In comparison, figures as at Q3 2017 (30 September) showed a total of 1,143 funds with an aggregate of GBP 265 billion net assets under management, placed in 2,026 separate pools.
Apart from normal fluctuations typical in the funds market, these figures indicate that while the number of funds and pools has slightly diminished over this period, assets under management have increased by GBP 31 billion. This trend is consistent with the pattern we saw last in Jersey as well as the wider market. This shows Jersey’s fund-friendly regulatory approach, including the introduction of a new private fund regime last year, continues to help push investment and maintain solid investor confidence despite prolonged global economic and political uncertainty.
There are many reasons for the continuing confidence in Jersey: as an IFC, the island has been economically and politically stable for decades and in 2018 Jersey was awarded “Best International Financial Centre 2018” at the Wealth Briefing GCC Region Awards 2018 and “IFC of the Year” at the CityWealthMag IFC awards for the sixth year running. These awards acknowledge the leading role Jersey has carved out for being close to the pulse of upcoming regulatory changes, such as the OECD’s “Base Erosion and Profit Shifting” framework (BEPS), the updated FCA rules on non-EEA AIFMs under the Alternative Investment Fund Managers Directive (AIFMD), the overhaul the private fund regime on the island and its expansion into the Dubai International Finance Centre by Jersey Finance opening offices there.
While Jersey still ranks behind certain other IFC fund jurisdictions such as Ireland, Luxembourg and Delaware with regard to number of funds or assets under management, the island remains a very popular choice for real estate, hedge and private equity funds. Jersey has been commended for its proactive stance in adopting global compliance standards by the European Securities and Markets Authority (ESMA), the OECD, EU and the IMF as a well-regulated IFC. The ESMA has confirmed on a number of occasions that there are no objections to Jersey being granted the AIFMD “passport”, allowing Jersey funds to conduct business in all EU member states, but, primarily as a result of Brexit, final approval is still awaited. This excellent reputation becomes increasingly important to fund managers, promoters and investors, who wish to ensure that their fund is domiciled in a business-friendly jurisdiction, which not only protects and grows their assets, but also protects their reputation.
In addition, BEPS and AIFMD have increased the importance of substance for funds and fund managers, with much more need to demonstrate an economic reality where the relevant expertise and people who manage the fund and hold the assets are based locally. This gives Jersey, with its 13,000-strong financial sector workforce and well-developed local infrastructure, an edge over competitor jurisdictions who have adopted more of a brass-plate approach, and who may not be able to comply with substance requirements as readily as Jersey. In November 2018, the states of Jersey published draft legislation addressing the substance concerns raised by the EU’s Code of Conduct Group for Business Taxation which is expected to be effective from 1 January 2019.
Notwithstanding Brexit’s suppressing influence on activity generally, the weak pound has led to a significant increase in the number of market participants using Jersey as a base for rest of world of transactions, in particular those based in the US. An increasing number also see Jersey as a stable launch point to access investors in the UK and EU member states. As Jersey is not part of the EU and its access to these markets is based on strong existing bilateral relationships entirely independent from the Brexit process, Jersey can offer greater certainty of access to investors in both the EU and the UK post-Brexit – whatever the outcome.
Fund formation and finance
Save for the follow-on from the reform of the private fund regime introduced in 2017 (and the recent developments in substance requirements (see below), there have been no substantial changes to the regulatory regime impacting fund formation, lending or security. The most commonly used fund structures in Jersey follow the well-established patterns and remain as companies, limited partnerships or unit trusts – the regulatory oversight ranging from unregulated eligible investor funds, moving through lightly regulated private funds to fully regulated retail collective investment funds.
Security is taken under and governed by the Security Interests (Jersey) Law 2012 (the 2012 Law). In force since January 2014, the 2012 Law is a stable and well-trodden security regime specifically designed for the needs of financial services. Perfection requirements for a Jersey law-governed security depend on the collateral and range from possession of the certificates representing certificated investment securities, control of deposit or portfolio accounts by way of notices and acknowledgments with the relevant account bank or custodian to registration on the public Security Interests Register (SIR), which will perfect security over any collateral and is the most common, and highly recommended, means of perfection.
A registration fee of currently GBP 150 is payable for each security document registered on SIR. No other stamp duties, taxes or registration fees are due in Jersey for the taking and registration of security.
In a fund finance context, lenders commonly take as transaction security:
In general, there is no legal or regulatory impediment to lending to funds in Jersey. The fund manager and directors/controllers of the fund can agree limits and restrictions in the constitutional documents of the fund and the investment manager agreement, if they so choose. In particular, the ability of the fund manager to borrow additional sums or grant security over the fund’s assets is an important commercial point to consider.
There are no regulatory restrictions on borrowing for Very Private Funds, funds under the Private Placement Funds Regime, Unregulated Funds or new Jersey Private Funds.
For slightly more regulated Expert Funds, Listed Funds and Eligible Investor Funds, no legal restrictions are set in stone but the JFSC reserves the right to additional scrutiny if the fund is permitted to borrow money in excess of 200% of its net asset value.
For open-ended certified collective investment funds offered to the general public, which are more heavily regulated, the JFSC provides guidance on borrowing restrictions of the following fund type:
Developments in the Jersey fund landscape
In light of BEPS, the changes in AIFMD reporting and the findings published by the EU’s Code of Conduct Group for Business Taxation, the funds world (not only in IFCs) sees a continued focus on substance. In order to take advantage of appropriate tax benefits, regulatory exemptions or reduced compliance burdens, it is more and more important that funds and fund managers can demonstrate substance. This means that there is also more importance on what the economic reality of a corporate structure looks like, where fund managers, administrators and key decision-makers are based, where economic value is being created and to whom relevant staff report.
This has been addressed in Jersey most recently by the introduction of the Draft Taxation (Companies – Economic Substance) (Jersey) Law 2018, which came into force on 1 January 2019. The law, and accompanying guidance to be issued in due course, sets out the requirements that will be imposed in Jersey to ensure the concerns of the EU’s Code of Conduct Group for Business Taxation are met and that Jersey continues to comply with the highest international standards.
Whilst detailed practical guidance is still awaited, it is clear that all Jersey tax-resident entities must be directed and managed in Jersey, which requires:
- the majority (but not all) board meetings of suitably experienced and qualified directors in Jersey at adequate frequencies, given the level of decision-making required;
- a quorum of the directors to be physically present in Jersey at these meetings;
- minutes recording the strategic decisions made at these meetings; and
- all company records to be stored in Jersey.
In addition, those who carry on certain specified activities (which include fund management business) will need to demonstrate greater local resources, and that they carry out core income-generating activities in Jersey. The nature of the core income-generating activities required in each case are set out in the legislation but detailed practical guidance is still awaited. As a guide, and having regard to the level of fund management carried on in Jersey, fund managers will need to demonstrate that:
- they have an adequate number of employees in Jersey;
- they have adequate expenditure in Jersey;
- they have adequate physical assets in Jersey; and
- the business undertaken in Jersey includes;
(i) taking decisions on the holding and selling of investments;
(ii) calculating risk and reserves;
(iii) taking decisions on currency or interest fluctuations; and/or
(iv) hedging positions, preparing reports and returns to investors and the Jersey Financial Services Commission, or any body or entity with equivalent functions relating to the supervision or regulation of such business.
It is important to note that many of these functions and requirements can be outsourced to local service providers and that only some, not all, of the requirements imposed on the activities of the business need to be undertaken in Jersey.
It is also worth mentioning Article 82 AIFMD, which aims to curb the use and abuse of letterbox entities: it is more important than ever for alternative investment fund managers to retain staff of sufficient experience, seniority and decision-making power to conduct the business of running the fund successfully. Senior management functions should not be relinquished to other decision-makers, wherever they are based.
It is also vital that any amount of delegation the fund manager may deem appropriate is not so much that it could be argued the fund manager has “by a substantial margin” divested itself of the key functions which make it the fund manager.
As a “substance” jurisdiction, Jersey’s has the necessary manpower, expertise and regulatory flexibility to move ahead of other offshore IFCs and benefit from the greater difficulty other IFCs may have in complying with their obligations. However, while the regime in Jersey may attract higher-quality investors and fund managers with a large focus in Europe, there are inevitably others, not interested in accessing European markets or concerned about good corporate governance, who chose to relocate to a “less substantial” jurisdiction.
The year ahead: A glimpse into the future of Jersey funds for 2019/20
At the risk of repeating what has gone before, moving into 2019 and beyond funds in Jersey (if they aren’t already) will increasingly have to be mindful of where their key decision-makers are located, risk-management takes place, assets are held and employees and management reside. It is also thought that Jersey as a reputable “substance jurisdiction” will become increasingly attractive to investors who wish to access the EU markets using the benefits of tax-neutral vehicles and expertise without needing to worry about regulatory or reputational concerns.
President Donald Trump’s roll-back of certain requirements under the Dodd-Frank Act in May 2018 may have led to some advisers of private funds no longer being required to register with the Security and Exchange Commission, but this has not had an appreciable effect on the Jersey market to date. It is unclear whether Jersey may feel the changes in time but, given the importance of substance moving forward, those operating in Jersey will be working to a higher standard in any event.
At the time of writing, the final outcome of the Brexit referendum is no clearer than it was back in 2016. While Jersey is neither part of the United Kingdom nor the EU, it enjoys close links with both and, whatever the outcome, will be recognised a stable route to investors across both regions. While those with no interest in raising funds in Europe may choose other jurisdictions in the face of increasing substance requirements, for those committed to Europe, Jersey is becoming an ever more attractive platform.