim to reduce or negate the requirement to
comply with European regulation. Equally, there may be good reason
to establish an Alternative Investment Fund (AIF) offshore but to
base the manager onshore making much of the AIFMD applicable. Some
may need an offshore depositary, others may require a robust and
demonstrable risk management function in-situ, whilst others may
choose to "opt out" altogether.
These are bespoke solutions tailored to the specific needs of
individual managers and require careful planning and targeted
investment underpinned by a flexible legal and regulatory
framework. Guernsey is a good example of a centre which provides a
dual regime with AIFMD equivalent regulations running alongside the
jurisdiction's existing rules – an "opt in" and
"opt out" choice.
Adopt best practice
It is crucial that offshore centres adopt best practice that
equals or exceeds their onshore counterparts. FATCA takes effect in
2014 imposing measures to prevent the non-payment of US tax.
The United Kingdom has followed suit with similar provisions
being introduced with its dependant territories, and the
Organisation for Economic Co-operation and Development (OECD) will
shortly impose a broad ranging common reporting standard. In
response, many offshore jurisdictions are enacting their own
legislation and entering into information sharing arrangements with
other countries to support these initiatives.
In practice, offshore service providers will be required to
revise their record keeping to include investor tax status and due
diligence and provide the requisite reporting or withholding
arrangements. This is not a small undertaking and will require
investment in both technology and local expertise.
Adapt or decline
Arguably the offshore centres have a more complex programme of
change if they are to offer managers and investors the enhanced
choices afforded by their unique status and maintain the highest
standards of transparency. Strategic responses include:
Invest – service providers must enhance technology and,
importantly provide their employees with relevant training and
Re-think – operating models may require a radical rework
to embrace the new challenges and remain competitive.
Collaborate – dialogue between industry, regulators and
tax authorities and within broader international groups to agree
responses and workable solutions should be supported.
Many offshore centres and service providers have invested
significant time and effort in responding to the unprecedented
change agenda which has for many resulted in a swelling pipeline of
new business, particularly in the alternative fund sector. Looking
forward, the pace of change will continue to be challenging. For
those agile financial centres able to adapt quickly and decisively
the outlook remains positive.
An original version of this article was by published by
Europe, July 2014.
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