By Simon Gray – The British Virgin Islands may be most famous in the international financial services industry for its corporate business, but for more than a decade it has been the world’s second-ranking offshore fund domicile. Comprising law firms, accounting and audit practices, fund administrators, asset managers and banks, the sector has played its part in sparking a construction boom on reclaimed land around the picturesque bay setting of the BVI capital, Road Town.
Today the territory’s fund service providers are examining the opportunities arising in a global environment characterised by a drive toward greater regulation and transparency, just as many alternative fund managers, especially small and start-up businesses, are by necessity looking for the most cost-effective options for domiciling not only their funds but themselves.
The islands’ government, in close co-operation with the industry promotional body, the BVI International Financial Centre, the regulator, the BVI Financial Services Commission, and representatives of the private sector, has worked hard in recent years to ensure that the territory’s legal and regulatory framework serves the requirements of the industry as well as meeting international standards in areas such as transparency, oversight and tax compliance.
Three years ago the long-waited Securities and Investment Business Act updated the BVI’s regulatory framework, in most areas involving less substantial change than bringing into the statutory requirements practices that were already widely followed in the sector. SIBA did introduce a number of measures reflecting changing global attitudes, such as extending the requirement for an annual audit to all registered and recognised BVI funds.
However, the authorities have continued to examine ways of adapting the territory’s legislation to the needs of the international fund manager community. An important step is the launch of the approved manager regime, which is designed as an alternative to the exempt manager status available in other jurisdictions, with the notable difference that BVI approved managers are subject to regulation, albeit with a light-touch approach.
Following the publication of the Investment Business (Approved Manager) Regulations, 2012 in November and of the Approved Investment Managers Guidelines, the regime came into effect on December 10. “The approved manager regime seeks to strike the right balance between flexibility and effective regulation, taking into account the relative risk profile of the business carried on,” says Ross Munro (pictured), global head of investment funds at law firm Harney, Westwood & Riegels.
Munro also chairs the Securities, Investment Business and Mutual Funds Advisory Committee, which has worked closely with the regulator in developing the regime. “I believe it will prove an attractive option for fund managers seeking to commence business quickly and in a cost-effective manner,” he says.
Simon Schilder, a partner at Ogier who heads the investment funds practice, adds: “The regime represents an important new development for the BVI fund industry and is a welcome supplement to the products available to investment managers utilising the BVI for the structuring of their funds.
“It is designed to appeal to small and mid-sized investment managers that are eligible to take advantage of a fast-track licensing process and an ongoing regulatory burden commensurate with the lower systemic risk posed by themselves and the funds that they manage. We anticipate that the approved investment manager regime will appeal in particular to operators of hedge and private equity funds.”
Munro says the aim is to attract managers that might otherwise be tempted by the exempt manager option. “But it is not an exemption,” he says. “One reason is the view that there should not be a wide exemption for certain kinds of investment manager even if they are targeting sophisticated investors. Also, to comply with the requirements of the EU’s AIFM Directive in particular, and no doubt other regulation in time, it must be possible to identify who is carrying on the business and bring them into the regulatory net.
“Up to now the regulatory requirements for obtaining and holding a licence were essentially the same for any type of investment business. However, managers up to a certain size are recognised as being relatively low-risk. There is a difference between managing a professional fund with a relatively low level of assets and offering foreign exchange broking services to the general public.
“Now there is a lighter touch regime for investment managers and advisors to funds and related vehicles that requires them only to make a few simple filings. Essentially it allows them to get up and running within seven days, compared with as long as several months in the past, and provides greater certainty than before about the licensing process.”
The development is particularly well tailored to the BVI’s existing client base because the territory has always appealed to small and start-up managers with relatively small volumes of assets under management, at least at the outset. Munro notes that a number of large global players with very substantial asset volumes also use the BVI, but he acknowledges: “Our sweet spot for new business has undoubtedly tended to be on the smaller side, because we are definitely cheaper and more flexible.”
Robert Briant, partner and head of the BVI office of Conyers Dill & Pearman, notes that the threshold for licensing under the light-touch regime is USD400m in assets under management for hedge fund firms and USD1bn in commitments for private equity houses. He says: “It’s a risk-based approach to licensing that is consistent with IOSCO standards – which exempt manager regimes elsewhere are certainly not. We believe this will be a very competitive product, but one that will bolster the reputation of the BVI for upholding international standards.”
Calum McKenzie, corporate director at Folio Group, which includes the islands’ leading fund administration business, adds: “Licence-holders will be real investment managers with genuine substance, giving them a regulatory seal of approval to back up their skills and track record. There is a big difference between a BVI approved manager with transparency and substance and a Delaware LLC where there is no indication who’s actually behind it.”
He adds that improved air connections to long-distance destinations are set to boost interest in the BVI as a relocation destination: “The building of a new longer runway at the airport will make it possible for airlines to fly direct from New York, Miami or Atlanta, less than a couple of hours away. And in terms of pure business needs, most investment managers really just need a phone and a good internet connection.”
Niall Brooks, managing director of Castlegate Investment Services, says that while the new regime does not require a manager to set up an extensive operation in the BVI, there are a lot of reasons why they might consider it an appealing option to do so. “One of the attractions of the BVI is that you don't need to have a large physical presence or a certain number of staff to set up an office here,” he says.
“Moving to an island like Tortola offers a different kind of lifestyle from the big-city environment of places like New York, Chicago or London, where hedge fund managers have traditionally congregated. Many people relish the outdoor lifestyle as well as the attractiveness of the surroundings here, and that has no doubt played a role for some of the firms that have chosen to move here.
“Certainly it is highly cost-effective to set up an office here, much more so than in any European jurisdiction you might name. Depending on its size and risk profile, a management company can apply for various regulatory exemptions that will bring its costs down, for instance regarding the requirement for an on-island compliance officer, for an audit, or for professional indemnity cover. And with the approved manager regime, the BVI becomes a one-stop shop for investment manager and fund.”
Munro points out that the territory benefits from a reputation for a robust legal system (it is home to the Commercial Division of the Eastern Caribbean Supreme Court), as well modest costs and good service providers. “For start-up managers, particularly from Asia, the previous regime requiring a full license was a disadvantage for structures involving an offshore fund manager, but we have taken steps to address that,” he says.
“SIBA introduced a relatively stringent licensing regime for all types of investment business. That regime has attracted a lot of foreign exchange brokers, and other intermediary-type business that benefits from having an investment business licence. However, it was harder to convince the manager of a professional fund that it was worth spending several months and USD50,000 trying to get a license when exempt status was available for USD5,000 and a simple filing elsewhere.”
Briant notes that for now, new fund activity remains relatively subdued in the BVI, as it is in other offshore and onshore alternative fund domiciles. While established managers continue to launch new vehicles, start-up businesses are finding it hard to gather sufficient capital to reach critical mass. “We are ticking along fine – we may not be burning down any bridges, but that reflects the state of the global economy more than anything,” he says. “In that environment we are well placed to meet the industry’s needs.”
Brooks points out that while SIBA did not involve major changes in the way the fund industry operates, it did underline the commitment of the jurisdiction to high standards of investor protection. “It has been helpful in bringing the comfort level and standards to the optimum international mark,” he says.
“It makes sense that a private fund with perhaps hundreds of millions of dollars in assets should have high levels of corporate governance including a properly-constituted board of directors and audited accounts. The BVI has simply insisted on the standards that investors expect anyway.”
Adds Schilder: “The BVI remains extremely competitive as a fund domicile for investment managers. With the SIBA and now the approved managers provision, the jurisdiction can boast a modern, user-friendly regulatory regime for funds and investment managers that appeals to both large and institutional as well as small and mid-sized managers.”
BVI practitioners view the European Union’s AIFM Directive, whose implementation is now just a matter of months away, as an opportunity rather than a threat. Says Brooks: “Given the cost of becoming established in Europe, a lot of managers may well decide to remain offshore and reach their clients through national private placement regimes.
“Realistically, an offshore jurisdiction does not need regulatory co-operation agreements with all 27 EU member states – the majority of investors are in six or seven at most. In that situation, the BVI may well appear a highly affordable centre from which to offer alternative investment funds in Europe.”
Schilder believes the BVI will be well positioned to take advantage of the future marketing passport for non-EU managers and funds due in 2015 or thereafter. “Ongoing initiatives to prepare the territory for AIFMD compliance are advanced,” he says. “The fact that it already has 13 tax information exchange agreements with EU member states, including the UK, France and Germany, already puts the BVI on the right track to ensure its funds can benefit from the passporting regime.”