By Simon Gray - In 2009, when leaders of the G20 nations meeting in London were putting a priority on bringing offshore centres to heel as part of their efforts to resolve the global financial crisis and economic downturn, it seemed that the days of jurisdictions like Guernsey in anything like their existing form were numbered. In Europe in particular, new legislation and tougher regulation appeared poised to drive a large proportion of offshore business onshore.
Three years later, the situation no longer seems nearly as clear-cut. Rather than financial business being driven toward more highly regulated onshore centres, many offshore jurisdictions, the Channel Islands to the fore, have reinforced their credentials as solid, well regulated and compliant with international standards, in a number of aspects more so than those members of the G20 that reckoned them a threat to global financial stability.
In particular, the entry into effect of the Alternative Investment Fund Managers Directive across the European Union on July 22 next year shows no sign, at least at present, of pushing managers to set up hedge funds and other alternative investment vehicles in Luxembourg, Ireland or Malta rather than in traditional offshore jurisdictions. In fact, managers appear to be exploring how they can use an offshore presence to avoid the strictures of the directive applying to funds that are not aimed at European investors.
However, there are a number of other complications on the regulatory horizon, such as the US Foreign Account Tax Compliance Act, which is also due to come into effect next year, although here too there are a number of details to be finalised, and the knock-on effects of the Dodd-Frank Act, which has brought most US-based alternative fund managers under the regulatory aegis of the Securities and Exchange Commission. These issues will affect fund jurisdictions and financial centres throughout the world, but especially those such as Guernsey whose business is overwhelmingly outward-focused.
“Guernsey has positioned itself successfully as a jurisdiction with the right balance between regulation and flexibility,” says Barney Lee, a group partner in the corporate and commercial department at law firm Appleby. “Managers can get done the things that they need to be done in a cost-efficient way, but investors can take comfort that the manager and the fund will both be well regulated.
“That the island's fund industry has continued to grow over the past few years in particular, and at enormous speed prior to that, suggests that we were right to pitch ourselves at that level – especially now that the growth of regulation globally, including the AIFMD, the Solvency II Directive, the Dodd Frank Act and Fatca, has brought this aspect to the forefront of mind for both managers and investors.”
Fiona Le Poidevin, who succeeded Peter Niven as chief executive of industry promotional agency Guernsey Finance at the beginning of July, admits that the industry has “a huge number of regulatory issues to contend with at the moment. Some of those issues coming out of the US, like Fatca, will affect people globally. But for Guernsey, the main question is the administrative and cost issues that dealing with the regulatory changes will entail, and the time that needs to be dedicated by managers and administrators to addressing them.
“Guernsey can’t afford to take its eye off the ball. We have been quick to set up industry working groups covering all the external regulatory issues that will affect us. On issues such as Fatca, the government is working alongside the industry to assess the impact throughout the financial sector, because it goes further than funds. They are also considering whether we would like to and would be able to become a Fatca partner jurisdiction.”
The issue of whether Guernsey should join countries including the UK, France and Switzerland in signing collective deals with the US authorities, as opposed to leaving it to individual financial institutions to conclude a compliance contract with the US Internal Revenue Service, is not as clear-cut as it might seem. Many companies based in international financial centres might find themselves faced with Fatca reporting requirements in multiple jurisdictions.
“What we have to think about is that this would lead to full exchange of information,” Le Poidevin says. “We don't have a double tax treaty with the US, although we do have a tax information exchange agreement. We have to see whether this would be a good fit for Guernsey or not. What it would mean is that the industry would report to the government or to the tax authorities here, which would transfer information to the IRS, as opposed to each institution having to register with the IRS individually.
“However, the industry still has to provide all that information, it still has to do the work. We have working parties looking at these issues, but at the same time institutions are examining them from a practical perspective. The question is how much we would have to change our systems. We have been through the EU Taxation of Savings Directive, but its scope was limited to the banks and interest income. This will be much wider and affect funds and the insurance industry as well as banking. However, it does mean that all the industry sectors are co-operating together rather than working on the same issues separately.”
Le Poidevin acknowledges that Fatca is likely to be the start of a broader requirement for cross-border exchange of information, but she notes that Guernsey has already demonstrated that it is in the forefront of international standards on this issue. “We have been commended by the Organization for Economic Co-operation and Development for our focus on tax transparency, and we now have 35 tax information exchange agreements,” she says.
“Several years ago we introduced measures equivalent to the Taxation of Savings Directive, and since then we have moved from exchange of information on request to full and automatic exchange of information. We have shown we are willing and able to comply, but right now the key issue is to obtain as much detail as we can get on Fatca, so that the industry can get more comfortable with what they need to do.”
Caroline Chan, a partner with law firm Ogier, is confident that Guernsey will come out of the regulatory tsunami at least as well as if not better than competing jurisdictions. “The island’s fund services providers and the Guernsey Financial Services Commission have always taken a flexible and proactive approach when considering the implications of international trends in regulation, taxation and similar matters,” she says. “A focus on promoter and investor needs has been the key driver in considering how to implement locally the various international initiatives.
“Although the current regulatory environment is challenging and will become even more so, there is a willingness in the island to consider these developments in a positive way, with a view to demonstrating high standards that meet investor needs and satisfy international requirements and expectations.
“The island's finance industry has often had some form of international initiative to consider or comply with during the past 50 years. However, throughout Guernsey has demonstrated a commitment to adhere to international standards on regulatory and other matters, while working to ensure that its fund products are and remain attractive to promoters and investors alike. We expect this approach to continue in response to new regulatory measures.”
One question asked increasingly about the implementation of the AIFM Directive is whether the legislation is more likely to drive business from offshore centres to onshore ones, or vice versa. “I think we will see movement in both directions,” Le Poidevin says. “A certain number of managers will go offshore, while others are already looking to establish Ucits products within the EU.
“But Guernsey is very well placed when people are looking at offshore centres. Jurisdictions such as Guernsey can provide more substance, about which there has been a lot of talk recently, because of our strength in depth of administrators, custodian and other service providers. Because of our acknowledged expertise, we are seeing an increasing number of non-Guernsey schemes where some element of administration, custody or management is provided in the island for funds that are not domiciled here.”
The Guernsey authorities are working on an AIFMD-compliant regime that will allow managers to benefit from the planned future extension of the EU single market for alternative investment products to funds and managers based in third-country jurisdictions. “The regulator is also working on getting co-operation agreements in place,” Le Poidevin says. “We feel we are well placed, but there is still a lot to do before the AIFM Directive comes in.”
Adds Lee: “The directive does impose additional obligations, but they are not so foreign to the regulatory culture in Guernsey that they will cause any kind of adaptation difficulty. Guernsey will be able to implement some kind of parallel AIFMD-compliant regime if that is what is required, relatively easily and without major adjustment. It may require some low-level regulation, but I don't think it will require new legislation.”
A number of other changes to the island’s legislative and regulatory framework are also underway. “Our class B rules for open-ended funds are being updated at the moment – they were probably due a spring-cleaning,” Lee says. “We are also expecting an amendment to the limited partnership law to create flexibility in some areas and add additional certainty in others. The changes are not major, but involve some tweaking around the edges to keep us competitive and perhaps provide an edge in some areas.”