Another vintage year for the Guernsey Funds Industry
An annual review of the Guernsey Funds market, by Appleby Partner, Kate Storey, on behalf of the Guernsey Investment Fund Association
The last twelve months have seen the Guernsey funds industry show its strength and stability during a period of significant international political changes.
The investment fund statistics for the fourth quarter of 2016 were very positive for Guernsey, building further on the previous five straight quarters of growth. For the year since 31 December 2015 total net asset value of funds under management and administration in Guernsey increased by 12.5%, bringing the total to £255.9 billion. There was also a year on year increase of 1.4% in the total number of closed ended investment funds established in Guernsey.
To achieve this growth Guernsey has continued to focus on what it has done best for several decades, including pioneering the use of innovative new products and technologies, whilst meeting the highest international regulatory standards.
Highest regulatory standards
In July 2016, Guernsey’s AIFMD compliant regime received its second unqualified positive assessment from ESMA. In making its assessment ESMA examined factors including investor protection, competition, market disruption and the monitoring of systemic risk, tax information exchange and anti-money laundering measures. The European Commission has not yet finalised its assessment of the ESMA advice on the extension of the AIFMD passport to third country jurisdictions, but Guernsey remains at the front of the queue for when the extension is granted. In the meantime, Guernsey AIFs and Fund Managers continue to have access to the EU markets through the various national private placement regimes (NPPR); those regimes remain unchanged and are working well for Guernsey funds.
Guernsey has been a market leader in introducing a dual funds regime and products such as its Manager-Led Product, so that it is prepared for AIFMD whilst giving optionality for non-AIFMD funds. In doing so, the Guernsey regime offers the funds market certainty now and in the future. Guernsey will continue to innovate and use its ability to legislate quickly to ensure that it is prepared for whatever the future environment is.
Base erosion and profit shifting (BEPS)
Guernsey is an OECD member through its relationship with the UK and is actively committed to the development and implementation of global standards in line with the OECD’s BEPS Action Plans. It considers itself to be effectively, a ‘BEPS-compliant jurisdiction’ – due to Guernsey’s finance sector model and regulatory framework, which through its focus on business substance prevents the Island being exploited significantly for BEPS and ensures equivalent outcomes to those that both the OECD and EU Commission are seeking to secure.
Guernsey’s government has committed to signing the BEPS Multilateral Instrument in order to implement tax treaty-related measures to combat BEPS and has already put in place the implementing regulations for Country by Country Reporting.
20th anniversary of the PCC
Guernsey has a long history of innovation in financial services products. 2017 marks the twentieth anniversary of the protected cell company (PCC), a new form of legal structure which Guernsey pioneered. In such a company shares can be issued in separate cells to shareholders who may be different for each cell and different from the shareholders of the “core” of the PCC. The assets and liabilities of each cell are legally segregated from those of the other cells and the core.
The PCC has great application in the funds industry, for example, using different cells for different strategies. There are clear cost and time savings in using a cell company rather than setting up multiple fund structures.
Cell companies can also be used as “rent-a-cell” platforms to white label to multiple investment advisers who each take a separate cell or cells for their separate fund(s). This is more cost effective for investment advisers than setting up a standalone fund structure and helps new investment advisers build a track record in an already established investment vehicle.
Dual funds regime
Guernsey took the innovative approach of introducing a dual regime for AIFMD whereby Guernsey fund managers can opt in to an AIFMD equivalent regime in advance of the extension of the third country passport, or alternatively remain out of AIFMD compliance where an AIFMD fund is not required (when using NPPR or marketing outside Europe).
Manager Led Product
Building on the interest generated by the dual funds regime in locating fund managers in Guernsey, in May last year the Guernsey regulator (GFSC) introduced the Manager-Led Product. This may be used by Guernsey based managers that are considered AIFMs under the Guernsey AIFMD Rules (rules which are equivalent to the AIFMD regime) and are seeking to market an AIF into a host country under the NPPR. Once licensed by the GFSC the Manager is able to launch new fund structures by simple notification to the GFSC, which will be registered by the GFSC within one business day of receipt. No regulatory rules are applied to the fund structures, only to the Manager, which must comply with the Guernsey AIFMD Rules. Capital may be concentrated at the Manager level. The Manager may request derogations from the AIFMD Rules if acceptable to the host country and the reporting requirements are maintained to the required standard.
The product therefore offers a proportionate risk based level of regulation, maintaining reporting requirements to AIFMD standards. It enables the fast track establishment of fund structures without duplication of regulatory requirements over several entities.
Private Investment Fund
In November 2016 the GFSC launched a new product termed a ‘Private Investment Fund’ or ‘PIF’. The philosophy of a PIF is a close relationship between investors and the licensed manager, who will be responsible for providing warranties on the ability of the investors to assume loss. The number of investors is restricted to no more than 50 legal or natural persons, however, an investment manager acting as agent for a wider group of stakeholders can count as one investor.
The key benefits of a PIF are:
- No information particulars required, significantly reducing cost and processing time;
- Licensing of manager and registration of PIF within one business day;
- No rules applied against licensed manager;
- No custodian required, including for open-ended funds;
- No limit on number of investors to whom PIF may be marketed (in contrast to comparable regimes of other jurisdictions);
- No requirement for PIF to be sub-threshold product for AIFMD.
Guernsey was recently involved in the first commercial deployment of blockchain technology, which is being used in the management and administration of a private equity fund managed by Unigestion and administered by Northern Trust in Guernsey. Blockchain technology allows the fund to transfer ownership stakes and be managed, serviced and audited throughout the investment lifecycle on a transparent platform, accessed via secure means.
Guernsey remains the number one offshore jurisdiction through which to set up funds for listing on the London Stock Exchange markets, offering a proven and expert platform from which to launch into the City.
Earlier this year the Channel Islands Securities Exchange rebranded as The International Stock Exchange (TISE), to reflect its international client base of issuers. As the Channel Islands are outside of the EU, the EU’s Market Abuse Regulation does not apply to securities listed on TISE, which applies its own market abuse rules proportionately to the type of listed product.
Over the last year TISE listed the first regulated bitcoin fund to be listed on an exchange globally, and has seen a resurgence of REITS, reflecting the growing interest in UK real estate since Brexit. As at January this year, more than a quarter of all UK REITS were listed on TISE.
In April this year TISE received recognition from BaFin, the German regulator, meaning that German UCITS can now invest into securities listed on TISE. This demonstrates that the German financial services authorities recognise the role that the British Crown Dependencies play in the flow of global capital.
Items on the GFSC’s agenda for 2017 include:
- development of a manager-led product for managers targeting markets excluding Europe;
- giving guidance on products which are not funds and fall outside regulation in Guernsey. This includes, for example, structures with a single investor or which are closely held or the investors are closely associated; and single asset structures;
- revising the Guernsey regulatory laws to address MiFID II.
Aside from Brexit there is current international focus on the two quite conflicting areas of data protection and public registers of beneficial ownership. Guernsey is responding to ensure appropriate legislation is put in place addressing both, albeit Guernsey funds will not be subject to its proposed Beneficial Ownership of Legal Persons (Guernsey) Law, as they are appropriately covered by the existing framework of disclosure by and to regulatory, tax and police authorities.
Outgoing Chairman of the Guernsey Investment Fund Association, Andrew Whittaker, recently noted, “Guernsey has put in place building blocks post-Brexit and has the skills and nimbleness to exploit opportunities as they arise”. Testament to this is the quality of the fund managers who continue to use Guernsey, such as Permira – whose latest fund recently closed at EUR7.5 billion – Apex and Cinven.
Whatever the future holds, the pedigree of Guernsey’s funds industry puts it in good stead to take advantage of the ever-changing global market.