In early 2005 a committee reviewing the investment sector of the finance industry in Guernsey (one of several review committees) was established with Advocate Peter Harwood as Chairman. Importantly, Peter Moffatt, the Director of the Investment Business Division of the Guernsey Financial Services Commission ("the Commission") was also appointed to the Committee. This recognised that industry and the regulator would need to cooperate and understand each other to create the appropriate environment for a modern off-shore centre.
The terms of reference for the Committee were "to consider the investment industry in the Bailiwick of Guernsey and the conditions required for its continued prosperity." The review would consider the legal and regulatory framework, as well as aspects of public policy relating to the industry.
The Committee produced a report in March 2006. The report recognised that there were two sub-sectors of the investment business sector in Guernsey:
- The fund-specific sector, e.g. investment funds, and related fund-specific services such as custodians, fund managers and administrators (by far the larger sector); and
- Non fund-specific sector, e.g. traditional investment advisers/stockbrokers, discretionary investment managers, execution-only broking activity, boutique investment houses and wealth management.
Perhaps the most important matter dealt with was the issue of time taken in the licensing and regulatory approval processes in the fund sector. The report suggested that the regulatory approach be altered so that regulation be concentrated less on the regulation of individual investment funds, with more attention given to the regulation of those licensees who provide services to investment funds.
To this end there were detailed proposals to:
- repeal the "Control of Borrowing" ordinances and replace them with a generic "Prospectus" law, applicable to all Guernsey entities, setting out minimum disclosure criteria for Offering Documents;
- take the funds’ provisions from the existing Protection of Investors Law and modify them to become a generic Funds Law applying to both the open and closed-ended sectors;
- establish two categories of fund – Regulated and Registered – and to remove the current requirement for Principal Managers. All funds, whether Regulated or Registered, would have to appoint a locally licensed administrator. Registered fund prospectuses would have to make it clear that the fund was not regulated by the Commission; and
- allow Guernsey service providers to offer services to non-Guernsey vehicles, subject only to a notification requirement to the Commission.
The report reached a further number of significant conclusions. In particular, the report found that the fund-specific sector had been responsible for creating and sustaining a significant volume of employment in the Island and contributing to the profile of the Island in the international investment community. Consequently, it was understood that it was important to encourage and sustain the fund-specific sector.
The report clearly recognised the possibility of an "overheating" economy and noted that there needed to be a careful balance between the amount of administration to be undertaken in Guernsey and the level of administration that was permitted to be outsourced. One key difference between the proposed Guernsey model and the model used in, for example, the Cayman Islands is that a Guernsey licensed entity must retain responsibility for the conduct of the administration of each Guernsey fund. The Cayman Islands’ model, which, if adopted, would have allowed greater administration of Guernsey-domiciled funds to be undertaken outside the Island, was expressly rejected because of the impact that would have on:
- the economic benefit retained within Guernsey;
- the continued sustainability of Guernsey as an administration centre; and
- the reputation of the Island where Guernsey-domiciled funds were administered by persons over whom the Commission had no authority.
The good news is that moves are already taking place to change regulatory policy to allow for these changes. In February 2007 the registered fund regime in respect of closed ended funds was implemented and the policy requirement for there to be a principal manager incorporated and licensed in Guernsey for open ended funds was reversed.
The report was keen to encourage growth within both fund-specific and non fund-specific sectors. In particular, the report considered it was important that the Island attracted intellectual capital to move to the Island and to establish ownership within the Island.
Even before the implementation of the report, the influx of new funds to the Island (chiefly hedge funds, private equity and property funds as well as traditional vehicles) is substantial, not only a reflection of global markets but also the new-found confidence the sector has as a result of the Harwood proposals. For instance in 2006 values of funds under administration and management increased to £130.2 billion (an increase of 30.2% in the year). There is also a new trend in the establishment of businesses such as asset managers, stock brokers and private wealth managers, driven by various factors. Again, the significance of the regained sense of purpose the investment sector now has should not be underestimated.
The streamlining of the authorisation and licensing processes for the investment business sector will produce faster responses and enable the industry to react more quickly to the pace of the global commercial environment. The focus of attention by the regulator will move towards more frequent monitoring and review of the licensed service providers. This shift of emphasis will present its own challenges with service providers themselves being required to take an enhanced responsibility for the business they conduct in order to protect the reputation of the Island (and their peers within the Island). As one service provider described to me recently "it will be the case that, if one of us drops the ball, we all do". There will need to be a greater degree of dialogue between the industry (as a whole and individual businesses) and the regulator as there will be a shared responsibility. To a large extent this is already starting to happen.
Challenging times, but a very bright future.
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