Worldwide: (More) Business As Usual

Last Updated: 17 November 2014
Article by Fiona Le Poidevin

Most Read Contributor in Guernsey, September 2018

When it comes to new regulations, Guernsey is offering optionality to overcome 'fortress Europe', according to Fiona Le Poidevin, Chief Executive of Guernsey Finance.

Guernsey's position 'offshore' and outside of the EU, coupled with our regulatory regime, infrastructure and expertise, mean the domicile offers tailored optionality for the international fund community.

Indeed, on a recent delegation to the US where I spoke to a range of fund managers, we heard how many of them were currently avoiding marketing into Europe completely due to onerous EU regulation. These fund houses were choosing to concentrate solely on the US market, because of what they described as "fortress Europe". Many managers and promoters had specific concerns surrounding how marketing funds into Europe had become much more challenging as a result of the Alternative Investment Fund Managers Directive (AIFMD) and said the amount of scope that individual national regulators had in the application of the directive was adding complexity, while compliance was adding another layer of administration which was in turn driving up costs.

Rather than being part of this "fortress Europe" conundrum, Guernsey is part of the solution because while the Island is in Europe geographically, it is not in the EU and therefore, is not required to implement AIFMD. It is true that a large part of our business relates to the European market but we also have a substantial amount of funds business which does not touch Europe at all. So while US fund managers remain content for the moment to concentrate efforts on the domestic market as it is currently outperforming others, this might not continue to be the case going forward and they could potentially miss out on investor interest and investment opportunities across Europe which could result in strong returns. As such, Guernsey has introduced a dual regulatory regime whereby it is possible to continue to distribute Guernsey funds into both European and non-European countries: the existing regime for those managers not requiring an AIFMD fund, including those using National Private Placement (NPP) regimes and those marketing outside Europe; as well as a new opt-in regime which is fully AIFMD-compliant.

The Guernsey model

The approach means managers and funds with no connection to Europe can continue to use Guernsey's existing regulatory rules which are completely free from the requirements and costs associated with AIFMD.

However, for managers wishing to market into Europe, Guernsey provides a European platform but one which is not actually in the EU. Indeed, the NPP route should be used where possible and full AIFMD status should only be sought if there is a particular commercial reason to do so. Guernsey funds marketing under NPP will have to report to the EU regulators of the countries into which they market funds, but this is essentially the same as what happened before AIFMD with NPP being favored particularly where a manager has identified two to four key countries into which to market, which is typically the case.

For those managers with elements of EU and non-EU business, parallel structures can also be utilized. It is possible to place non-EU business in a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.

The European Commission is looking to implement the new passporting regime for non-EU managers in July 2015 but until this regime is implemented and operating effectively, Guernsey managers will continue to market to European investors under NPP.

The AIFMD equivalent option

Third countries, which include Guernsey, are not required to implement an AIFMD equivalent regime until 2015.

However, Guernsey was quick to act and full AIFMD equivalent rules for Guernsey fund managers and depositaries whose activities are caught by AIFMD came into effect on January 2, 2014. FAQs are issued by Guernsey's regulator, the Guernsey Financial Services Commission (GFSC), on its website and include how to deal with practical aspects of implementing the rules. Ultimately it will be a commercial decision for fund managers whether or not to avail of the opt-in regime, bearing in mind the associated costs and requirements.

The point is that Guernsey's dual regulatory regime provides optionality that allows clients to be serviced in the manner most appropriate to their specific circumstances.

Substance

The post-crisis environment, including AIFMD, has brought about greater scrutiny of structuring arrangements and in particular, issues of substance. Unlike some competitor jurisdictions, Guernsey has the advantage of significant substance already being present within many existing structures. Corporate governance is enhanced by having a significant pool of experienced non-executive directors with a deep knowledge of investment funds. Leading investment houses such as Apax, Apollo, BC Partners, Coller Capital, HarbourVest, KKR, Pantheon, Permira and Starwood have their funds domiciled and serviced in Guernsey (with a number also having offices and staff present). In fact, some $150 billion of non-Guernsey funds, typically from the Cayman Islands or Delaware, are administered and managed in Guernsey which is a testament to our quality service provision. Certain promoters have also decided to re-domicile funds to Guernsey which is facilitated by flexible migration rules.

Guernsey administrators range from major international names such as Northern Trust, State Street, JP Morgan and Citco to specialist independent administrators. Major global custodians are also based in Guernsey and they are now being supplemented by specialist administrators who are establishing Guernsey-based depositaries to service private equity and real estate funds which have not previously had the requirement for a depositary but who can take advantage of a depositary-lite regime for non-financial assets under AIFMD. Guernsey's funds industry now manages and administers more than 1,000 funds valued at nearly half a trillion US dollars, with the net asset value of private equity funds increasing 6.2 percent over the year and by 123 percent in the last five years.

Our fund expertise is also demonstrated through Guernsey's position as a center for listed vehicles with London Stock

Exchange (LSE) figures showing that there are more Guernsey entities listed on its markets than from any other jurisdiction globally (ex-UK); there are currently 125 Guernsey investment funds and trading companies on the LSE with a combined market capitalization of approximately $60 billion.

Other international exchanges Guernsey entities list on include those in Dublin, Frankfurt, Toronto, Johannesburg and Hong Kong, as well as NASDAQ, Euronext and the local Channel Islands Securities Exchange (CISE).

Closing thoughts

US and other non-European managers are of the view that regulation is making it especially difficult to market funds into Europe, but the extent of the experience which has been built up by fund administrators, the legal profession and the wider financial services community means Guernsey can provide an answer. Guernsey offers a solution based in a European time zone with access to the EU market but without the administrative and cost burden of AIFMD and from a jurisdiction which

has significant substance, high standards and a global reach.

An original version of this article was first published by Private Funds Management, October 2014.

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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