Isle of Man flexes its competitive muscles
The fund services industry in the Isle of Man has been active for well over a decade but for much of its existence it has been overshadowed by other areas of the financial services industry on the island, while in international terms it has been perceived as a small niche business of limited interest to much of the burgeoning global alternative investment sector. However, that perception is no longer valid.
Over the past few years, the government's financial promotion body, Isle of Man Finance, has undertaken a series of initiatives in collaboration with the industry, through the Fund Managers Association, to raise the industry's profile, especially among the key gatekeepers for global funds business among the London law firms. In addition to regular industry roadshows and a presence at international funds conferences, Isle of Man of Man Finance recently established a permanent London office. This is particularly important, according to industry players, because the growth of the global funds industry is not only providing increased opportunities for new business but is placing a strain on the biggest hedge fund administration centre in Europe, Dublin, in a way that turns a spotlight on facets of the fund servicing business in which the Isle of Man has an appreciable competitive advantage.
Competition for alternative fund administration business has become intense as it has grown from a small and relatively specialised activity into a mainstream field into which many of the world's leading banking groups have now moved to offer administration and custody services to the estimated USD1.2trn in global hedge fund assets. As well as the Isle of Man, other jurisdictions that are now seeking to challenge the dominance of the established centres of Dublin and the Cayman Islands include Jersey, Guernsey and Luxembourg, with Gibraltar also looking to establish itself in the market.
The Channel Islands, which have both recently revamped their fund regulation structures, are particularly keen competitors, as in other areas of the offshore financial services industry. 'There's always been competition between the islands in different areas, and there always will be, especially as they have to respond to international initiatives such as the OECD harmful tax campaign and the European Union's Savings Tax Directive,' says PricewaterhouseCoopers investment management partner Mike Simpson. 'Recently other jurisdictions have seen an opportunity to take business away from Cayman, and all the islands want a piece of that market.' According to Isle of Man Finance business development manager Brian Donegan, the island has an important story to tell about the cost benefits it enjoys over rival administration centres, as well as a much greater ability to scale up quickly in response to increasing levels of business.
He says: 'If you're looking to build a scalable business, as many of our prospects do, they look at the island in terms of its capacity to grow as well as its cost base, and the other factors involved in bringing people in here. 'For a start, there is a simple work permit system - we had 10,000 work permit applications last year, including 5,000 in the financial services sector, and fewer than one percent were turned down. A detached house here costs about £300,000, compared with our estimates of about £600,000 for the Channel Islands, £750,000 to £800,000 in Dublin and £1.2m in Cayman.
'Meanwhile, the average Cayman salary for a fund accountant is around £55,000, and in the Channel Islands and Dublin about £40,000, whereas here it's about £30,000. Yet at the same time we estimate that the staff turnover rate in the Channel Islands is around 30 per cent, and Dublin is suffering from a rate of 50 per cent, but in the Isle of Man we estimate the rate to be between seven and 10 per cent. It's a huge difference when you consider how important it is in the fund industry to attract the right people and retain them.'
Andrew Ashworth, managing director of Abacus Financial Services, the island's thirdranking administrator after HSBC and Fortis, attributes the strength of new business flowing into the jurisdiction to a new perception of the Isle of Man among its key intermediaries, London-based fund lawyers. He says: 'The island is thriving, with the establishment of new administrators and strong asset growth stemming from fund performance, inflows of new money, the launch of new funds and the transfer of existing ones.'
In the past five to 10 years, he believes, the jurisdiction has been accepted for the first time as a serious option for administration by the global funds industry. 'It's partly down to the way the island has been marketed, but also the sheer fact that it's got critical mass,' he says. 'Isle of Man Finance has its own London office, and all three Isle of Man law firms that specialise in funds have operations there too. All these efforts are starting to pay dividends with a recognition that wasn't there in the past.' Both industry and government expect dividends to flow from a reform of the island's tax structure formalised in April. This will give most businesses a zero rate of corporate tax (something already enjoyed by the funds sector since 2003), apart from the banks, which will pay a 10 per cent rate, while wealthy individuals who are taxpayers in the Isle of Man will in future benefit from a tax cap of £100,000 on their worldwide income.
This latter measure in particular should bolster efforts to encourage fund managers to move themselves and their operations to the island. Says Simpson: 'There is quite a high level of interest in this, and there have been talks with managers as well as administrators about moving operations to or setting up to the island. We're an hour away from City Airport, which is quicker to reach than from many parts of London.' Says Ashworth: 'We're never going to be Mayfair, where there are people who are wealthy in their own right, and given a choice will stay in London. However, there are already a handful of managers, some of them well known like Charlemagne Capital and Laxey Partners. I don't think we will ever be looking to attract many hedge fund startups and their trading teams - instead it is more suited to middle and back office operations. However, there will always be a certain style of manager who doesn't want the hassle of commuting and who appreciates the freedom and security that the island offers.'
Caledonian Fund Services managing director Gordon Wilson expects the tax changes, along with the increasing flow of business, to attract more administrators to the Isle of Man. He says: 'A further increase in the number of administrators would add to the island's credibility. A lot of people have looked at the idea and thought they couldn't build a large enough business to make it work. But I believe that as capacity issues grow in other jurisdictions such as the Channel Islands, where it's more difficult to bring people in, get them settled and accommodate their families, the Isle of Man will emerge as an alternative.' Richard Vanderplank of leading law firm Cains believes that another impending legislative change will also boost the island's position. 'We have new companies legislation about to hit the books as well, which provides for a corporate vehicle that is extremely flexible and has a lot of the characteristics of the International Business Company familiar in the warm water jurisdictions.
'We hope it will prove useful as a structure for funds. The legislation is designed to be extremely flexible from an administrative perspective while also meeting international obligations. It's been vetted by a lot of different people on and off the island and received a clean bill of health in that respect, as well as from a legal perspective.'
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