Harwood report promises a fund regulation revolution
Guernsey is on the brink of what many industry professionals believe may be a revolution in the way funds are authorised and regulated, following the publication - expected imminently - of a report from a working party led by leading Guernsey advocate Peter Harwood. Although full details of the report have not yet been released, it is understood to put flesh on concepts that members of the industry have been discussing for some time.
With members of the government and officials from the Guernsey Financial Services Commission having taken part in the deliberations of the working party Harwood led, their endorsement of the recommendations is seen as all but a formality, and some observers believe the measures could be enacted into law as early as this autumn.
Says KPMG partner Neale Jehan: 'We hope that what will come out of the Harwood report will be a completely new regime that will leap Guernsey close to being the pre-eminent offshore jurisdiction. There is general support for the fact that we need to change the regime, so everyone's waiting for the report to arrive and ready to debate it.' Ernst & Young partner Peter Franks argues that the proposals contained in the report will contribute to 'a phenomenal step change in the perception of Guernsey' over the next 12 months that will build upon the island's image of being innovative and open to new ideas, underlined by the introduction of the QIF regime last February and other legislation over the past year.
Says Franks: 'The Harwood report stems from a government-led initiative around 12 months ago to look at the whole regulatory and legal framework and identify the changes that would be required to encourage the future growth of Guernsey. That means that a lot of the existing legal framework will be pushed aside and replaced by new frameworks that will encourage business to flow here.'
At present the report is being digested by members of the industry and the political authorities. Says Guernsey Finance chief executive Peter Niven: 'The report's recommendations will go a long way toward changing the way we regulate funds in the Bailiwick, and will provide another layer of opportunity on which the industry can capitalise, on the strength of the momentum it has gathered over the course of the past 12 months.'
'The industry itself sees this as a great opportunity. Certainly by September, when we hold our annual funds conference in London, we'll have started down the road to implementing the Harwood recommendations. That will be an ideal time to showcase the industry.'
It is understood that a key proposal is to create a distinction between regulated and registered funds. Regulated funds will consist of traditional Ucits-type funds as well as Guernsey's existing class B schemes, which are frequently used for alternative investment funds. These funds will be required to have their administration carried out in Guernsey, and their promoters and managers will be subject to full due diligence by the GFSC when the funds are set up.
By contrast, registered funds domiciled in Guernsey can have their administration performed in other jurisdictions. This regime is similar to the Qualifying Investor Fund structure in that once the administrators have notified the regulator that they have satisfactorily carried out due diligence work, the fund will be free to do business. Observers say the distinction between regulated and registered funds mirrors the current different treatment of closed-ended and open-ended funds, with the latter subject to a much higher degree of regulation. However, that distinction would disappear under the Harwood proposals by combining the Control of Borrowing Ordinance with the Protection of Investors Law into a unified funds law.
By contrast with other jurisdictions that have enacted separate pieces of legislation for each type of fund, such as retail funds, private equity and property, Harwood and his colleagues have taken the view that simplicity is the best approach, advocating a single law and providing regulatory exemptions to different types of fund through schedules to the legislation.
The proposed structure will be revolutionary, industry members believe, because it will 'collapse totally' the involvement of the regulator in the authorisation process. Instead of waiting six weeks or even six months for regulatory approval, they say, fund promoters will be approved to start doing business as soon as their application has been submitted by the administrator to the GFSC.
This change is a vital one for Guernsey because it brings the island into line with rival jurisdictions such as the Cayman Islands that have benefited from a fund approval process that takes as little as a couple of days. The principle of an accelerated approval process was first introduced with the QIF regime last year, but the Harwood proposals would extend it to other types of fund with fewer restrictions on whom they can market to. Similarly, the Harwood working party is thought to recommend that administrators should be able simply to notify the commission that they are taking on non-Guernsey funds, ending the requirement for them to seek permission to do so.
The report is also expected to propose bringing the rules into line with standard industry practice by allowing the safekeeping and oversight roles of a fund's custodian to be split. This would enable custody to be performed anywhere in the world as long as a custodian in Guernsey was responsible for ensuring that the fund's assets were in place. The Harwood report is one of a number of initiatives that aim to improve the competitiveness of different area of Guernsey's financial services industry. A working group for the fiduciary sector has already published proposals that are set to introduce the civil law concept of foundations into Guernsey law, in a symbolic counterpoint to Switzerland's adoption last year of the common law concept of trusts.
Rapid action to implement the Harwood recommendations is expected, since representatives of the industry, the regulator and the government have already signed off on the proposals within the working group, and according to some estimated it could all be implemented into law by October. With good ideas copied swiftly in the offshore world, time is of the essence. Says Franks: 'There's no point in putting your cards on the table and waiting for someone to overtake you.'
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