Originally published in Private Client Practitioner Guernsey Supplement, December 2011
There is an implicit assumption that somehow the European Union's Alternative Investment Fund Management Directive (AIFMD) is going to impact on Guernsey's reputation as a leading offshore finance centre. Butterfield Bank's head of custody services, Sadie Podmore, argues that the directive is an opportunity for fund administrators in Guernsey to promote their expertise and resilience.
Many pundits have been touting the idea that the AIFMD, and its US equivalent the Dodd Frank Act, will bring a level of onerous regulation and costs on the heads of fund managers, and, by extension, administrators. In Guernsey, the feeling is that the AIFMD is a real opportunity for the jurisdiction to continue to promote its position as the leading international centre for fund establishment and administration.
There is no question, for some, the directive does seem to herald a high level of expensive regulation. This will see fund managers looking hard at their service providers and looking at alternative jurisdictions that can truly boast to be experienced in this type of work and demonstrate international regulatory standards that meet the directive's requirements but without the arduous regulatory burden. Guernsey can lead the pack here.
With so much more in terms of costs at stake those looking to invest will be searching for fund managers, administrators and offshore custodians that can demonstrate a clear track record and a level of expertise that negates the potential issues with AIFMD.
The EU has confirmed there will be a continuation of the private placement regime until 2018. This means, subject to certain conditions, third country alternative investment funds will continue to be able to market to professional investors based in EU member states under the existing private placement. It is also anticipated the EU will recognise an AIFMD equivalence for Guernsey which would put the jurisdiction at the forefront of those international finance centres that investors and fund managers are considering in their flight to quality.
The uncertainty of the AIFMD and how it will ultimately develop looms over the EU fund destinations rather than Guernsey directly. Some of the detail originating from AIFMD Level 2, with respect to custody and capital adequacy and professional indemnity insurance merely attempts to address perceived 'systemic risks' that are not, in reality, there – this just adds needless cost, for which the investor will ultimately have to pay. More than ever there is a need to talk to advisers and clients, who are often EU-based, about migrating their existing set up to Guernsey.
Significant levels of infrastructure and expertise have been developed in Guernsey making it a desirable base for many international investment structures and funds – even where there is no tax angle.
Fears that higher standards of global regulation, policing and co-operation would drive business away from Guernsey have simply not come to pass. In reality, Guernsey offers an economical and politically stable environment in which international cross-border business can continue and is thriving as a result of these high standards.
As well as the quality evident in the support services such as telecommunications and air links, Guernsey boasts a reputation for providing on-island experience specialising in the provision of custodial services to funds in a multi-market and multi-instrument capacity.
Guernsey already has a number of the necessary requirements to achieve AIFMD equivalence with an excellent track record and internationally recognised standards that already conform to best practice. Guernsey has 29 Tax Information Exchange Agreements (TIEAs) with 10 EU Member states including the UK and it has a high anti-money laundering regime.
The directive is not intended to impact fund managers with an aggregate gross asset value of less than EUR 100 million. Guernsey historically has serviced funds of all sizes including small niche funds that require a high level of expertise and due to this threshold will fall outside the focus of the AIMFD and should continue unfettered.
This noticeable shift towards funds with more esoteric asset classes, such as litigation claims, fine wine, art, cleantech and life interest settlements coupled with fund managers being more motivated through AIFMD to move between service providers to spread risk, means experienced custodians who are lithe and quick to react will continue to be successful in securing business.
AIFMD will only increase the demand for senior, experienced personnel to deal with increasingly complex technicalities. Guernsey will also remain open to non-EU business and, indeed, some managers, which are currently based within the EU, may find the directive too restrictive. Utilising Guernsey based managers, administrators and custodians could provide the solution.
End of private placement model
The removal of the private placement model in 2018 may lead to sponsors using a third country alternative investment managers and an alternate Guernsey investment fund. Guernsey is well-placed to accept this business as it is prepared already to be among the first non-EU jurisdiction to meet all the relevant requirements and its regulatory and compliance standards are already market leading.
Sponsors could therefore choose Guernsey over and above their home jurisdiction that could be struggling to meet the AIFMD, or equivalent, criteria. Guernsey's regulatory framework, in seeking equivalence and third country status, is also flexible enough for those managers not requiring an EU passport; it is designed for non-EU investors to set up a fund in a well-regulated jurisdiction without the additional burden of cost of reaching out to a European investor base.
Indeed dual parallel delivery of funds for European and non-European investors can be structured side by side, allowing investment ideas to be delivered in accordance with the investors' location while the custodianship, administration and management of both vehicles can have a common home and service provider base in Guernsey – an enviable position for most other offshore finance centres.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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