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Ross Munro, partner, investment funds & regulatory, Harneys

Service providers reap dividends from focus on emerging markets

By James Williams – It seems apt that as this report assesses how the BVI has evolved as a jurisdiction over the last 10 years as the islands’ financial regulator, the Financial Services Commission, recently celebrated its 10th anniversary.

Since the Financial Services Commission Act was passed in December 2001, the Commission has worked hard to police the financial system under its motto of “Vigilance, Integrity, Accountability”. It now employs 140 people and continues to evolve. May 2010, for example, saw the introduction of the Securities & Investment Business Act, replacing the Mutual Funds Act. Although it hardly reinvented the wheel, what it did do was help clarify the FSC’s aims, adding another layer of credibility to what was already a well regulated and cost efficient funds domicile.

Looking at BVI’s service provider infrastructure, it is well represented in the legal, administration and accounting/auditing space, but there are gaps: most notably, the fact that no universal banks or global custodians operate there. In today’s uncertain economic climate that’s unlikely to change any time soon. Nevertheless, it’s a missing cog and one that the BVI needs to do more to address: indeed, one of the criticisms levelled at the BVI is that it doesn’t promote itself well enough.

“The positive story of the BVI is not being told enough,” comments
David Bateman, Head of Fund Services at Conifer Fund Services BVI.
Ross Munro (pictured), partner, Investment Funds & Regulatory at law firm Harneys, adds: “The lack of a global bank does contrast us with the Caymans. It leaves a gap. Also, it leaves us short of people wanting to sell the jurisdiction. A globally recognised bank with an interest in promoting BVI products would certainly be beneficial.

“Having said that over the seven years I’ve been in the BVI its fund services infrastructure has come a long way. The arrival of the large Cayman law firms during that period has driven the market forward. There are five or six credible law firms here capable of doing funds work so there is genuine choice.” Harneys has been operating there for 50 years and is the original BVI law firm.

Simon Schilder, a partner at law firm Ogier, adds: “There’s been
significant development with regards to law firms. In addition to Ogier, Appleby, Maples & Calder, Walkers have arrived and we’ve also got a couple of new firms about to arrive imminently – Mourant and Bedell Cristin (who’ve just merged with BVI firm Barker Adams).”
Collectively, these firms are known as the offshore “magic circle”. To put things into context Helene Anne Lewis, Senior Partner at law firm SimonetteLewis adds: “There has been a 50 per cent growth in the number of law firms over the last 10 years. Today, there are approximately 35 law firms and some 400 lawyers operating out of the BVI. Our legislation is sophisticated and ahead of the curve. Several senior UK Queen’s Counsel are admitted to practice here and the BVI is highly regarded as a litigation forum.”
Schilder, however, is disappointed that the BVI hasn’t managed to attract larger fund administrators, even though the fund administration community is populated with a number of niche, independent firms that he says “still have an important role to play within the funds industry”.

One of the islands’ biggest administrators, with AuA of USD3.5billion, is Folio Group. Incidentally, like the FSC, it too has just celebrated its 10th anniversary (September to be precise). When it opened there were only a couple of other fund administrators on the islands – Hedge Fund Services (later bought by Fortis Prime Services) and ATU Fund Administrators - according to Daniel Cann, speaking from the firm’s Panama office which he heads up as Managing Director and Group Marketing Director.

“An example of another successful fund administrator that has opened offices in the BVI is Conifer Fund Services who are our main competitor. Also, a number of law firms have tried their hand at fund administration with varying degrees of success,” says Cann.  

Folio BVIs’ Corporate Director, Calum McKenzie, has mixed thoughts on the islands’ infrastructure. Whilst he concedes there’s been huge growth in the quality and number of service providers, he doesn’t believe this is necessarily reflected in fund administration. “There are some new firms here but none of the major names have moved in.”

Drake Advisors is an independent administrator with a focus on emerging markets. One of its key client bases is South Africa. The firm has been operating out of the BVI since 2008 and has 12 staff, prior to which it did administration under its sister entity, Osiris which was established in the BVI in 1999.
Executive Director Nicolaas Faure hasn’t noticed any obvious increase in service provider levels over recent years. In his opinion they’re very good but have essentially stayed “on par”. “When I went to the BVI I was surprised by the high level of service. If you consider fund auditing I wouldn’t say the guys go into a forensic level of detail but certainly the SAS 70 standard is well known by all the auditors in the BVI,” comments Faure.
Part of Drake’s philosophy is to attract clients that can’t necessarily afford to be in the Caymans, be they existing or new managers. With cost concerns at the top of people’s agendas right now, the BVI is well placed to capitalise on its ability to offer well-regulated funds and licensed managers - which investors increasingly want to see – at competitive prices.
As Faure explains: “If regulation is high on a manager’s agenda we would advise them that Cayman may be a better fit – it’s well regulated but comes with a bit of a price tag. If regulation is low on a manager’s agenda we advise them to use Anguilla where things are slightly more relaxed. The BVI fits really well between the two. It gives quite good regulation at a good price. It’s a good all-rounder and that’s why we picked the BVI as our headquarters.”  
The BVI fund product is first-rate and although smaller than the Caymans, the islands’ industry has 2,627 mutual funds. According to the FSC’s latest figures the BVI had 40 new professional funds compared to 44 in Q2 and, more revealingly, compared to 27 in Q3 2010. It has taken time to recover from 2008, but there are signs the BVI is building back momentum.
Bateman says that Conifer’s business has been steady in 2011 and has given the firm the opportunity to improve its technology offering. “With our new iCon platform we can offer state-of-the-art cloud-based reporting that encompasses portfolio analytics including attribution and risk metrics,” explains Bateman.
“We’ve seen more fund formation than since the first half of 2008, it’s been positive,” confirms Munro. “We’ve been encouraged by both existing managers offering new products and a reasonable number of new start-ups. Overall it’s encouraging without being desperately exciting.”
Folio’s McKenzie shares a similar sentiment, pointing out that the market stabilised in 2011 relative to the previous year.   
“We have seen many fewer closures in 2011 than we did in 2010. Based on our numbers I would say there’s been some new money but no huge inflows,” confirms McKenzie. Cann believes it’s easy to be pessimistic and hopes the bottom of the market was reached in 2011. One encouraging sign, he says, is an increase in the number of enquiries compared to 2010. “Without wanting to be too optimistic we hope this trend continues into 2012.”   
“Even in the last couple of weeks we’ve had calls from clients we first spoke to two or three years ago and they’re coming back to us now with a view to kick starting funds in Q1 2012. So we have to be positive,” adds McKenzie.
Drake has had three positive quarters for the funds it administers. Says Faure: “The jurisdiction as a whole is in positive shape I think. The knock-on effects of ’08 had a massive impact but if you look at the number of companies being registered, the number of funds coming in, you’ll see it’s well above 2010 levels.” 
The BVI has continued to be an appealing jurisdiction for other service providers. In the accounting/auditing space the four big firms are located on Tortola Island: KPMG, Deloitte Touche, PwC and Ernst & Young.
Deloitte has been operating in the BVI since 1978. In 1995 the firm had three staff: now there are 60. Mark Chapman, Managing Partner, believes that accountancy and auditing standards in the BVI are excellent: “We are all operating in global markets and must maintain the quality standards set by our global organisations.” He adds: “2011 was a solid year. We’ve seen more start-ups than the previous three years. Existing managers are really focused on increasing their AUM rather than look to new products at this stage.”
The most remarkable change in the past five years has been the eradication of NAV-light. Keeping accounting records in Excel is no longer acceptable in the BVI. This has raised the barriers to entry because full service NAV costs more than NAV-light says Chapman: “On the upside, increased quality has led to greater confidence and more appetite for BVI funds from investors.” He notes that a move towards IFRS remains on the radar for 2012.
Schilder thinks that one of the biggest developments in the last 10 years has been the establishment of a commercial court in the BVI with a Chancery judge sitting in it (Edward Bannister QC). “The missing piece of the jigsaw where we haven’t been as successful as we would have liked is having one or more large fund administrators and/or banks. This would enhance the BVI offering.” 
This is a bone of contention for McKenzie. “The big name administrators are administering huge BVI funds but they’re operating out of New York, Nova Scotia: they don’t need to be here. That’s one of the issues we’re trying to raise with the FSC but it’s a tricky subject to be honest.”     
Schilder says the reason more financial institutions haven’t arrived to date is reflective of today’s economic environment. A point that Cann also raises: “It’s a cost issue in many regards. It’s not cheap to run a business out of a jurisdiction like the BVI, or the Caymans for that matter.”
Nevertheless, it is believed that at least one major bank has been looking around the BVI for the last 12 months. If they come, it will enhance the islands’ reputation even further.
Bateman believes the BVI IFC is doing a good job with limited resources: “They held a successful conference in New York recently which I attended along with other BVI service providers.”
Mara Spencer, Managing Director of ACE Fund Services, an independent administrator, is confident the BVIs’ administration space will continue to evolve and strengthen. “There are a lot of managers looking to exploit these economic conditions to establish new hedge funds. We’ve seen how well other areas like legal have evolved. I am optimistic although it won’t happen overnight.”
Today’s uncertain economic climate and the drive for cost-efficient solutions probably favour smaller administrators like ACE who can afford to be flexible and keep overheads low. Bigger administrators and banks are not likely to want the additional cost burden of opening offices in the BVI right now.
In all other areas of fund services, however, the BVI has come a long way over the last 10 years. With SIBA in place, it should feel confident going forward.
“Although the global recession has affected us, in the last two quarters we’ve seen some uptick in business. I think that will continue for 2012 as the emerging markets take a foothold in directing the trend of the global economy,” reflects Lewis.
Please click here to download a copy of the Hedgeweek Special Report: BVI Hedge Fund Services 2012


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