The following article, taken from Jersey ~ First for Finance ? Celebrating 60 Years of Finance 1961-2021 was authored by Iain Millar, Group Partner for our Appleby Jersey corporate team.
Jersey's political and economic stability, forward thinking and robust regulatory framework, has set Jersey apart from other international finance centres for 60 years, making Jersey a world leader in all aspects of international finance, evolving over the years to develop a global platform which encompasses funds finance, real estate finance and Islamic finance.
Over a 60-year period change is the law of life and Jersey's regulatory framework has undergone repeated fundamental reform in this period. The year 1961 saw the Income Tax (Jersey) Law being drafted and major banks beginning to establish offshore operations in Jersey in earnest, with Hill Samuel the first merchant bank to arrive. Throughout the period Jersey has continued to enact helpful new regulation but the pace of pace change has increased markedly throughout and in a little over half a dozen years it has fundamentally overhauled its security regime, its private funds regime and its legislation in relation to limited liability partnerships.
In addition, the Taxation (Companies - Economic Substance) (Jersey) 2019 (the Substance Law) has brought substance requirements to Jersey in order to address concerns that Jersey companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Jersey. EU Finance Ministers signalled their approval of the Substance Law by whitelisting Jersey on 12th March 2019 and the Organisation for Economic Cooperation and Development (OECD) followed with their endorsement of the Substance Law later that summer.
The Financial Services (Disclosure and Provision of Information)
(Jersey) Law 2020 was introduced to implement the requirements set
out by the Financial Action Task Force (FATF) to Jersey. These
requirements were to ensure availability of adequate, accurate and
timely information in respect of
beneficial ownership and control of legal persons or trusts and such beneficial ownership information can now be obtained or accessed in an appropriate fashion by competent authorities.
In the run up to Brexit it is fair to say that informed market observers held different views as to how Brexit would impact the UK and Jersey but there was certainly no shortage of concern about both the implementation of Brexit and its potential impact. In addition to Brexit, the tragic emergence of COVID-19 clearly added significantly to the unpredictability facing the world and clearly no sector (and virtually no individual) has been left unaffected by the pandemic.
We are now over 18 months into living with these twin challenges and despite the tragic cost of the pandemic, Jersey's ability to offer seamless, efficient access to investor markets around the world has ensured that there has certainly not been a crisis in demand for professional services in Jersey. The real estate finance, funds finance and Islamic finance sectors have all proved to be extremely robust in the face of the most significant challenges to face those sectors since the emergence of Jersey as an international finance centre.
Despite the social and economic headwinds and aided by regulatory changes and a clear strategy, figures in the latest Monterey Insight Jersey Fund Report 2020 show that for Jersey's funds industry as a whole, as of 30th June 2020, total net assets stood at US$482.2 billion. This was up 20.4% on 2017 and is the highest level ever recorded. In fact, in 2020 around 36% of the constituent funds quoted on the AREF/IPD UK Quarterly Property Fund Index, made use of a Jersey structure.
Research by Capital Economics on Jersey's value to Britain shows that Jersey is home to more than £600 billion in corporate asset vehicles. Around 80% of that is thought to be invested in real estate, with a strong emphasis on UK commercial real estate.
The latest figures from the Jersey Financial Services Commission (JFSC) show that 365 Jersey Private Funds have been authorised and that annual growth in Jersey Private Funds was 27% (as at 30th September 2020). The fourth quarter of 2020 also saw the record creation of limited partnerships in Jersey.
In recent years Jersey has also invested significant time and resources into building the foundations of a global platform. Beyond Europe, Jersey is well placed to connect global managers and investors, with a growing number of managers in the US and Asia in particular looking for a European time-zone hub, outside of AIFMD rules, that can offer a transparent environment, as well as offering investors relatively straightforward access into the markets of both the UK and EU.
Jersey Finance has worked hard to promote its vision of 'Global Jersey' not least by promoting Jersey's finance industry in Asia since 2005 and opening an office in Hong Kong in 2009. It continues to support the Hong Kong office with regular business seminars, roadshows and reception to enhance Jersey's relationships and contacts in the region. Jersey has signed a Tax
Information Exchange Agreement with China and a double taxation agreement with Hong Kong, which further strengthens Jersey's links to the region.
In 2009 a statement of cooperation was entered into between the JFSC and four US financial regulators. This built on the Tax Information Exchange Agreement that was entered into between Jersey and the US in 2002.
Jersey's global platform should align well with the UK's pursuit of a more globally diverse role. This drive is demonstrated by agreeing trade deals with seven of the 11 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and ongoing talks continuing with New Zealand and Australia. In June 2021 the Department for International Trade published the 'UK Accession to CPTPP: The UK's Strategic Approach', which alongside pursuing a trade deal with the US, increasingly look to be pillars of the 'Global Britain' trading strategy.
Looking forward, Jersey has introduced legislation to support
the establishment of limited liability companies in Jersey, which
should be popular with US investors, fund managers and other
businesses in allowing them to set up structures in Jersey that are familiar with their own market. Jersey seems well placed to provide access to UK investors and opportunities in this new trading environment. This position was further affirmed by the UK's Financial Conduct Authority signing a Memorandum of Understanding with the JFSC in 2019. Despite Jersey's increasingly global role, Europe remains an important market and in particular Jersey is well placed to support non-EU managers wanting to access capital from within the EU. Significantly, the most recent Jersey Funds Association (JFA) survey of its members found that attitudes have now become positive, with over 80% of respondents saying Brexit would be neutral or would even increase business for Jersey.
Respondent's cited Jersey being a third country in relation to the EU as an important feature. The private placement regime means that Jersey also has all the infrastructure in place to enable funds to continue to market seamlessly into the EU through a well established and highly recognised route.
The JFA survey also revealed 97% of managers want access to only
three countries within the EU or less and for such managers private
placement is likely to be the best route. This is supported
by the evidence on the ground where recent figures outlining the number of alternative managers marketing into Europe through private placement in Jersey rose 9% in 2019 to more than 180 and anecdotally 2020 continued to show that private placement is increasingly attractive to UK and other non-EU managers. Jersey also plays an important role in enabling managers from within the EU to mitigate the impact of Brexit. A huge proportion of investors in alternatives are based in the UK making access to the City an important issue for managers based in the EU.
All this clearly shows Jersey has an enviable position of having
a strong funds sector and is navigating the challenges of the
moment very well. It is also a banking and finance centre, so
Jersey is ideally placed as a location for both lenders and
borrowers in the funds finance arena. There are a number of
financial institutions - including specialist debt funds - based in
Jersey, who provide these products. There are more than 20 bank
branches and subsidiaries located in Jersey and they include nearly
half of the top 25 banks in the world, by Tier 1 Capital and
Jersey's banking sector holds an average Tier 1 Capital ratio
that is 50% higher than Basel III requirements.
The security regime has been radically overhauled and is now a modern regime, which is popular with lenders and borrowers alike.
With interest rates still at historically low levels and an increased awareness and provision of finance available to funds, it is likely that fund finance will grow globally and locally.
In addition, Jersey has developed as one of the world's most
astute and acknowledged expert providers of Shariah compliant
structures and family office solutions - even before it opened
office a few years ago at the Dubai International Finance Centre (DIFC) - and is now the domicile of choice for Islamic asset and fund domiciliation and Sukuk structures for investors across the MENA region. Jersey is also the preferred domicile for developed asset classes, such as real estate and private equity for Shariah compliant fund mandates.
Funds in Jersey are broadly regulated depending on the type and number of investors they have and whether they are closed or open-ended funds. Sophisticated or institutional investors are often subject to a lighter touch regulatory framework, provided that the offer document clearly outlines the risks involved in the fund. Jersey's government has issued a helpful Statement of Practice in respect of Murayama contracts used in Shariah compliant funding structures and also specific guidance in respect of economic substance requirements in relation to Shariah compliant lending, which has been seen as another helpful step by market practitioners.
Shariah scholars have deemed the use of Jersey entities as potentially acceptable for use and this enables Jersey entities to be used successfully to facilitate Sukuk structures. Jersey based entities have been used in connection with a wide variety of Shariah compliant capital markets transactions. These have included structures established for the purpose of making off-balance sheet investments and securitising assets including:
- Jersey incorporated companies typically used for Sukuk
- limited partnerships issuing partnership interests;
- trusts, such as the well-known Jersey property unit trust; and
- real estate structures using companies, limited partnerships or JPUTs.
Regulation and supervision of Sukuk issues and other Shariah
compliant products is provided by the JFSC. The JFSC is familiar
with Shariah compliant products and they are processed in the
same manner as other securities, as Jersey's laws are broad enough to permit the issue of all types of Shariah compliant instruments.
A private trust company acts as trustee of the family trust (or
trusts) and the directors of that company could include members of
the family and even the family's close advisors acting
alongside professional trustees. That company will often be advised
by a family council or similar body. Private trust companies are
increasingly being used by high net worth private clients, who
prefer to establish their own entities and allow them to act as the
trustee of their family trusts,
rather than transferring assets to a third party professional trustee company.
Due to Jersey's leading reputation for trust expertise,
Jersey trusts appeal to many Shariah investors and they use Jersey
trusts for wealth and succession planning as well as for
charitable and philanthropic purposes. The introduction of foundations to Jersey in 2009 has also proved popular with the Islamic finance community. Foundations can offer high net worth individuals (HNWIs) an attractive alternative to trusts for holding wealth with a structure designed to meet their needs. In addition, foundations can potentially allow greater control than is possible for a beneficiary of a trust.
One of the main reasons that Jersey foundations are often used for charitable and philanthropic purposes is that they can be highly tailored to suit individual requirements. In addition, foundations which comply with the statutory charity test in Jersey can seek to be registered as a charity in Jersey. Having done so that charity can choose to be registered on either the general or the restricted section of the Charities Register. This is an important factor for families looking at setting up Awqaf or Shariah compliant endowments.
As Jersey's finance industry reaches its diamond anniversary there can be no doubt that Jersey is now the best regulated and most transparent it has ever been. It has navigated tremendous winds in recent years and will surely continue to build on its global platform in the future.
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.