Fri, 16/11/2007 - 10:10
For an executive from a Jersey hedge fund administration firm, Gary Clark is remarkable sanguine about the island's launch at the beginning of next year of a new category of funds that come with no regulatory obligation to use any Jersey service provider. But as head of hedge fund services at Mourant International Finance Administration, Clark subscribes to the theory that a rising tide lifts all boats.
The introduction of Unregulated Funds is widely viewed by the island's fund services industry as a move that can for the first time put Jersey on a level playing field with the Cayman Islands as a competitor for the domiciliation of hedge funds and other alternative investment vehicles. But whatever the success of the new regime, there is no guarantee that - directly at least - it will bring any work at all to Jersey firms.
In an increasingly global marketplace, that matters less and less, according to Clark, a former chairman of the Jersey Funds Association. In fact, he notes, the majority of the work carried out by Mourant International Finance Administration in Jersey is for funds domiciled in other jurisdictions.
At the end of June, according to Lipper's latest Jersey Fund Encyclopaedia, Mourant was by far the largest administrator of all funds, both locally-domiciled and foreign, serviced in Jersey, with USD74.5bn in assets - almost three times as much as its nearest competitor. In the past year Mourant has seen its assets under administration grow from USD100bn to USD150bn across its worldwide businesses, with much of that growth in Jersey. And although its business focuses on Jersey domicile alone, the administration business's sister law firm, Mourant du Feu & Jeune, is also the island's leading provider of legal services to the sector as adviser to 873 funds and sub-funds, some 64 per cent of the total.
Clark argues that the fact Unregulated Funds will be able to select administrators wherever they choose promises in fact to benefit Jersey because a requirement to use local providers might overstrain the capacity of the island's administration sector. He and other representatives of the sector believe that a significant number of managers will in fact opt for a Jersey service provider, but the flexibility of the regime means there will be no problems about outsourcing some functions to other jurisdictions if necessary.
'We're all increasingly global in our outlook and in the way we service our clients, so every organisation that has the ability to structure its affairs to carry out certain functions away from the island if they have capacity issues or they have a centre of excellence elsewhere can do so, without creating a huge raft of perceived additional cost from oversight requirements,' Clark says.
'It allows us to respond in a more global way and get round the resourcing issues. It's not just Jersey - there are resources issues in Guernsey, in Luxembourg and in Dublin, everyone's in the same boat. With the worldwide shortage of administration talent, the flexibility of the regime is a helpful thing.'
There is still some concern about whether Jersey is capable of breaking into the ranks of the most important fund servicing centres. Heather MacCallum, an executive director with KPMG Channel Islands in Jersey, says the hedge fund sector has suffered from the fact that business tends to flow to jurisdictions where the industry is most prominent. 'Cayman is still out there as a phenomenal leader, so that's where people go to establish hedge funds,' she says. 'I don't think Jersey has yet broken through that barrier.
'Hedge fund processing and administration is very resource-intensive. We haven't convinced the world yet that we have the capacity to run large-scale hedge fund administration here. The investment it takes in people and technology is huge, and some administrators have to decide whether they are in that game or not. Until they are up and running with several hedge large funds, they have state of the art systems and experienced people, it's hard to convince new clients, and it will be hard for the sector to really take off. But Jersey does have a number of administrators committed to investing in the necessary resources and IT infrastructure.'
Although Jersey has long enjoyed a strong reputation for the domicile and servicing of property funds, it was the launch three years ago of the Expert Funds Guide that put the island on the map as a centre for the alternative fund industry as a whole, and kick-started the growth of the administration business.
Central to the concept of Expert Funds was that many of the due diligence responsibilities previously shouldered by the regulator, the Jersey Financial Services Commission, during the process of authorising new funds would henceforth be undertaken by a licensed administrator. In order to achieve a three-day turnaround period for authorisation applications, on a par with the timescale in some rival jurisdictions, much of the regulatory burden would shift from the product to the service provider.
The success of the Expert Funds regime since then has brought vigorous growth to the administration sector, and with it a wave of corporate activity as new players seek to enter the market by acquiring local providers, such as BNP Paribas's purchase of Royal Bank of Scotland International Securities Services, which was completed in July.
Over the past couple of years the Expert Funds regime has undergone some amendment and updating, and it has been supplemented by the Listed Funds Guide, which offers a similar fast-track approval process for funds destined to be listed on stock exchanges, as well as the Non-Domiciled Funds Guide, which is designed to ease the regulatory process for Jersey administrators to take on funds established outside the island.
'The Expert Funds regime is a huge success,' Clark says. 'Over the past five years, fund assets serviced in Jersey have more than doubled from around GBP100bn to more than GBP200bn. The focus on alternative asset classes is evident and the proportion represented by Expert Funds is quite significant. Clearly the evidence is that when we've given the market something that it likes, people use it.'
There's some debate among administrators about whether the Non-Domiciled Funds regime has enjoyed the same success, with some providers arguing that any regulatory process surrounding the servicing of non-domiciled funds places Jersey at a competitive disadvantage compared with other fund centres.
Clark is generally upbeat about the regime's impact. 'In my business, I mainly look after non-Jersey funds, and making it easier to do that is clearly a good thing,' he says. 'Now we're not double-regulating a fund that's domiciled in another jurisdiction and creating layers of extra regulation in a way that's not attractive to that fund, its manager or its investors. The new regime has definitely had a positive effect.'
David Pirouet, a partner with PricewaterhouseCoopers in Jersey, adds: 'The changes to the rules have made the process of administering non-domiciled funds easier and more straightforward. In the past there were additional regulatory burdens involved in administration of, say, a Cayman fund. Now it is much simpler and we're back on a level playing field with other jurisdictions, which wasn't the case a few years ago.'
Robert Kirkby, technical director at the industry promotional agency Jersey Finance, believes the Non-Domiciled Funds regime may have suffered from unduly high expectations. 'When it was introduced it wasn't expected to double the size of the market, but rather provide a nice add-on that a few people thought was useful,' he says. 'Some people probably had higher expectations of a large inflow of business than were realistic. It wasn't anything more than a light-touch regime for funds domiciled elsewhere.'
Kirkby notes that the rules governing non-domiciled business were adopted in order to protect Jersey's reputation, but believes a rethink could be on the cards once the island's new regulatory regime covering fund administrators is in place. 'Regulation of the service provider could do the job, but at the time we didn't have that - it will only take effect in mid-November,' he says. 'We'll see how that beds down over the next six months or so and what the issues are. There may be teething problems to iron out and that could be one of them.'
Pirouet says the Listed Fund Guide, issued earlier this year has been successful in providing both speed and certainty to the authorisation process. 'It's provided certainty to both local and UK lawyers about how long the process will take and what's required. In addition, from the beginning of this year Jersey's regulation has been recognised by Euronext, which is of benefit to alternative funds. We've been involved with the listing of property and other funds on Euronext, something that has grown significantly in popularity over the past year and a half.'
But members of the industry readily acknowledge that even before the launch of the Unregulated Funds regime, resources issues are never far away. Jersey has long found it necessary to control immigration through a system of housing and employment permits, and while the will is there to help the financial industry attract the skills and manpower it needs, this must be balanced against the capacity of the island to absorb newcomers.
'There have always been controls on housing and on the establishment of businesses,' says Ozannes corporate partner Mark Chambers. 'The States of Jersey has made a political commitment to encourage more people to come to the island who are contributing a lot to its wellbeing. The success of the industry requires economic migration into the island, alongside the training of local residents. But inevitably there are constraints in living in an island nine miles by five that eventually will prove insurmountable simply in terms of sheer numbers.'
These considerations are prompting administrators to focus on the higher added-value aspects of the fund business and to examine where some lower-value, labour intensive functions can be outsourced to offices or third-party providers in other jurisdictions when manpower is cheaper or simply more available. This in turn is increasing pressure on administrators to spend heavily on maximising automation of administrative functions, something that favours big institutions rather than niche players and is probably contributing to the wave of restructuring.
Says Clark: 'We need flexibility to do more outside the island. We'll keep on bringing talented people in. The environment has got much easier in the past couple of years than it has been historically. For the moment it's a benign environment, but it's challenging because, like everywhere else, there is a limited talent pool.'
Inevitably administrators are becoming choosier about the business they take on. 'When you have a lot on in terms of new clients and new projects, and you have a lot of ambitious targets to hit, you become more selective about the way you pitch for business,' Clark says. 'You perhaps don't pitch quite as aggressively as you would if you were looking for your first client.
'You're wanting to make sure you get fees that are appropriate to doing a good job, you're not trying to buy business. Inevitably some work will find a cheaper home elsewhere, perhaps with a hungry administrator that has less business overall, but it doesn't mean that you have no capacity left for new business.'
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