By Simon Gray – The Isle of Man is seeking to give its fund services industry new impetus by attracting fresh fund administration business and is looking for new service providers to expand capacity in the island. But at the same time the authorities hope the jurisdiction’s advantages in areas such as taxation, operating costs and set-up incentives can tempt start-up alternative fund managers to establish themselves on the island and existing ones to move part of their operations there.
The British crown dependency already has a small but not insignificant manager community, showcased by Laxey Partners, the emerging markets manager and activist investor named after a village on the island’s east coast a few kilometres north of the capital, Douglas. However, the government’s head of business development for the fund sector, Brian Donegan (pictured), believes there is particular potential to expand the sector at a time when newcomers to the industry are struggling with heavy cost and compliance burdens.
“With regulatory changes, particularly in the US, including the Volker Rule barring banks from operating proprietary trading desks, a lot of very talented people are now considering starting their own businesses,” he says. “It’s a good time in that the worst of the crisis seems to be behind us and there’s plenty of volatility in the marketplace, which the hedge fund industry thrives on.
“Over the coming years we expect to see a lot of new management firms launched, and as a jurisdiction we are looking to attract quality start-ups – that is, seasoned people who’ve been around the circuit a couple of times and are now on their first fundraising round. Not only are such people a better reputational risk for the jurisdiction, we can help them get started through a package of financial assistance measures.”
Donegan says that financial help is particularly important to start-up firms because it can help them build performance track records at a time when institutions in particular are wary about placing money with untried names. “One of the first things that will drive a firm’s performance is its cost base,” he says. “We can offer a 40 per cent grant toward capital expenditure in year one, covering areas including hardware, software, office space and recruitment. A lot of start-ups are already finding that an attractive proposition.”
Just as important, he believes, is that the Isle of Man is ready to welcome established managers even if they want to keep a foothold in London. “The proposition we have been offering them is to keep the investment management and client relations activities in Mayfair, but to move operations and administrative functions to the Isle of Man and benefit from our advantageous tax regime,” he says.
“Provided you delegate all the strategic management advice to the fund adviser in London, you are rated at zero for tax purposes in the Isle of Man. The past two years have not been a good time for moving jurisdiction, but now we believe people are looking for a viable alternative to London, especially after the recent uncertainty over the investment management exemption in the UK, the increase in the top income tax rate to 50 per cent and the recent changes to the taxation of non-domiciled residents in Britain.”
However, Susan Macgregor, assistant vice-president in the Isle of Man intermediary and institutional wealth solutions team at Barclays Wealth, says the reasons for managers choosing the Isle of Man extend well beyond financial considerations. “Some of them have made a lifestyle choice to be based here in person, while others firms have moved a large part of their operation here,” she says.
“We’re trying to use the success stories to persuade other managers to move, although there’s probably been so much uncertainty in the market over the past two or three years that a lot of London-based managers whom we might expect to consider moving are sitting tight for the moment.”
Angus Gilmore, director of operations and risk at Ernst & Young and chairman of the Isle of Man Fund Managers Association, notes that the combination of government grants and the introduction of the graduated licensing procedure for fund managers by the Isle of Man Financial Supervision Commission is designed to increase the jurisdiction’s appeal to start-up firms.
“Instead of requiring a complete infrastructure, including compliance officers, systems and everything else, to be in place before managers can apply for a licence, there is now a two-stage process that enables managers to apply for an initial licence,” Gilmore says. “They can then announce their presence to the market and start fundraising, but as soon as they actually start taking in funds they must apply for the full licence.”
He emphasises that managers must still comply with various requirements, such as having an established track record in the industry and assurance of good character, in order to receive an initial licence. “What we are trying to do is to ensure a sensible level of costs and certainty over those costs while managers are out marketing,” he says. “An initial licence from the commission is no guarantee that they will be awarded the full licence, but it enables them to work toward fulfilment of the criteria.
“This plays to the Isle of Man’s strength in terms of cost and capability. We offer lower costs than you will find in the Channel Islands, for instance, in areas such as administration. In addition, over the years the island has differentiated itself by offering a more boutique service and the ability to deal with more esoteric assets and strategies. That means that auditors, bankers, lawyers and administrators are used to being far more involved with the manager and helping them through the set-up process.”
Whatever the success of efforts to attract fund managers, the Isle of Man authorities and promotional groups continue to target growth in administration work, both of Isle-of Man domiciled vehicles and of funds established elsewhere, especially in the Cayman Islands, and through increasing business flows for existing fund administrators as well as attracting new entrants to the sector.
Assets under administration in the Isle of Man fell by more than 40 per cent in the course of 2008 and 2009 as a result of performance losses and investor redemptions, but also because of a restructuring at HSBC Securities Services that saw alternative fund administration work consolidated in Luxembourg and Dublin, at the expense of the Isle of Man, where around 100 jobs were lost, and Guernsey.
At the same time the sector has suffered, at least in terms of its external promotion, by uncertainty over the future of its other big administration firm, the former Fortis Prime Fund Solutions business, after the Fortis group was taken into public ownership by the Dutch state. Currently known as ABN Amro Fund Services, but still trading under the Prime Fund Solutions name, the business is in the process of being acquired by Credit Suisse, a transaction that was announced last May and has taken longer to complete than expected but that is now set to go through within weeks.
Mike Kelly, managing director of ABN Amro Fund Services (IOM), says he is optimistic about the business outlook once the ownership change is complete. “Business for us, like much of the fund industry, is relatively slow at the moment compared with the period running up to 2008, but opportunities are starting to appear again. Hopefully the marketplace as a whole has now bottomed out.”
Kelly believes that despite HSBC’s decision to move its operations elsewhere, the Isle of Man is well placed to develop as a centre for administration business in the coming years – especially, he believes, because managers who are not targeting European investors may be reluctant to jump through the hoops required to comply with the European Union’s Alternative Investment Fund Managers Directive.
“Regulatory changes in Europe and elsewhere will impact significantly upon the industry across the globe,” he says. “The Isle of Man is well aware of this, and we can see several areas where we believe we can position ourselves very competitively. For example, Isle of Man funds that are managed and administered on the island and that are marketed to the US, the Middle East or South Africa can fall completely outside the scope of the directive. That would enable managers to avoid the constraints that the directive threatens to introduce.”
Meanwhile, activity within the jurisdiction is also poised to benefit from the recovery of its major fund manager clients. Says Kelly: “While the past three years have seen restructuring of funds and an exodus of investor capital, there are indications that this money is ready and willing to return to managers once they have regrouped and developed new investment models, drawing on their existing management expertise.”
Whether or not other big international administrators would consider setting up operations in the Isle of Man will only be seen over time, he believes. “As the markets recover, there is no reason why the island should not be on the global radar once more,” he says. “The Isle of Man offers stability, skills and many years of experience in the industry. Many jurisdictions weren’t active in the fund industry 15 years ago. Over those years we’ve gained a lot of expertise here, and we also benefit from the fact that staff turnover is much lower here than in competing jurisdictions.”
PwC partner Peter Craig says that stability and personal service allow even the island’s smaller, locally-owned service providers to compete for business. “Clients are very people-focused when it comes to administration,” he says. “Managers have day-to-day relationships with ‘Julie’ who does the share registry and ‘Michael’ who handles NAV calculation. The island offers personal service, staff turnover is very low, and it’s an industry that people enjoy working in. By contrast, clients may not have those long-term individual relationships dealing with administrators in larger jurisdictions.”
The island has attracted a number of fast-growing international administration firms in recent years, including Apex Fund Services, Caledonian Group and Cayman National Bank. In addition Appleby, which in 2009 became the first offshore magic circle law firm to establish a presence in the jurisdiction through a merger with local firm Dickinson Cruickshank, has also obtained a fund administration licence. Says Craig: “These are international businesses that see an opening in the Isle of Man.”
In addition, he says, fund administration benefits from the pool of skills available in the island’s large international life assurance sector: “The largest part of the asset management industry in the Isle of Man is actually in life companies that offer unitised product – the skills within the two sectors are highly complementary.
“There are people who deal with new business, and who price the underlying funds that people invest in. The only difference is with life assurance there is an actuary in the middle. The island has a large pool of people with relevant experience and knowledge, and whom fund administrators can draw on if they need to expand.”
Over the years there has been an ongoing debate about the importance of the Isle of Man’s own range of fund structures to the growth of the industry, especially among administrators that mostly service funds domiciled elsewhere. Nevertheless industry members believe that recent changes to the line-up of funds aimed at retail and sophisticated investors have benefited the jurisdiction, notably by clarifying the types of fund aimed at different classes of investor.
Following the replacement in 2007 of the Experienced Investor Fund and the Professional Investor Fund by the Qualifying Fund and the Specialist Fund, and the implementation of a new legislative structure for the industry the following year with the Collective Investment Schemes Act, last May the Isle of Man Financial Supervision Commission introduced the Regulated Fund, a new regime that replaces the International Scheme and entails high levels of oversight by the regulator of the fund, its governance and service providers.
The Regulated Fund is aimed at retail investors (it is normally sold through independent financial advisers) or markets requiring a fiduciary depositary; there areno restrictions on types of investor. The fund must have an Isle of Man manager and a regulated fiduciary custodian/trustee.
By contrast, the Qualifying Fund may have a minimum investment level below USD100,000 but is aimed at non-retail investors; it must have an Isle of Man manager and an appointed custodian. Specialist Funds have a minimum investment level above USD100,000; there is no formal requirement for a custodian and the administrator may be either in the Isle of Man or another “acceptable” jurisdiction.
There is also growth in the Exempt Scheme product that must not be offered at all to the public, must have fewer than 50 investors, and is outside any form of regulation. “This is a very popular vehicle for family office and private arrangement-type business,” Gilmore says.
“The Regulated Fund, which is approved for listing on the Irish Stock Exchange, is attracting some new business,” says Appleby senior associate Gill Crennell. “Following the review of our fund products by representatives of the island’s fund industry and the regulator, we now have an excellent mix ranging from typical offshore unregulated schemes right through to fully regulated Ucits-equivalent funds. The review was in response to what we saw as an increasing appetite for a degree of regulation, and even our lightly regulated schemes are registered with the regulator.”
Gilmore argues that the redefinition of the Isle of Man’s fund range, along with its approach to attracting managers, are part of a broader strategy targeting the needs of high net worth individuals, whether inside or outside the fund industry. “The benefits to wealthy individuals of relocating here get better as the environment improves,” he says. “For example, we offer a corporate aircraft register and are developing a large base operation for private aircraft at the airport.
“We are building the environment around the high net worth space as a whole, which obviously includes fund managers. As ever with these things, it’s a question of resources. We are a niche player in the wider financial services world, and it's important that we concentrate our resources in the right place.”