By James Williams – In 2009 the BVI, perhaps surprisingly given that its been a long-time member of IOSCO, found itself on an OECD ‘grey list’ of jurisdictions deemed to have done an insufficient amount to implement international standards on tax information exchange. It was soon rectified. The minimum number of Tax Information Exchange Agreements – TIEAs – stipulated by the OECD is 12: the BVI got these within one month of the grey list being reported.
Today, it has 21 TIEAs, 12 of which are with EU member states including the UK, France and Germany.
This illustrates the BVIs’ commitment to being seen by the global investment community as a cooperative, proactive and well-regulated jurisdiction at a time when offshore markets are having to embrace transparency and shore up their powers of regulatory oversight. In many respects, the BVI is doing a good job.
“The main thing for the BVI is actually staying off the various grey lists,” explains Tim Clipstone of Walkers. “We’ve just passed a Phase 1 peer review by the OECD which reviews the legislation in place to perform appropriately under the TIEAs. There’s also been a recent Financial Stability Board review undertaken by the IMF which the BVI passed with flying colours and is the highest tier of adherence.”
This was a full regime review that looked not only at the tax exchange structure of jurisdictions but the entire system of corporate governance and took into consideration an array of economic and political questions in deciding whether a jurisdiction was stable or not. That the BVI came through it, whilst a number of European jurisdictions did not, is commendable.
Nicolaas Faure (pictured), Executive Director of Drake Advisors, a fund administrator, believes the TIEAs are good for the BVI but for Drake this hasn’t necessarily translated into more clients coming through the door: possibly because the firm focuses on emerging markets. “The TIEAs might well bring a new class of manager to the BVI. Those looking to passport their funds at a later stage into onshore European markets like Ireland, for example, will benefit from setting up in the BVI,” says Faure.
Global regulation of hedge fund managers has ramped up post-08, particularly in the US under Dodd-Frank, which requires those running assets over USD150million to register with the SEC. Offshore jurisdictions like the BVI have therefore had no choice but to respond to international pressure, culminating in the introduction of the Securities & Investment Business Act (SIBA) on 17 May 2010. The previous Mutual Funds Act had existed for 12 years.
Simon Schilder, a partner at law firm Ogier and chairman of the BVI Investment Funds Association says the BVI Investment Funds Association is working closely with the islands’ financial regulator, the Financial Services Commission, to develop the BVI funds product and improve the islands’ competitiveness.
“Several members of the BVI Investments Funds Association’s executive committee, including myself, sit on the Securities, Investment Business and Mutual Funds Advisory Committee, which is the committee established by the FSC to advise it on changes to SIBA and the regulation of, amongst other things, the BVI funds industry,” says Schilder.
“As industry participants we are continually looking at ways to make the BVI as attractive as possible, whilst at the same time, also maintaining international best practice for regulation, so as to encourage growth of the BVI investment funds industry.”
When SIBA replaced the Mutual Funds Act in 2010 there was little substantive change per se to the regulatory regime of funds. It was more a case of established FSC policies and best practice being codified: auditing of professional and private funds, making notification filings in relation to key changes, a minimum of two fund directors etc.
Changes to public funds and the Public Funds Code were, however, more significant. “The substantive effect of SIBA was, effectively, to widen the distinction between the regulation of private and professional funds (i.e. hedge funds) on the one hand and the regulation of public funds (i.e. retail funds) on the other,” comments Schilder.
Ross Munro of Harneys believes SIBA has, on the whole, been positively received by the funds industry. “Our funds clients have dealt with it in their stride. Most are dealing with more burdensome regulation in other parts of the world: the story of increased regulation is hardly unique.”
Various elements, under SIBA, have tightened up. With regards to auditors, whilst managers don’t need local audit sign-off they must appoint a firm who audits in accordance with accounting standards deemed acceptable by the FSC: namely GAAP and IFRS.
Mark Chapman of Deloitte & Touche says that all private and professional funds had to appoint an auditor prior to SIBA, so in that sense nothing has changed. “Where there has been significant change results from subsidiary legislation which stipulates that an auditor is qualified to act if he is a member of certain professional bodies and is eligible to be appointed as auditor under the rules of his professional body – qualification that some audit firms may be unable to meet.”
The ability to choose a non-BVI auditor actually presents something of a double-edged sword. As Chapman further elaborates: “We’ve seen a number of foreign audit firms consult with their Practice Protection or Risk Management Groups and have determined that they’re unable to meet the certifications required and cannot meet the specific reporting to the FSC that may be required under notice because of privacy or other laws in their home jurisdiction.”
In such circumstances, BVI-based audit firms like Deloitte, KPMG and PwC are well positioned to service BVI funds. This could perhaps explain the reason why Ernst & Young recently opened an office there, giving the islands a full set of “Big 4” accountancy firms: precisely what the IFC wants as it looks to encourage growth of the islands’ fund services infrastructure.
Another area that SIBA has helped clarify is that of independent directors. At least two directors are required for funds at all times, one of which can be an individual. “What this means is that SIBA acknowledges the use of corporate directors. Previously there was always a question mark over the status of corporate directors so that’s a useful development,” explains Clipstone.
He adds that under SIBA there’s also been an extension of the professional fund grace period. Previously, a professional fund was only allowed to start trading 14 days before it was finally approved, although Clipstone says it was never clear precisely what standing a professional fund had in those 14 days. “What SIBA now allows is a 21-day ‘grace period’ for professional funds whereby as long as you’re compliant with the professional fund regime it can be treated as a professional fund and marketed as such before the recognition certificate is issued, provided the fund applies for recognition within 14 days of commencing trading.”
Tightening its regulatory regime might have been viewed negatively five or six years ago but if anything, in today’s climate, the BVI is in a stronger position than ever. It’s bigger neighbour, the Caymans, equally has a well-respected regulated fund regime.
But there remains one crucial difference between the two jurisdictions: whilst the Caymans allow fund managers to remain exempt, the BVI requires everyone to be licensed, irrespective of size.
Few believe that onerous licensing, and a subsequent cost burden, should necessarily apply to start-up managers keen to minimise costs in the early stages of fund management.
“I think the FSC and the policy commission feel that whilst a light touch for professional and private funds is appropriate, there ought to be a level of regulation for all managers, given that it’s the manager who makes the investment decisions for the funds,” says Clipstone. “The licensing cost is not, in and of itself, large but it can take a long time to get a full license.” This, he says, may not be appropriate for many start-ups, especially for those managing their own money.
In Europe, even De Minimus managers with less than EUR100million in AUM will still be regulated under the AIFMD, just less rigorously. Clipstone thinks the stance taken by the FSC may dovetail into today’s global regulatory environment “better than the Cayman exempt manager stance”, but is keen to emphasise: “The point is that the Dodd-Frank Act and AIFM Directive recognise that there can be asset thresholds under which a lighter touch for managers might be appropriate.”
Munro concurs: “Managers running less than USD150million in the US are subject to a lower level of regulation: that to me makes sense. The FSC is cognisant of the potential for systemic risk. There are large managers with funds based in the BVI and Caymans who could pose some systemic risk but frankly anyone under USD150million isn’t going to bring down the banking system.” Munro says that the BVI authorities are aware of the need to offer something different and progress is being made but that a move towards a wide-ranging exempt manager status is unlikely.
This is understandable given that investors want tighter control of managers, wherever they operate. In that regard it might well be that the Caymans close the loophole that allows for exempt fund managers although Folio Group’s Calum McKenzie says that “if they have any sense they’ll resist doing that to the hilt because it’ll have a huge impact on their industry”.
“The reason the Caymans can have exempt fund managers is because their funds are not in effect ‘regulated’ funds but rather entities registered with CIMA. In this regard we are aware that the FSC are considering certain options, particularly given that the financial crisis and introduction of SIBA has led to a decrease in the number of BVI funds.”
One undisclosed source confirmed that a compromise might be in the pipeline, which could end up being something halfway between the BVIs’ full licensing regime and the Caymans exempt regime for managers. The FSC were contacted to comment on this issue but did not respond.
If this were to happen, it would be well received by the islands’ service providers and doubtless help attract more managers.
Under the Mutual Funds Act, getting managers licensed was a lengthy process, under SIBA, it’s become even more rigorous.
“It’s streamlined some processes but made others difficult. On the whole I don’t think it’s had any negative impact on our business. There’s more regulatory compliance which makes things a little slower than people would like but it’s more sophisticated,” explains Helene Anne Lewis, Senior Partner at law firm SimonetteLewis.
Schilder says that whereas previously it was a six-week process, “now you’re looking at probably two to three months”.
“The Securities Investment Business and Mutual Funds Advisory Committee, which I sit on, is looking at a couple of things that we think will enhance SIBA and make the jurisdiction appealing. We hope to have some news about a product shortly.”
Lewis notes that more human resources at the regulatory level would probably “expedite things”. “Other than that I think we have the right regulatory touch and blend of legislation to service the market.”
For now, managers who choose the BVI can look on the bright side: having the license can only be a positive in the eyes of investors. Once they get it, the hard work’s done.
Moreover, with the AIFM Directive looming on the European horizon, the BVI is seen to be tilting its regulatory stance in the right direction.
As more fund managers launch onshore regulated hedge funds to help diversify their client base, some believe that offshore centres will come under increased threat. In this respect the BVI is better placed to accommodate non-EU managers wishing to market their funds into Europe: with its 21 TIEAs, to date, the BVI can safely meet bilateral tax agreements between European member states and any non-European jurisdiction (third country) that will be required under the AIFMD.
“We don’t expect any difficulties for managers wanting to passport BVI funds,” says Schilder. “What we haven’t seen is funds leaving the BVI or the Caymans to go and register in Ireland or Luxembourg as a QIF or SIF.”
However, that’s not to suggest that all Anglo-Saxon managers will remain offshore. Some will, inevitably, for cost reasons, move completely onshore if that’s where the bulk of their investors are located.
Schilder adds the following caveat: “For managers marketing to non-EU investors, for instance in Asia, Latin America or the Middle East and with little or no other nexus to Europe, the AIFMD will be largely irrelevant. The positive thing for us in the BVI is that Asia has tended to use Caribbean vehicles. Looking ahead, if some European managers opt to move completely to onshore jurisdictions, that loss may well be offset by growth in new business coming from Asia and the BRIC economies.”
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