This stark rise reflects Jersey’s increasing popularity as a funds jurisdiction and, in particular, as a home for funds investing in alternative asset classes, including hedge, real estate and private equity funds, which make up approximately 81% of funds business in Jersey. In addition, the lightly regulated Jersey Private Fund introduced in 2017 also continues to increase in popularity, with over 250 JPFs launched to date.
There are many reasons for the continuing confidence in Jersey: as an IFC. With an increasing global need to demonstrate local economic substance, Jersey, with its 13,000-strong financial sector workforce and well-developed local infrastructure, have the edge over competitor jurisdictions who cannot comply with global substance requirements as readily as Jersey. With the introduction of the Taxation (Companies – Economic Substance) (Jersey) Law on 1 January 2019, Jersey was removed from the EU Code Group Grey List in March 2019.
Notwithstanding Brexit’s continued suppressing influence on activity generally, the weak pound is still attracting market participants using Jersey as a base for rest-of-the-world transactions and as a 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 well-established patterns and remain as companies, limited partnerships or unit trusts. The regulatory oversight ranges 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 GBP150 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 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 base erosion and profit-shifting (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 and reduced compliance burdens, it is more and more important that funds and fund managers can demonstrate substance in their jurisdiction of tax domicile. This means that there is also more importance placed 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 Taxation (Companies – Economic Substance) (Jersey) Law 2019, which led to the Island’s removal from the EU Code Group Grey List in March 2019. Under the law, those who carry on certain specified activities (including fund management) will need to demonstrate greater local resources, and that they carry out core income-generating activities in Jersey. The requirements imposed by the legislation are in line with those which have been imposed globally in all major competing IFCs, and service providers and professional advisors on the Island are well positioned to ensure compliance is as painless as possible for those who may previously have lacked economic substance.
As a “substance” jurisdiction, Jersey 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.
The year ahead: A glimpse into the future of Jersey funds for 2020/21
Moving into 2020 and beyond, funds in Jersey 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 EU markets using the benefits of tax-neutral vehicles and expertise without needing to worry about regulatory or reputational concerns.
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 as a stable route for investors across both regions. Jersey is becoming an ever-more attractive platform for European-focused funds.