The fund industry that came in from the cold
Long overshadowed by the sheer scale of the islands' corporate domicile and administration business, the funds industry in the British Virgin Islands - mostly consisting of hedge funds, along with a couple of hundred funds available to a more retail market plus an indeterminate number of private equity and property funds that do not cross the regulatory radar - is showing renewed signs of vigour.
At the end of the first quarter of 2006, the latest period for which the BVI Financial Services Commission has published statistics, the jurisdiction had a total of 2,216 active funds, comprising 1,410 professional funds, which are restricted to high net worth and institutional investors, 806 private funds, which distribute shares on a private basis and have fewer than 50 investors, and 200 public funds, which are available to a wider market directly and through intermediaries by virtue of having a lower minimum investment than professional funds.
The strongest growth has been in professional funds, with the number of new funds established growing by 46 per cent from the same period of the previous year. The newly-regained popularity of BVI funds has enabled the jurisdiction to leapfrog Bermuda to become the second-ranking offshore fund domicile, albeit still far behind the Cayman Islands, which boasted a total of 8,522 active funds at the end of March this year.
The growth of the funds industry, and the enduring strength of the corporate domicile market that encompassed more than 710,000 companies at the end of the first quarter of 2006, reflect not only the BVI's competitiveness in terms of skills and costs but also its ability to maintain a good reputation worldwide, according to Baker Tilly audit director Nigel MacPhail. 'We're standing up very well indeed,' he says. 'Whenever anything has been asked of us, we've handled it. We've never been blacklisted - we're one of the cleanest offshore jurisdictions in the world.' Humphry Leue, operations director of the BVI International Financial Centre, the industry promotional agency, points to the jurisdiction's ability to attract top professionals from around the world. 'More and more people are looking to move to the BVI as a place to work and to live, which they might not have done 20 years ago,' he says.
'If you look at the factors behind the economic strength of the territory and the fact business has been booming, there's very low crime, virtually no unemployment, and a good education system. We've not only managed to attract the numbers we need to support the industry but to attract the right calibre and expertise. Users of BVI products and services are comfortable with the levels of service, knowledge and expertise they are getting.'
Expertise in the legal profession in particular is arguably the single most important factor in the re-emergence as a fund domicile of the BVI, once the offshore world's leader, after years in the doldrums. Virtually all industry participants and observers point to the development of a vigorous legal sector, which now includes not only Harney Westwood & Riegels, long the leading local firm active in international financial services, but five members of the so-called 'offshore magic circle': Walkers and Maples & Calder from Cayman, Conyers Dill & Pearman and Appleby from Bermuda, and Ogier from Jersey.
These six firms have established longstanding relationships with top onshore lawyers in the main centres that provide referrals of fund business, London, New York and Hong Kong. In several cases they have offices of their own in those cities as well as in Dublin, another funds hub, or regional sources of business such as Dubai and Montevideo.
Their presence is both a reassurance to clients who were once wary of doing business in a jurisdiction with a narrow choice of legal service providers, and a
source of intellectual capital that is enabling the BVI to offer a much more sophisticated range of transactions, structures and services, according to John Greenwood, who recently moved from Appleby to become a funds partner with Withers.
'Lacking service providers was the disadvantage of the BVI for a number of years until law firms such as Maples & Calder, Walkers and Appleby arrived,' he says. 'It has really boosted the number of referrals, and the type of work coming in has become more complex. Previously the jurisdiction didn't have sufficient people who could speak the same language as the lawyers in New York or London, or indeed Hong Kong. Now the intellectual capital that was severely lacking is not just in Tortola, but spread among other jurisdictions where lawyers are practising BVI law.' The industry has also benefited from recent changes to the legislation on corporate structure that have come into effect over the past two years to replace international business companies with BVI business companies, according to Walkers managing partner Heidi de Vries. 'With the BVI Business Companies Act there are now effectively seven different types of company we can incorporate.
'We can now offer segregated portfolio companies, which allows us to compete effectively with other jurisdictions that offer protected cell structures. There is also growth in the establishment of investment managers, a popular route especially for start-ups that want to have not only their fund but their investment management firm based in the BVI.' At the end of March 2006, 436 investment managers were established in the jurisdiction.
Conyers partner Robert Briant argues that the BVI's legislation and regulatory structure makes the BVI if anything a more attractive funds domicile than Cayman. He says: 'The BVI Business Companies Act is fundamentally better legislation. We recently merged two very large funds with similar strategies, a Delaware-style merger which you cannot do in Cayman. It is the corporate statute that makes most sense in areas such as capital and par value, and has the best of the new corporate features like continuation, merger, consolidation and protected cell structures.
"The other element is the Mutual Funds Act and its distinction between private, professional and public funds - so simple and straightforward that Cayman has considered copying it. The other factor that makes BVI funds so successful is that there is no requirement for a local administrator or for a local audit sign-off, which Cayman does require. And the regulator is quite responsive with a turnaround time of 48 hours for a properly structured professional or private fund with a functionary in an acceptable jurisdiction.'
Members of the BVI financial services industry are also happy to acknowledge that an important additional consideration is cost. 'The BVI remains competitive on cost,' says Robert Hirst, head of banking at VP Bank. 'In the funds area, a whole range of charges for set-up, legal fees and registration are cheaper here than in Cayman, and perhaps also other jurisdictions such as the Channel Islands. Cayman may enjoy brand loyalty for funds, but if clients start to look at expense, they may well consider the BVI as well.' However, there is concern lest growth in areas such as fund administration starts to push staffing costs higher and add to personnel turnover, which many industry members say is on the increase. While most firms are making extensive efforts to encourage the professional development of local people, for example by encouraging them to acquire accounting qualifications, there is a recognition that the need for expatriates and their specialist skills will not eliminated in the foreseeable future. 'When jobs are available, the priority is always to put a BV Islander into the role, but when we need additional services and people who can bring in other skills, it means applying for work permits,' says DeVries. 'It's quite a long drawn-out process that can take a few months, but the system is improving. I don't think firms are suffering because they can't get the people they need.'
Mathieu Santerre, who has just moved from Fortis's fund administration operation in the BVI to the firm's New York office, says the relatively recent emergence of the administration sector means that it is difficult to find qualified fund accountants in the local market. 'In the past, the BVI financial sector was built around trust companies, so many local people studied to be corporate lawyers,' he says. 'It's relatively easy to find well-qualified local people for shareholder servicing, but for fund accounting most people are coming in from abroad.'
Finding qualified people interested in moving to the BVI may not be difficult. More people are looking to travel as part of their career, De Vries notes, and 'a spell working on a Caribbean island is attractive to many'. Deloitte managing partner Mark Chapman says that even though there is a global shortage of qualified accountants, 'we probably have one CV coming through each day from within Deloitte. And we're always focusing on improving the local talent pool. We ensure that all the people we hire become qualified accountants - that's a prerequisite for joining the firm here.' However, some firms say the problem is a bar to taking on certain kinds of work. At Equity Trust, which is gearing up its fund services business globally, much of the work taken on by the BVI office is farmed out to other jurisdictions such as Luxembourg. Says director Miles Walton: 'The big issue here is getting specialist staff, and despite all you hear, read and see, for people down here to keep the staff they have got is quite challenging.
"There are two issues at play. There's the local market, which is quite aggressive, and people move fairly frequently. Meanwhile expatriate staff tend to be transitory by nature and some only come here for two or three years. It's still relatively cheap in the BVI, which is why the industry is still competitive, but the reality is that people who come here from the Channel Islands are probably taking a reduction in salary, especially when sterling is so strong.' Despite the generally upbeat outlook, there are some complaints within the industry that on occasion new legislation is sprung on the industry or pushed through faster than some practitioners would like, although it is acknowledged that eventually new legislation largely reflects the concerns of the private sector.
Law firms note that certain provisions of the Insolvency Act, which introduced the notion of administration, were not put into effect after it was pointed out that that this would deter business reliant upon secured lending. The firms hope that a 'whistleblower' provision in a planned revamp of the funds legislation, which would require a fund's proposed authorised agent to report any breaches of statute or of the fund's articles of association to the regulator, will meet a similar fate.
It has also been noted that at times the BVI's company registry has been unusually slow in issuing corporate documents, although this has been attributed to the problems of accommodating two systems during the period of overlap between international business companies and BVI business companies. And some lawyers complain that the enforcement division of the Financial Services Commission can be heavy-handed in their dealings with clients, although others say that the occasional disagreements with the regulator are comparable with what happens in other jurisdictions.
Members of the industry are keenly awaiting the final outcome of the revamp ofthe funds industry legislation. Says Robert McIntyre, managing partner of Maples & Calder: 'I'd particularly like to see a manager exemption on the lines of that in Cayman, whereby managers of funds targeted at sophisticated investors don't have to go through a full licensing exercise. In the BVI you can obtain a general management licence or a restricted management licence, but the time it takes can be quite frustrating for clients, especially for a professional fund.' Ruth Chadwick, director of investment business at the BVI Financial Services Commission, enjoys the confidence of the industry for her ability to balance its commercial needs with the requirement to
assure sound and effective regulation. For example, few practitioners express indignation with the recent introduction of a system of administrative penalties designed to ensure, for example, that mutual funds pay their fees on time, or indeed at all. 'The penalties apply to any breach of legislation or regulation,' Chadwick says. 'It will hopefully encourage a more professional approach. In my view, non-payment of fees is indicative of a sloppy attitude.' One of her major projects over the past three years has been the Securities and Investment Business legislation that is planned to supersede the 1996 Mutual Funds Act. Says Chadwick: 'The new act will encompass all the existing mutual funds legislation and go beyond it to cover some intermediary markets such as segregated portfolio management and the giving of investment advice, broker dealing activities, marketing and the securities market. We
hope it will add yet more value to what the BVI can offer.'
The philosophy behind a complete overhaul of the legislation rather than simply updating the existing law, she says, is to make rule-making more flexible. 'We want to make the whole process a lot easier by working toward a set of guiding principles in the primary legislation, and then enacting the details in a series of regulations, which are a lot easier to amend when needed than if they were part of the primary legislation. We are also trying to move toward a series of codes of practice for different segments of the industry, which again won't require the burdensome legislative process to change.' The Securities and Investment Business legislation is not expected to result in any change to the system of professional, private and public funds ('Why fix something that ain't broke?'), but is likely to introduce an audit requirement for private and professional as well as public funds. 'Most funds these days have an audit anyway, so it won't be a particularly burdensome requirement to move to an audit requirement for all funds,' Chadwick says.
Private and professional funds will also be required to submit offering documents to the egulator, whereas currently a prospectus is only required for public funds. 'We learn so much from that offering document that it's beneficial to us as a regulator,' she says. 'In its absence we know very little about the funds we regulate, which exposes us to huge risks. Again, because funds already prepare these documents it won't be difficult or burdensome to supply them to the regulator.'
The proposed authorised representative is an individual, who will have to obtain a licence and meet fit and proper criteria, who can act on behalf of the fund. 'The funds may be constituted here, but they are not physically based here,' Chadwick says. 'Management and administration may be carried out anywhere around the globe. The authorised representative provides a nexus in the BVI. We see this as a building block that will enable us to have much more knowledge and information at our fingertips.'
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