As announced in UPDATE 10, plans are proceeding for development of the Channel Islands Stock Exchange (CISE), which is to be based in Guernsey. The CISE is due to commence operations in September 1998.
The Development Committee (the Committee) for the CISE, composed of the seven members of the former Stock Exchange Task Force, all of whom are from prominent local financial services firms, and Mr Harry Taylor, Commissioner, as ex-Officio President, has been formed to assist in developing this initiative. The intention is to widen representation on the Committee by inviting further members from within Jersey's finance sector.
Initially, the CISE will concentrate on the core products of:
- Investment funds; Channel Islands
- Structured debt instruments and Euro debt instruments;
- Primary listings of securities issued by domestic companies;
- Secondary listings of securities issued by domestic companies;
- Secondary listings of securities issued by overseas companies.
Following the submission of a detailed feasibility study, The International Securities Consultancy, specialists in the setting up of stock exchanges, are currently engaged in advising and assisting the Committee in the establishment of this new offshore stock exchange. Membership Rules and Listing Rules are being drafted, and plans to recruit a Chief Executive are already in hand.
The CISE is a truly industry led initiative; assistance and ideas are flowing in from all sectors of finance business - from the legal and accounting professions and the IT, banking, insurance and fund sectors.
There is growing enthusiasm amongst local commercial firms and increasing interest from outside the community. Consultation with the Jersey regulatory authority and Jersey institutions has been concluded recently in order to ensure that the particular needs and services of Jersey's financial market are catered for in the eventual design and structure of the CISE.
A pathfinder prospectus for the CISE should be available by mid April and will be sent by the Committee to all interested parties in the Channel Islands and beyond.
EXCELLENT YEAR FOR GUERNSEY FUND
The total value of funds under management at 31 December 1997 amounted to £16.5 billion, up 23.5% over the year. Although the Asian economic crisis took its toll on global financial markets in the last quarter of 1997, which was reflected in the underlying value of funds, the net asset value of Guernsey open- ended funds under management increased by 25% from the previous year end. Likewise, in the closed- ended sector, the value of funds under management increased by 19.5% over the year.
1997 was a record year in terms of the total number of funds under management, reaching a high of 372. The Commission authorised a total of 39 new open-ended schemes and gave its consent for 36 new closed-ended funds during the year. A further 50 sub-classes of existing umbrella funds were approved resulting in a total of 505 active open-ended investment pools at 31 Decemher 1997.
The outlook remains positive with a further 22 open-ended funds and a 12 closed-ended funds on the horizon. There is continued interest in emerging markets, global equities, hedge funds and, in particular, within the closed-ended sector, property funds.
GUERNSEY NOW FULL MEMBER OF IOSCO
The Commission is pleased to report that in early November 1997 Guernsey was admitted as a full member of the International Organisation of Securities Commissions (IOSCO) Peter Crook, Director General of the Commission, accepted the invitation to change Guernsey's membership status from associate member at the XXIInd Annual Conference of IOSCO in Taipei, Taiwan.
The invitation to assume full member status is in recognition of Guernsey's commitment to high standards of financial regulation. As an associate member of IOSCO for the past five years, the Commission has participated in a variety of meetings and discussions leading to resolutions on a number of key regulatory and market issues of common interest amongst members. ISOCO, which was created in 1983, has 134 members from 80 countries and has evolved to become a leading international forum for securities and futures markets regulatory, authorities.
With its enhanced status, Guernsey hopes to contribute in a meaningful way to IOSCO's future activities. In his speech of acceptance, Mr Crook noted that international supervisory co-operation will increasingly be the bedrock of financial regulation in the future. The Commission fully endorses IOSCO's objectives of regulatory co-operation, mutual assistance and the promotion of high regulatory standards and looks forward to strengthening its relationship with IOSCO and its members.
MIGRATION OF COMPANIES
All important feature of Guernsey company legislation is the Migration of Companies Ordinance and the Amalgamation of Companies Ordinance, both of which were introduced in 1997. Respectively, these Ordinances allow non-Guernsey companies falling within the appropriate criteria to redomicile in Guernsey without any break in the continuity of their existence and permit Guernsey companies to amalgamate and for Guernsey and non-Guernsey companies to amalgamate.
Application to the investment Busincss Division (IBD) has already been made to allow an overseas corporate collective investment scheme, to redomicile in Guernsey under the Migration of Companies Ordinance, and it is envisaged that this will be approved shortly. It is anticipated that similar applications will be made to the IBD during 1998.
Protected Cell Companies (PCC's)
Another feature of local company legislation - which Guernsey pioneered- is the Protected Cell Companies Ordinance 1997. This permits the incorporation of special purpose vehicles providing legal segregation of the assets of each cell (class in the context of an umbrella or multi-class fund) and avoids any risk of contagion between classes by protecting the assets of each class from the liabilities of other classes. Fund managers have utilised this facility quite creatively
A Protected Cell Company (PCC):
- is one legal entity;
- provides, for each cell, legal segregation and protection of assets and liabilities;
- may create its own core shares and cell shares, providing two classes of assets - core (or non- cellular), attributable to the PCC directly, and cellular, attributable to the cells;
- call provide all unlimited number of cells;
- can be converted from all existing company;
- offers flexibility in the allocation of capital between the core and individual cells;
- offers a wide range of potential applications.
The overriding concept behind the PCC legislation is that creditors of one cell have no recourse to the assets of another, thus avoiding the risk of contagion between the classes of a fund. Creditors will, however, have recourse to the core assets.
Since the introduction of the PCC legislation. seven PCC's have been authorised, two of which have converted to the PCC structure from existing umbrella funds. A further three PCC funds have been authorised by the Commission since the start of 1998 (to mid-March) and there are several more applications in the pipeline.
STEADY GROWTH IN CLOSED-ENDED SECTOR
Since statistical records for this sector began in 1990, there has been substantial growth in both the number of closed-ended funds and their total value under management. As at 31 December 1997 the number of such funds reached 192 (a new record and an increase of 250% since December 1990) and the value of funds under management has increased as impressively by 292% over the same period, reaching a total of £5.3 billion at the 1997 year end.
Of the 192 funds, 59% are investment companies, 24% are unit trusts and the remaining 17% have been formed as limited partnerships. The legislation which controls the establishment of such schemes is the Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959, as amended (COBO). Closed ended funds require consent under COBO, and the day to day administrative work in relation to COBO is carried out by the staff of the Commission on behalf of the Advisory and Finance Committee of the States (Parliament) of Guernsey.
After much consultation with the finance sector, and from drawing on precedents and the experience of other jurisdictions, the Limited Partnerships (Guernsey) Law, 1995 came into force on 1 February 1996. A refining process has made the legislation as simple and as flexible as possible.
The legislation has a number of attractive features:
- tax transparency - the incurring of any liability to tax in the hands of investors (limited partners) rather than in the hands of the partnership as such;
- a minimum of one general partner and one limited partner;
- the option of a fixed duration;
- accounts maintained in any currency; and
- the choice of separate legal personality.
Since January 1997 the limited partnership structure has proved to be popular and attractive to fund promoters and investors alike. During the last 12 months, 10 out of the 39 funds granted consent under the COBO have been limited partnerships. They have a wide investor base, and a variety of investment ranges and policies.
There has been increased interest in establishing property funds in recent months. Whilst such funds have been established in Guernsey for many years, the recent trend is for larger funds with more sophisticated investment strategies such as offering investors sectoral or regional asset allocation. The target markets for such funds are institutions and high net worth investors.
In recent years, Guernsey has seen an increasing number of closed-ended funds focused towards direct and alternative investment programmes. Innovative, hybrid fund structures have evolved which are capable of meeting the demand to invest through the indirect market for those institutional investors preferring a more diverse approach in property through a vehicle which can offer a degree of liquidity.
The majority of closed-ended funds are sponsored by UK based institutions. However, it is anticipated that with the advent of the Channel Islands Stock Exchange and the potential liquidity which a listing on the exchange would offer, Guernsey will prove even more attractive to internationally based businesses as a jurisdiction for the establishment of closed-ended funds.
RECORD NUMBER OF INVESTORS
The success of Guernsey's fund sector is further evidenced by the record number of investors in both open and closed-ended funds. As at 31st December 1997, the level reached a high of 123,894 which represents an increase of 67% since statistical records began in 1990.
CLASS Q - PROFESSIONAL INVESTOR FUNDS
Following consultation with the local fund industry and their professional advisers (Qualifying Professional Investor Funds) (Class Q) Rules 1998 (the Class Q Rules) were made by the Commission. The Class Q Rules became effective on 2 March 1998.
Since 1990, when the Collective Investment Schemes (Class B) Rules were introduced, there has been a steady increase in the level of interest in funds targeting institutions and high net worth individuals. In response to demand from international fund sponsors and in order to maintain its competitiveness in this area where Guernsey has corned a niche in the market, the Commission has established the Class Q Rules which are specific to qualifying professional investors.
A qualifying professional investor is defined as:
- a government, local authority or public authority (in the Bailiwick or elsewhere); or
- a trustee of a trust which, at the time of investment, has net assets in excess of £2,000,000 (or currency equivalent); or
- a body corporate or limited partnership, if it or any holding company or subsidiary has, at the time of investment, net assets in excess of £2,000,000 (or currency equivalent); or
- an individual who has, together with any spouse, at the time of investment, a minimum net worth (which excludes that individual's main residence and household goods) of £500,000 (or currency equivalent).
Class Q schemes, as with Class A and B schemes, will be subject to permanent and continuing supervision by the Commission and this should enhance the ability of sponsors to market Class Q schemes in other jurisdictions (in compliance with local regulatory requirements and upon application).
The Class Q Rules offer a clear and concise set of requirements for the operation of professional investor funds and have been designed to encourage innovation. Key features of the Class Q Rules inclue: no prescribed minimum individual subscription requirement, simplified document requirements (fast tract authorisation process), and choice of legal structures, i.e., companies (including protected cell companies), trusts or limited partnerships.
COLLECTIVE INVESTMENT FUNDS - CONSTITUTION AND MANAGEMENT
Collective investment funds established in, or administered/managed from Guernsey fall into two categories, open and closed-ended, both of which utilise a wide range of legal structures in their formation.
Both may be constituted as unit trusts, companies or limited partnership. An open-ended unit trust is a non-corporate entity established under a trust deed wherein the investor's interests are represented by units reflecting the net asset value of the fund. Open ended investment companies are the corporate equivalent or unit trusts and investors interests are represented by redeemable shares.
A Guernsey authorised open-ended vehicle falls into one of three classes, as indicated in the following table:
Class A Schemes "UCITS equivalent" schemes which closely follow the rules which apply to UK authorised funds under the UK Financial Service Act, 1986 ("FSA") Class B Funds Ranging from the retail product aimed at the `general public' via institutional schemes to the strictly private fund. Class Q Funds Targeted at the qualifying professional investor (see section above)When the Bailiwick of Guernsey was granted Designated Territory Status under section 87 of the FSA in December 1988, the regulation governing Guernsey's Class A schemes was recognised as providing investors with protection at least equivalent to that provided under the FSA. The equivalency of regulation is also recognised around the world, including Australia, Japan, Switzerland and several countries within the European Union.
The Class B schemes rules are more flexible than the class A rules, most significantly in the areas of investment and borrowing powers. The Commission maintains a high standard of investor protection by exercising judgement and discretion when considering each proposed application.
Collective investment funds, whether open or closed-ended and whether unit trust, investment companies or limited partnerships, are eligible to register as "exempt companies", that are based in Guernsey but exempt from income tax, subject to payment of an annual fee (1998, £600).
THE PREMIER LOCATION FOR OFFSHORE FUNDS
Guernsey's Continued International Appeal
The trend towards the internationalisation of the fund sector in Guernsey is evidence by the 26 fund sponsors not previously represented on the Island who have launched a fund product during 1997. Guernsey has funds sponsored by institutions from 38 countries.
Significant Business Development
There was a significant increase in 1997 in the provision of local fund services for non-Guernsey schemes. Non-Guernsey schemes are open-ended funds which are established/incorporated in other jurisdictions and have a Guernsey licensed institution providing a fund service. Approval was given to various Guernsey institutions licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to provide either management, administration or custodial services to 45 new non-Guernsey schemes during the year, bringing the total value of such schemes to £4.6 billion at the end 1997.
The growth in this area of business is expected to continue. The provision of fund services from Guernsey for such non-Guernsey schemes allows fund sponsors to choose the domicile with which they are familiar to launch their funds and to take advantage of the time zone that meets their investors needs.
However, it should be noted that if the intention is to utilise the services of Guernsey licensees in respect of both management/administration and custody in connection with an open-ended fund, then the fund must apply for authorisation in Guernsey.
The chart (right) illustrates the country of establishment/incorporation of the 86 open-ended schemes serviced by a Guernsey fund administrator or custodian. Most of the schemes serviced in Guernsey are companies (77%), whilst 19% are unit trusts and 4% are limited partnerships.
EXTENSION OF THE POI LAW
The consultation process on the proposed extension of the current scope of the Protection of Investors (Bailiwick of Guernsey) Law, 1987 ("POI Law") to cover all forms of investment business, which began in February 1996, is drawing to the conclusion. In January 1998 the States of Guernsey approved tile Policy Letter which set out detailed proposals on the extension of the POI Law. It is now likely that the extended Law will come into force in July 1998.
The essential reasons for the proposed extension are to:
- safeguard the interests of the investing public and the reputation of the Bailiwick as a well ordered finance centre; and
- assist investment business in Guernsey in the international promotion of their services.
During the consultation period, the Commission has been assisted by a Working Group of practitioners who have discussed and deliberated on issues as set out in two consultative papers and assisted in the development of rules to apply to the additional areas of regulated business proposed. The final agreed version of the draft rules which will be applicable to licensees when the POI Law is extended, is shortly to be circulated for comments/representations in accordance with Section 13(1) of the POI Law.
The proposed rules will be modest and in essence a codification of best practice. There will be no additional fees for those already licensed under the POI Law, while new licensees will pay the standard fees upon application and annually thereafter.
AN ANNUAL SURVEY OF THE GUERNSEY FUND MANAGEMENT SECTOR - COOPERS & LYBRAND
The results of Coopers & Lybrands fifth annual survey of the Guernsey Fund Management industry confirm that Guernsey's Offshore funds business continues to flourish. The survey covered members of the Guernsey Fund Managers Association who account for over 95% of regulated fund management business and achieved a 100% response rate for the first time in its history.
Key extracts from Coopers & Lybrand's survey follow:
- 95% of those surveyed are at least as optimistic about business prospects for 1998 as they were for 1997 - fund groups who manage and administer funds for third party advisors are particularly confident about future prospects;
- spending on IT, to increase efficiency, management of staff costs and the retention of highly skilled people are regarded as essential in driving businesses forward in 1998 - and in maintaining the low cost/income ratios that Guernsey funds enjoy compared to most other offshore jurisdictions;
- 70% of fund managers reported increased volumes and values of business and this trend is expected to continue into 1998;
- the three key success factors in generating new business will be improving client service, maintaining above average investment performance and innovative product design;
- the increase in business was largely matched by increases in profitability - this trend too is expected to continue through 1998;
- to meet competitive threats, both locally and from other jurisdictions, over 75% of fund managers expect to increase marketing spend in 1998;
- maintaining Guernsey's high regulatory, standards and its reputation, particularly among professional investors, is crucial to the future of the industry locally;
- fund groups recognise the importance of working with regulators to achieve regulators to achieve an effective low cost regulatory environment - the benefits of a wide range of regulated products have been enhanced by the introduction of new Class Q schemes for professional investors and enabling legislation for Protected Cell Companies;
- the contributing turbulence in world stock markets and competition from other offshore jurisdictions are regarded as the main external threats - Fund groups also recognise the scale of the problem posed by EMU and the year 2000;
- expectations of new business growth are highest for Class B and non-Guernsey funds Many managers expect significant new business in hedge funds and a smaller number continue to see substantial opportunities in private equity and venture capital business;
- Switzerland and the EU, including the UK, are regarded as providing tile greatest marketing opportunities in 1998 the Americas are increasing in
- importance at tile expense of Asia;
- EU equities are expected to be the most popular form of investment in the immediate future.
The members of the Guernsey Fund Managers Association continue to be optimistic about their business prospects, whilst showing a high degree of realism about challenges ahead. Within a flexible but effective regulatory environment, Guernsey offers all innovative and competitive range of products that few other offshore centres call match.
MESSAGE FROM THE CHAIEMAN _ GUERNSEY FUND MANAGERS ASSOCIATION
Nick MaCathie, Chairman, Guernsey Fund Managers Association and Managing Director Guinness Flight Fund Managers:
"On behalf of the Guernsey Fund Managers Association I would like to say that we are particularly pleased that the Q Class scheme is now in place a product which I understand has already prompted considerable interest.
The Association also looks forward in anticipation to the launch of the Channel Islands Stock Exchange. We would like to record our congratulations to the Commission for their initiative in suggesting the establishment of a stock exchange for the benefit of the Islands.
Once again this clearly illustrates the innovative thinking that drives the Commission and provides encouragement for the finance sector in Guernsey to be proactive in developing new products and services which will receive international recognition."
Three additional Analysts joined the Commission in 1997 and have successfully completed the Commission's training programme.
Sian Thomas, David Pledge, and Hayley Vermeulen are all recent graduates who each bring a variety of skills, knowledge and experience to the Division
We would like to thank Michael Bane, a Senior Manager at Coopers & Lybrand, Mark Huntley, Deputy Managing Director of Guernsey International Fund Managers and Barry Carroll, Senior Manager and Director, Butterfield Fund Managers, for their contributions to this edition of Update Investment Special.
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.