Jersey: Channel Islands Funds Quarterly Legal And Regulatory Update 1 January 2018 – 31 March 2018

1 Jersey Developments

1.1 Growth for Jersey funds sector confirmed by end of year statistics

As mentioned in our previous briefing, fund assets serviced in Jersey are increasing year on year. The end of year statistics published by Jersey Finance confirm the findings of the Monterey Jersey Fund Report, published in November 2017. The net asset value of regulated funds being serviced through Jersey rose by 10% over the last quarter and by 12% year-on-year to stand at £291.1 billion (as at 31 December 2017), the highest value ever recorded. These are welcome results for Jersey. As a jurisdiction for funds and fund administration and with asset managers expected to substantially increase their allocation in alternatives over the coming years, it is a sign of confidence in the future of our industry in Jersey.

1.2 Marketing Jersey AIFs into Europe

Recent statistics confirm that in 2017, 291 Jersey AIFs were marketed into Europe through National Private Placement Regimes (NPPRs), representing a 15% year-on-year increase. The path is particular well-trod in key alternative funds markets such as the UK, Netherlands, Ireland and the Nordic countries. Interestingly, only 3% of EU AIFs are currently registered for marketing in more than three member states (a statistic recently published by the European Commission in support of new legislation to facilitate cross-border marketing– see paragraph 4.1 below). Whilst Jersey AIFs can access European capital via NPPRs, avoiding the full rigour of the AIFMD, it appears that many EU AIFs would be better served by being in domiciled in Jersey. 

1.3 Jersey celebrates success of JPF regime with 100 JPFs registered in less than a year

The 100th Jersey Private Fund was registered by the JFSC in early March underlining the interest in the product since it was launched in mid-March last year. The latest addition to Jersey's suite of fund structuring options, the JPF was introduced to provide institutional and professional investors with a more streamlined and fast-track regime with tailored ongoing regulatory requirements, under which funds for up to 50 investors could be established in as little as 48 hours.

The JPF is also available to managers seeking some vital certainty in marketing their funds into Europe through NPPRs.

1.4 JFSC issues statement on regulation of ICOs

Following on from the States of Jersey statement in relation to ICOs (Initial Coin Offerings), in which the States confirmed its commitment to creating a modern digital economy, on 2 February 2018, the JFSC issued a statement on the regulation of ICOs in Jersey. The statement [read here] seeks to clarify the regulatory treatment of ICOs and to ensure that the public are fully aware of the role of the JFSC in relation to ICOs. In particular, the JFSC has been alerted to recent articles that claim that certain ICOs are regulated by the JFSC, which the JFSC considers to be misleading. Most jurisdictions do not regulated ICOs at all but Jersey does require all companies to seek consent from the JFSC to issue shares.  In granting these consents (known as COBO consents), the JFSC requires that investors are provided with sufficient information about investing in the company and the risks associated with an investment, including the risk of losing the entire investment. The JFSC does not consider the financial standing of the unregulated company selling such ICOs.

1.5 Brexit and Jersey

On 6 March 2018, the Minister for External Relations presented the Brexit Information Report: February 2018 Update to the States. The Report is the fourth report on the Government of Jersey's Brexit preparations and provides an update on Brexit developments and the work undertaken since the last report in July 2017. [Read here].

It is the Government of Jersey's intention that the Island should be included within the transition/implementation arrangements to the extent of Jersey's existing relationship with the EU, to allow the Government and businesses to prepare for Jersey's own future relationship with the EU from a position of certainty.

After Brexit, Jersey will no longer be able to draw on the UK government's support in protecting its interests and influencing the direction of EU policy, yet decisions taken at EU level will continue to impact on Jersey's interests. As such, the Government of Jersey intends to emphasize the benefits of the Island's relationship with Europe, including highlighting that Jersey is a conduit for investment into the EU to the value of EUR188 billion, which equates to 4% of the EU's total stock of liabilities, and that the Island supports over 88,000 jobs on the continent.

On 23 January 2018 the Draft European Union (Repeal and Amendment) (Jersey) Law 201- (EURAL) was lodged au Greffe. The purpose of the EURAL is to make necessary changes to Jersey's domestic laws governing its relationship with the EU and provide the States Assembly with the powers it requires to provide for a smooth transition to Jersey's new legal relationship with the EU.

1.6 Phasing out of Unregulated Exchange-Traded Funds

Following consultation with the funds industry in Jersey, it was decided to phase out one of the Unregulated Fund regimes - the Unregulated Exchange-Traded Fund. The JFSC confirmed in February 2018 [read here] that as from 1 April 2018, no new notifications of Unregulated Exchange-Traded Funds will be accepted by the Registrar.

Existing Unregulated Exchange-Traded Funds (notified to the Registrar prior to 1 April 2018) will be able to continue in operation until the end of their natural life.

The phasing out of Existing Unregulated Exchange-Traded Funds is part of a rationalisation and consolidation of Jersey's funds regimes. Further rationalisation and consolidation of Jersey public fund regimes is expected over the coming years.

1.7 Ratification of tax agreement between Jersey and Spain lodged

On 5 March 2018, the Jersey Minister for External Relations lodged for ratification the Tax Information Exchange Agreement between the Government of Jersey and the Kingdom of Spain. The Agreement provides for the exchange of information on tax matters on request between Jersey and Spain. This is a welcome development demonstrating good relations between the jurisdictions.

1.8 JFSC commences phase 1 of risk-based supervision data collection

As On 14 March 2018, the JFSC commenced the first phase of risk-based supervision data collection. The JFSC has sent an email to all reporting entities inviting them to begin the data collection process. Reporting entities are required to complete a questionnaire which can be downloaded from the myJFSC portal.

1.9 GDPR in Jersey

The Data Protection (Jersey) Law 2018 (which replaces the current Data Protection (Jersey) Law 2005 and Data Protection (Authority) Jersey Law 2018) will come into effect on 25 May 2018. The new Laws will bring Jersey legislation in line with the EU General Data Protection Regulation, as described more fully in our briefing [ read here].

2 Guernsey Developments

2.1 GFSC clarifies warranty requirement for Guernsey's Private Investment Fund

The Guernsey Financial Services Commission (GFSC) has published new FAQs relating to the Private Investment Fund (PIF). Importantly, the FAQs clarify the position relating to the so-called 'manager warranty'.

The use of the term 'warranty' has been replaced with a 'declaration'. This declaration is a confirmation from the manager that they have considered the investor's ability to sustain losses. The FAQs also set out how a manager may seek to satisfy themselves that they have made adequate investigation into an investor's ability to sustain losses. The term 'warranty' had perhaps led to an initially over-cautious approach in the marketplace – but despite the misunderstandings, the model was still gaining traction.

The FAQs provide a most welcome clarification to the PIF regime which we expect to end any ambiguity about the nature and extent of managers' responsibilities. The PIF is based on a close relationship between investors and managers, and the requirement for managers to make a straight-forward declaration to the regulator regarding investors' ability to sustain losses should not be onerous.

This clarification further demonstrates the willingness of the GFSC to listen to market participants' concerns and to act and clarify where issues arise, even where the rules are relatively new.

2.2 Virtual currencies, crypto currencies and Initial Coin Offerings

The GFSC has made a statement emphasising its policy of encouraging innovation through initiatives such as their Innovation Soundbox, where existing or future licensees can go to discuss ideas, innovations or future applications with authorisation or supervisory experts. 

The GFSC recognises that globally, one special area of innovation within financial services has been the increasing use of virtual, or crypto, currencies including the development of Initial Coin Offerings (ICOs), where an individual receives a token or coin in exchange for an investment into a company or alternative vehicle.

The GFSC has confirmed that it believes there are significant risks in the use of virtual or crypto currencies especially for retail customers. Nevertheless, they understand that professional investors with a high risk appetite may wish to invest in this developing sector.

The GFSC will assess any application by the same criteria they use for other assets types or structures, which means they look to ensure that key controls are appropriate – for example, around custody, liquidity, valuation of assets and investor information.

The GFSC have stated that, due to the significant risk of fraud and/or money laundering, they would be cautious about approving applications for ICOs which could then be traded on a secondary market. They would also be cautious about the establishment of a digital currency exchange within the Bailiwick.

2.3 Revision of laws project

The GFSC is seeking feedback on the provisions of the draft Protection of Investors (Bailiwick of Guernsey) Law, 2018, the draft Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2018 and the definitions which are proposed to be used across the revised supervisory laws and specifically whether these may have any unintended consequences or contain fatal flaws.

The GFSC has published engagement papers in relation to these setting out the topics upon which assistance is requested and questions regarding unintended consequences and whether there are any significant issues in relation to specific provisions or proposed definitions.

The engagement periods for the draft laws run until midnight on 11 April and 11 May, 2018 respectively.

2.4 Guernsey sees three consecutive years of funds growth

Figures published by the GFSC confirmed a third consecutive year of growth for Guernsey's fund sector. At the end of December 2017, the net asset value of all funds under management and administration in Guernsey stood at £270 billion (a 5.6% increase on December 2016).

This represented an increase of approximately £14 billion over the previous 12 months and growth of £1 billion in the three months to the end of 2017.

The GFSC approved 18 new investment funds during the fourth quarter of 2017, 17 of which were closed-ended and the remaining one open-ended. Both the quarterly and the annual growth figures suggest that fund managers continue to see Guernsey as a stable environment notwithstanding any uncertainly caused by Brexit.

Real estate funds were the biggest mover of the year, with the net asset value showing a year-on-year increase of 42% to nearly £21 billion, boosted by a strong fourth quarter. There was also an increase of 8.89% in the number of real estate funds over the year, from 90 at the end of December 2016 to 98 at the end of December 2017.

2.5 GDPR in Guernsey

The Data Protection (Bailiwick of Guernsey) Law, 2017 (the Data Protection Law) will repeal and replace Guernsey's current data protection regime with provisions to protect the rights of individuals in relation to their personal data, and provide for the free movement of personal data, in a manner equivalent and consistent with GDPR.

The office of the Data Protection Commissioner has confirmed that the Data Protection Law will come into force on 25 May 2018 and has published guidance and resources to assist organisations in working towards compliance.

2.6 GFSC clarification on status of AIM as recognised exchange

The GFSC confirmed in a statement on 26 February 2018 that it considers the London Stock Exchange's AIM market as qualifying as a recognised exchange for the purposes of applying exemptions under the regulated activity as a director under the Fiduciaries Law.

2.7 Guernsey Investment Funds Q4 2017

Download our overview of the stats for Q4 2017 here.

3 Channel Islands Developments

3.1 TISE publishes new guidance in relation to UCITS funds

The International Stock Exchange (TISE) has published a new brochure which showcases the way in which a TISE listing may facilitate greater investment from Undertakings for Collective Investment in Transferable Securities (UCITS) funds. A key finding is that UCITS funds which are established in many EEA jurisdictions only need to disclose TISE as a potential source of investable assets within the fund documentation for TISE-listed products to be considered eligible 'listed' assets.

UCITS regulations (UCITS IV and UCITS V) stipulate the proportion of investment UCITS funds may allocate to 'unlisted' and 'listed' products, with a greater amount to the latter. However, the regulations are not highly prescriptive about what constitutes a stock exchange which qualifies for its listed products to be deemed as 'listed' for these purposes. Instead, the manner in which individual EEA jurisdictions have transposed the UCITS regulations domestically determines how UCITS funds established in those territories can invest into products listed on different stock exchanges. EEA jurisdictions have taken a variety of approaches.

The brochure clarifies that TISE either already meets general criteria, can be disclosed in the fund documentation as a potential source of investable assets or is a recognised stock exchange for some jurisdictions (or is seeking this status).

No matter how achieved, TISE-listed products being considered eligible listed assets increases the potential allocation from UCITS funds. As such, it makes TISE a more attractive venue for listing products, including other types of funds and also debt, which themselves may wish to attract investment from UCITS funds.

4 Global Developments

4.1 New rules proposed for pre-marketing in the EU

On 12 March 2018, the EU Commission issued proposals for a new Directive and new Regulation intended to boost cross border marking for investment funds.  The new rules would allow pre-marketing but would also narrow the scope of what pre-marketing is to the "direct or indirect provision of information on investment strategies or investment ideas" to EU professional investors "in order to test their interest in an AIF which is not yet established".  The aim is to encourage cross-border marketing across EU Member States in light of recent statistics (mentioned above) that show that only a handful of EU AIFs (less than 3 %) are marketed in more than three Member States.

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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