Originally published in www.hfmweek.com
The contributors are all listed in full at the end of this article.
As Jersey continues to enhance its regulatory regime it is becoming a leading European centre for specialist funds business. Recent figures show that the value of funds under administration in Jersey, now at a record high of £179.1bn, has risen by 30% over 2006. The hedge fund sector along, with private equity and property, has been the catalyst for much of the growth that began in 2004 when the Expert Fund Guide, the new streamlined authorisation regime for alternative investment funds, was introduced by the Jersey Financial Services Commission (JFSC). Since then, the momentum has shown no signs of slowing. In the last 12 months, expert funds registered in Jersey have more than doubled to 274, while the net asset value of such funds now stands at £29.5bn.
Jersey also has welcomes new businesses to the island, including hedge fund managers. The island has an active campaign to encourage specialist fund managers and family office firms to relocate. Tax professionals have argued that fund managers can more easily manage and control their business if the manager and business is located in an offshore location. This advantage, along with the quality of the regulation and other factors such as the island’s close proximity to London, the language, schools, climate and a safe environment, make Jersey an attractive base where fund managers can re-locate.
While business growth has been spectacular, the industry has to continue to innovate and evolve. It has consulted closely with the Commission on further enhancements to the regulatory regime. The first measure was to introduce the Listed Fund Guide, the new authorisation process for closed-ended funds. Secondly, there was formal recognition by the Dutch Financial Markets Authority, which enables Jersey funds to be listed on the Euronext Exchange without the need for a licence. And thirdly, changes in the island’s income tax law ensures that Jersey companies are treated as non-resident for tax purposes if certain conditions are fulfilled. These and further developments are designed to make the island an even more attractive jurisdiction for specialist funds.
Beverley Le Cuirot
HFM: How will the Dutch Financial Markets Authority (AFM) decision to add Jersey to its list of well-regulated jurisdictions help Jersey’s hedge fund industry in the future?
Andrew Dann (AD): It will encourage a greater number of alternative investments such as hedge funds to become domiciled on the island. Jersey is recognised as having ‘adequate supervision’, meaning that a Jersey-domiciled entity does not require a licence in the Netherlands to list on Euronext. Jersey is one of four jurisdictions with list approval, allowing fund managers to set up a Jersey entity within a fund structure. This factor, in addition to Jersey’s favourable tax regime is yet another reason why many hedge funds listed on Euronext will incorporate a Jersey registered company within their structure.
Alan Brint (AB): Jersey is becoming a respected hedge fund jurisdiction in the alternative space. Bilateral agreements with member countries of the EU are an example of this and are likely to become more prolific as the reputation of the island’s hedge fund industry increases.
David Pirouet (DP): It is international recognition of Jersey as a quality jurisdiction. There have been a number of listings of both hedge funds and private equity through Euronext in the last year. So this is recognition of the quality of Jersey by an internationally-acknowledge exchange. It’s a good opportunity for the island for potential future listings.
Marcus Stone (MS): It will enable Jersey funds to be listed on the Euronext, without the need for a licence in the Netherlands. The advantage of using Euronext is that you can actually list an interest in a limited partnership and other forms of units, as opposed to just shares. We have had quite a few initial enquiries and there may be significant interest in the next few months.
Mark Hill (MH): The Dutch AFM’s decision to include Jersey comes at a time when there is considerable interest from institutions looking to raise capital through a listing on the Euronext exchange. Under the Dutch ‘Act of the Supervision of Investment Institutions’, foreign funds are not required to obtain a licence if the fund is subject to actual supervision in its home jurisdiction. Jersey’s presence on the shortlist, which includes Luxembourg, Guernsey and the USA, of jurisdictions that are deemed to have adequate supervision by the Dutch AFM, will enhance its reputation as the preferred offshore domicile amongst promoters wishing to list funds on this popular exchange.
What are the benefits to fund managers and hedge fund service providers of the introduction of the Listed Fund Guide by JFSC in January 2007?
AD: The Listed Fund regime has improved the appeal of Jersey as a leading European centre. Funds can now be listed on Euronext, London Stock Exchange (LSE), Dublin and the CISX. This regime gives closed-ended investments funds listed on European or other leading stock exchanges access to a streamlined 72 hour approval process. Although similar to the Expert Fund regime in terms of a streamlined approach, the Listed Fund regime is not restricted to ‘expert investors’ and appeals to fund managers and hedge fund service providers. Speed of application is key to fund managers and Jersey now boasts two regimes that enable this, saving time and resources. The principal benefits are certainty of the process and the timing - which are both critical in any fund launch.
Tamara Menteshvili (TM): It is a proactive set of regulations that allows the fast-tracking of both the establishment of a fund and the listing of it. Maintaining the list of recognised exchanges for that purpose is conducive to our exchange, because our rules are linked to that regime. The first port of call will be to consider a listing on our exchange. We have approximately 50 hedge funds listed, domiciled in a variety of places and something in the order of about 70 funds of hedge funds, again domiciled in a variety of places. The idea is that all the new instruments and legal structures, plus the Listed Fund Guide, lend themselves to encouraging investment business to come to Jersey in the first place.
AB: The island’s evolution of fund regulations and guidelines help to provide the industry with a framework in which to conduct its business whilst reducing the ambiguity of what can or cannot be done.
DP: When Jersey brought in the Expert Fund Guide in 2004 there were potential issues about using an expert fund for listing purposes. Now, with the Listed Fund Guide, it gives certainty and a fasttrack procedure for certain closed-end investment funds to be listed on recognised exchanges. It provides an opportunity for Jersey to make use of the buoyant market for listings over the last few years.
MS: It will grant access to a streamlined 72 hour approval process. The regime applies to funds listed on recognised stock exchanges, including London, New York, Dublin, CISX and Euronext. It is a light touch, fast-track regulatory regime for listed closed-end funds. It will make Jersey more attractive for private equity and hedge funds. Historically, these have gone to other jurisdictions like Dublin, BVI and Cayman who have effectively rubber-stamped the process as opposed to conducting a high-level review.
MH: The Listed Fund Guide was introduced in January this year by JFSC in response to increased market demand. The Guide seeks to provide a quick and cost effective approach to establishing funds in Jersey through a 72 hour fasttrack authorisation process for all funds qualifying as Listed Funds. To qualify, a fund must be closedended, listed on a recognised exchange (including London, New York, Dublin and Channel Islands Stock Exchanges, the Alternative Investment Market and Euronext), and the investment manager must meet certain criteria to be considered of good standing by the JFSC.
How might The States of Jersey’s recent approval of an amendment to the island’s Income Tax Law add to its attractiveness as a domicile?
AD: The amendment to Jersey Income Tax law provides further flexibility to the funds industry, ensuring companies are treated as non-resident for tax purposes. This allows Jersey to compete directly with other jurisdictions such as the Cayman Islands. This makes the island more attractive and enhances the finance industry as a whole. The law is no longer seen as an obstacle.
TM: It’s not so much the domiciles of the funds that the tax laws will affect. It is geared towards attracting asset managers to be based in Jersey. It is a different take on the notion of attracting hedge fund business generally, rather than specific fund administration issues. You can use the analogy of Jersey as being the ‘new Connecticut’ - the technology is there to allow funds or assets to be managed remotely and for people to have a lifestyle choice of where they work. You can encourage more fund management which has got to be seen as a good thing.
AB: Changes to the tax environment in all offshore jurisdictions as a result of international fiscal pressures do not necessarily provide a competitive advantage but certainly assist in maintaining a level playing field. The amendments to Jersey’s income tax law will assist in maintaining this level playing field.
DP: The main aspect that I’m aware of for this particular change is to do with potentially using Jersey companies as the equivalent of UK Real Estate Investment Trusts (REITs). The property sector is very buoyant in Jersey. There are other changes which affect the establishment of hedge fund managers, hedge funds or private equity locally and are called the ‘zero/ten’ changes. They’ve been approved locally and the details are being finalised at the moment. From the beginning of 2009 you’ll have a zero/ten framework coming into play, whereby certain Jersey-regulated companies will be subjected to 10% tax instead of 20%. All other companies will be zero-rated. It’s all part of the framework for attracting people such as hedge fund managers, senior traders or private equity managers who have become or are going to become resident on the island.
MS: Although the amendment is linked with the proposed changes to REITs in the UK, it will ensure that Jersey companies are treated as non-resident for tax purposes if certain conditions are fulfilled. It is designed to attract certain UK structures that require a UK tax-resident company which cannot be resident for tax purposes in another jurisdiction. It is also intended to attract business that would historically have gone to the Cayman Islands. The relevance to the alternative investment industry is more with respect to certain high-level taxdriven structures.
MH: The recent amendment to the Island’s Income Tax law will ensure that a company incorporated in Jersey but managed and controlled outside the Island, will not be considered to be resident for tax purposes. This will be particularly attractive to certain investment structures, such as UK REITS, which, under draft UK REIT legislation, could benefit from favourable tax treatment in the UK if they can demonstrate that: "the company is a body corporate which is (a) resident in the United Kingdom and (b) is not resident anywhere else". Accordingly, a Jersey company can be deemed to be resident in the UK by ensuring its management and control are exercised from the UK and not resident elsewhere by ensuring it is not a Jersey resident company for tax purposes.
What are the major factors that allow Jersey to continue to hold its position as a leading European jurisdiction for specialist funds like hedge funds?
AD: Jersey continues to be a jurisdiction of choice for the fund industry. During 2006 the total value of funds under investment management increased by £12.9bn, up by 26.2% on the previous year. It is difficult to claim that any one jurisdiction is the European leader, but the Jersey funds market continues to grow and this is primarily linked to regulatory changes. The new Listed Fund Guide allows quicker and easier set up, requiring fewer resources and providing greater protection to various share classes with the introduction of the incorporated cell company (ICC) and protected cell company (PCC) structures. This is all in addition to Jersey’s favourable tax regime.
TM: Jersey’s stance on innovative products is an important factor. When you’ve got cutting edge technology and legislation, people who engineer financial products gravitate towards it – they need that kind of environment to develop products. For example, Jersey introduced legal structures which segregate and protect assets - the PCC and the ICC legislation. These sorts of products are innovative legal structures and are useful to structured funds and hedge funds in particular.
AB: Jersey is just one of several Europeanlocated ‘offshore’ centres competing for hedge fund business. It has long maintained a mature resource infrastructure with which to attract fund business in general but the introduction in recent years of the ‘expert investor fund’ regime and other regulatory changes has enabled Jersey to meet the demanding requirements of the alternative investment segment.
DP: If you go back three or four years, Jersey wasn’t really being considered for hedge funds. It has come a long way, although there is still progress to be made in certain areas. From a recognition point of view, about a year ago,one of the local legal firms was involved in a survey of all the major UK legal firms. At that time, Jersey was recognised to be second to Cayman, of all the European hedge fund centres. And Jersey is now getting international recognition from exchanges such as Euronext.
MS: Jersey has always been a welcoming jurisdiction for alternative investments and it has, compared to certain other jurisdictions, more flexible forms of regulation for fund promoters and administrators. It offers a wide range of investment vehicles and, as a result, the volume of business has grown. Jersey has no-par or par-value companies, guaranteed two companies, limited partnerships, unit trusts and cell companies available. It is also a stable, mature jurisdiction with a high quality judiciary, legal framework and professional financial services industry. We are at the cutting edge in respect of private equity and hedge funds, although Jersey does face certain challenges on the global market from BVI and Cayman.
MH: Since the introduction of the Expert Fund regime, Jersey has sought to enhance its position as demonstrated by the recent announcement of three new initiatives, including the recognition by the Dutch AFM, the introduction of the Listed Fund Guide and changes to Jersey’s Income Tax Law. In addition to its progressive regulatory regime, the Island offers a varied choice of experienced and knowledgeable legal and audit firms together with custodians and administration service-providers. Recently announced statistics from the JFSC underline this success in that the number of Expert Funds registered in Jersey has more than doubled from 134 to 274 in the 12 months up to the end of December 2006 and that the total value of the funds industry has increased by 30% during the same period to £179.1 bn of which just over 16% is attributable to the growth in Expert Funds.
What recommendations are likely to come out of the completed Action Plan following the last IMF assessment in Jersey?
TM: The last IMF review was favourable – they’re just coming back for a health check. All of us feel quite comfortable that when they come back to visit us again they’ll be equally as positive as they were last time.
AB: The regulatory environment for Jersey’s fund industry continues to evolve with more frequent amendments than has historically been the case. The introduction of ‘self-certification’ and ‘fast-track’ processes will require that the island’s regulatory authority regularly monitors the activities of fund functionaries to ensure that Jersey maintains the highest of industry standards and protects its ranking and reputation in the international financial community.
DP: One of the Action Points from the last assessment was the introduction of codes of practice for Jersey functionaries – fund managers, administrators and custodians - who perform a function for the funds sector. The Codes of Practice are about to go through a final consultation and are due to be implemented later this year. Also consolidation of the different funds laws has taken place – the Collective Investment Funds (Jersey) Law 1988 into the Financial Services (Jersey) Law 1998. There was also a recommendation for additional powers for potential inspections by the regulator.
MS: There has always been a watching brief kept over the so-called competing jurisdictions. The objective is really to obtain a rating by the IMF in 2008 that compares favourably with the rating of the Financial Action Task Force member. From a regulatory perspective, it also relates to money-laundering concerns. The JFSC is focusing on ensuring compliance with the standards. It has increased its manpower throughout this year to achieve its aims and objectives. At the same time, it is looking at outsourcing, especially to firms of accountants. It is also reviewing its Codes of Practice for trust company businesses and looking at new codes of practice for fund services business.
MH: There are several reasons why funds and their investment managers are seeking to redomicile to Jersey, including favourable taxation, proximity to Europe, lifestyle advantages and a progressive regulatory framework that is increasingly being recognised by other onshore jurisdictions as equivalent to their own regimes. Following increased interest from the UK revenue authorities in the activities of UK investment managers in relation to offshore funds, there is a growing trend to move investment management and central control offshore. Our proximity to London and other major European markets makes Jersey an enticing proposition when considering such a move. This, coupled with the ease of travel from mainland Europe to Jersey, means that non-Jersey based directors can easily attend meetings held on the Island. Investment managers wishing to redomicile offshore may also wish to migrate their funds to the same jurisdiction to benefit from a single regulatory and taxation regime. As Jersey continues to develop and expand its investment community, we expect the interest from funds and their investment managers in Jersey to continue.
How can Jersey administrators continue to make their service offerings attractive to new and existing clients?
AD: Local administrators need to continually invest in new systems and particularly in people. One of the first questions a potential client asks is about the robustness and functionality of systems. Dedicated people in the areas of administration, the preparation of financial statements, secretarial, projects and relationship management are fundamental to providing an excellent service. Expertise in these specialist roles is increasingly the expectation of clients. The robustness of the control environment is also important to existing and new clients. Service providers’ reports like SAS 70s may assist local administrators in demonstrating their commitment in this regard.
TM: I think now is the right time for them to set out their stalls - in terms of hedge funds, property funds and alternative investment as a whole – and emphasise the wealth of experience available, the innovative products, the technology available and the favourable time zone. I think now is the time to go forward and fly the flag for Jersey.
AB: Fund administrators need to find their niche offering (whether this is in providing services to property funds, venture capital funds, single strategy hedge funds or fund of hedge funds) and invest in their chosen speciality. Most Jersey administrators, so far, have taken this approach and do not spread their capacity too thinly thus ensuring that they deliver a consistent quality service to their clients.
DP: Mainly by making sure that its service is flexible and tailored to the particular needs of clients and also that it maintains a high quality standard of service, Jersey has built its reputation up as a well-respected fund management centre for a number of years. It has changed from a focus on retail funds to one on alternatives over the last five to seven years. PwC keeps all the service providers up-to-date with key regulatory and accounting developments and assists them in providing training for administrators on updates in accounting and regulatory practices.
MS: Some of the fund administrators were first established over 30 years ago. Consequently, the administrators tend to be highly trained – some are qualified lawyers and accountants. They all have appropriate the investment qualifications. and there is a high degree of professionalism.
MH: The opportunity exists for administrators to provide a global multi-jurisdictional and fully integrated service proposition. Increasingly, fund promoters are wishing to appoint a single organisation to undertake the legal, administration and relationship management necessary to ensure a smooth and timely launch of new and innovative products. Maples Finance has developed such capabilities by building on the synergies and expertise of our global presence as well as through our connection with the law firm, Maples and Calder. Maples Finance works with clients ranging from large institutional investment advisors to small ‘boutique’ hedge fund managers, at the same time ensuring that the level of service provided is customised to meet the specific needs of each client. We recognise that the ability to provide accurate, timely and consistent services from all jurisdictions in which we operate has required a significant investment in technology and system infrastructure to meet the ever evolving needs of the fund promoter and their investor client base. We will make such investment to ensure the highest levels of client service are maintained.
What has prompted administrators in Jersey to operate more of a ‘one-stopshop’ approach in the manner of Cayman and Dublin, as opposed to outsourcing services?
TM: There are aspects of outsourcing that make economic sense, while not losing any of the controls that are important to corporate governance and to making sure that compliance with the requirements is met. Jersey has a different scale of facilities within the jurisdiction that others might not have. It really depends on what they think is manageable, both from the capacity perspective and that of cost-effectiveness.
AB: It is likely that as capacity constraints – particularly on staffing – become a major concern for industry participants, there will be a move by administrators towards more outsourcing. Globalisation of service providers and their client base, together with fee compression, will require technology investment that will persuade participants to outsource to major operational hubs. It is likely that in the future, most offshore finance jurisdictions such as Jersey will concentrate on high-value client-facing functions and providing a one-stop shop client service delivery point.
DP: Jersey has a three-pronged strategic approach. It offers the domiciling, administration and managing of funds as part of a key strategy in establishing itself as a leading fund management centre, whether a promoter is interested in one or all parts of that service. There are a number of fund managers already present on the island and some of them have been here for several years. The intention is to continue to increase their presence on the island: with not only a third-party administration, but also with other elements of the hedge fund community. When different fund managers are looking to use other providers for certain services – be it on an outsourced basis or on a full basis. Jersey has the full range of investment services on offer.
MS: What Jersey wanted to achieve was to target specialist funds. Therefore, the one-stop approach really developed that way. There has been a move, for example, with other Jersey law firms to provide legal advice and to administer the fund. The feeling gained from speaking to lawyers in City firms, is that this is seen to be a particularly uncomfortable approach, because it is inappropriate that the partner leading the transaction also has a beneficial interest in the fund administration arm. The one-stop shop approach is absolutely fine in principle. However, you are faced with the difficult, yet important, question of independence.
Beverley Le Cuirot is director of marketing with Jersey Finance, the promotional body for the finance industry in Jersey. She has worked in the marketing industry for the past 28 years and in the offshore finance industry in Jersey since 1992.
Andrew Dann is Ernst & Young’s managing partner for the Channel Islands. He has over 20 years’ experience in the investment funds industry and is responsible for the firm’s services to the industry. Dann has significant experience of Jersey expert funds as well as being the engagement partner for a number of property funds and hedge funds. Dann is also a committee member of the Jersey Funds Association and a member of the Ernst & Young global investment management group.
David Pirouet is an audit & business assurance partner in PwC Jersey, Channel Islands, having also worked in Canada and London. He has specialised in investment management and is a member of the PwC European Hedge Fund Group
Alan Brint is head of corporate & institutional (British Isles) for Royal Bank of Canada, based in the Channel Islands. His team is responsible for the provision of custody and fund administration services to corporate and institutional clients and manages over $40 billion of assets.
Tamara Menteshvili is chief executive of the Channel Islands Stock Exchange and was formerly the deputy director of investment business at the Guernsey Financial Services Commission (GFSC) since 1995. During this time, she developed a supervisory regime for the extended Protection of Investors Law and was central in establishing the exchange.
Mark Hill is a director of Maples Finance Jersey and has over twenty years’ experience within corporate and fund administration services in Jersey.
Marcus Stone is a partner and advocate with Ozannes (Jersey). Stone joined Ozannes in 2006 to establish their new Jersey legal practice. He has 10 years experience in Jersey law, specialising in banking and finance, investment funds and the creation of securitisation structures and programmes.
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