Since Jersey introduced the Expert Fund Guide in February 2004 its status as a jurisdiction for alternative investment funds has grown, to the point where it now comes second only to the industry leader the Cayman Islands. Subsequent developments, including the Non-Domiciled Fund Guide, the Listed Fund Guide, recognition of the jurisdiction by the Dutch financial services regulator, and a push at government level to invite fund management businesses and family offices to relocate to the Island have enhanced this position. But Jersey is not resting on its laurels and significant developments are taking place in the legislative regime governing funds and their functionaries. Further radical proposals have just been approved which could result in Jersey claiming a leading position alongside Cayman.
Key Regulatory Issues:
Jersey has worked hard to maintain its position as a jurisdiction where regulation is adequate for the protection of investors, without being too intrusive, recognising that different categories of investors require, and may appreciate, different degrees of regulation and protection. The focus of the Jersey Financial Services Commission ("JFSC") over the past few years appears to have been to reduce, where applicable, the scope of prescriptive regulation in relation to investment funds and at the same time to ensure that service providers of those funds are appropriately regulated.
This desire to regulate more effectively service providers resident in Jersey and to be less prescriptive about the fund vehicles themselves, has achieved formal recognition in a significant legislative change to be implemented in November, 2007 pursuant to which fund service providers (including investment management, investment advisory, fund administration, custody, depository and registrar functions) will cease to be regulated under the Collective Investment Funds (Jersey) Law 1988 and will fall to be regulated as a new class of financial services business to be named Fund Services Business under the Financial Services (Jersey) Law 1998. The Collective Investment Funds Law will remain in place as the principal source of regulation for the fund vehicles themselves, but it is intended that the regulatory emphasis should fall upon the functionaries in Jersey. In addition to moving the regulatory umbrella to the Financial Services Law, the JFSC is introducing for the first time codes of practice with which the Jersey funds service providers will be expected to comply. The basis of this regulation, however, is that of establishing a set of clear principles to which industry participants are required to adhere without being prescriptive as to the manner in which these requirements can be met. In this way the JFSC is able to allow a degree of flexibility to industry participants without imposing upon them a particular model or method of acting.
New Class Of Unregulated Funds
There is a substantial degree of co-operation and collaborative effort between the JFSC and private participants in the funds industry in Jersey in framing, developing and introducing regulatory change. A prime example of this is the announcement by the JFSC of the introduction early in 2008 of an unregulated class of fund. Over the summer a team comprising representatives of the Jersey Funds Association, Jersey Finance Limited and the JFSC, have worked together to consider the terms of reference for such a class. The new class of fund will be available only to ‘eligible investors’ – those with a minimum initial investment of $1m or certain defined classes of high net worth, sophisticated or institutional investors. Provided the fund can ensure compliance with this requirement there will be no other regulatory obligations placed upon it in Jersey and, in particular, it will not be required to appoint any Jersey-based service providers. If introduced this will, at last, create a very credible European alternative to the Cayman Islands as a domicile of choice for hedge funds and other alternative investment funds. It will also mean that fund sponsors and promoters will have a wide and flexible choice of fund categories in Jersey to choose from.
Pressing Home The Advantage
These and other initiatives can only strengthen Jersey’s position as a key player in the global offshore funds industry, particularly as Jersey also has some other pretty convincing weapons in its armoury. These include Expert Funds which are lightly regulated investment vehicles which can be established on a fast track basis and are available to expert and sophisticated investors. The success of these funds – 105 launched in the twelve months ending in August 2007 giving a total of 319 since their introduction – has surpassed industry expectations and flags to the world Jersey’s intention to target different products, such as property, venture capital and private equity funds.
There will, of course, be challenges along the way. The European-based fund market is an obvious prime target, but other competitor jurisdictions in the region, such as Guernsey, Dublin and Luxembourg will be refining their fund legislation and products to attract a share of the business. Cayman will continue to have some advantages in attracting U.S. based fund business, namely proximity and familiarity, but there is certainly scope for attracting European and other managers and investors who want a flexible jurisdiction coupled with the security and enhanced reputation which arises from association with Jersey.
Despite these challenges, Jersey has good reason to feel confident that it can beat the competition. New and innovative products added to a solid funds tradition put Jersey in a strong position. It may have been the case in the early days of the hedge fund industry that managers were seeking to set up in the least regulated jurisdictions. However, the industry has matured and investors and managers are increasingly seeking top-quality jurisdictions with sufficient, but not excessive regulation. A further driving force is the fact that tax authorities in the home jurisdictions of both the managers and investors are increasing their scrutiny to ensure that offshore status in each case is legitimate, and if, for example, board meetings are required, Jersey is clearly a logical choice for European managers and directors rather than the Caribbean jurisdictions. Coupled with all of this, and adding weight to its reputation generally, is Jersey’s initiative to attract hedge fund managers to become resident themselves in Jersey.
Jersey is at the forefront in developing legislation which responds to the demands of managers, lawyers and investors for increasingly complex fund products. An obvious example is the introduction of segregated cell legislation with innovations to make it more attractive than similar structures in other jurisdictions. Protected Cell Company legislation was introduced in 2006 allowing segregation of assets within separate cells. However, there was some concern that other jurisdictions might not recognise this segregation, particularly as the PCC, including its cells, remained as one legal entity. The response has been to introduce the innovative Incorporated Cell Company. Each cell in the ICC has separate legal status, which enhances the ability to ring-fence the assets, but still allows the manager and other service providers to maintain greater control than if each cell were replaced by separate subsidiaries in a traditional umbrella structure. The potential for the innovative use of the ICC structure is only gradually being realised, and will spread beyond funds.
Ultimately, the success of any jurisdiction hinges upon the willingness of the private and government sectors to co-operate to create a business-friendly environment. In Jersey there is a consensus that maintaining a certain level of regulation actually attracts the best business and reassures investors and onshore jurisdictions. Couple this with an increasingly user-friendly legislative framework and you have a winning combination.
This article first appeared in Legal Week on 1 November 2007.
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