By Fiona Le Poidevin (pictured), Guernsey Finance – In July 2013 the global economy is continuing to throw up significant events but these are nothing in comparison with what we saw and experienced five years ago when the financial crisis was unravelling before our eyes. Indeed, it is precisely the events of 2008 which now frame our current environment, including economic, as well as political and social developments. This includes the introduction of the Alternative Investment Fund Managers Directive (AIFMD) with effect from 22 July 2013.
AIFMD was born out of a belief within the European Union (EU) that a lack of oversight of the alternative investment funds sector, in particular hedge funds and private equity, had contributed to the global financial crisis. Yet, now it’s not so much what got us to this point but how we will go about dealing with it which concerns us, particularly with still so many unknowns. The Directive has been the subject of much debate and its implications remain unclear – and are likely to do so post 22 July 2013 – due to the fact that much of the detail is open to interpretation by individual Member States.
AIFMD seeks to regulate EU-based Alternative Investment Fund Managers (AIFMs), managers of EU established Alternative Investment Funds (AIFs) and managers that market AIFs into the EU. So, in essence, if either the manager or the fund has a relationship with the EU then the Directive comes into play.
Guernsey is not in the EU and therefore, is not required to implement AIFMD. However, with Europe still one of our biggest markets, we have a large proportion of business which does relate to the EU in some form and so potentially falls within scope of the Directive. As such, we have had to be alive to what will be required now and in the future to maintain access to EU markets.
Yet, Guernsey also has a substantial – and growing – amount of funds business which originates from locations such as the US, Middle East, Latin America, Russia, India and Asia that does not touch the EU at all. Therefore, we have also had to be mindful of the fact that we do not want to prohibit this business and in fact, we believe that our position outside of the EU but within the European time zone actually offers an opportunity to attract more non-EU work.
The Guernsey options
Guernsey is introducing a regime to ensure that we can continue to service both EU and non-EU business following AIFMD coming into effect. There will be a full AIFMD equivalent offering for those EU investors and managers who need or choose to take this route. There will also be a continuation of the existing regime for those who fall outside the scope of AIFMD (non-EU business); and the maintenance of the same, if slightly amended, process for those who are able to take advantage of National Private Placement (NPP) regimes.
An important point to make is that Guernsey’s position as a third country means that we do not have to introduce a fully equivalent AIFMD regime for our alternative investment managers and funds to maintain access to EU markets from 22 July 2013. The existing NPP regimes will continue to offer a route for managers and funds based in third countries, such as Guernsey, to access the EU until at least 2015 and most likely, 2018.
However, in order to continue under NPP after 22 July 2013, AIFMD imposes additional regulatory obligations under Articles 42 and 43. On 7 June 2013, the Guernsey Financial Services Commission (GFSC) issued The AIFMD (Marketing) Rules, 2013, together with a notification form. The forms are for Guernsey-based managers to notify the GFSC of which EU (and wider EEA) countries they will market each fund. The GFSC has confirmed that it is able to accept completed forms prior to 22 July 2013.
In addition, it has recently been confirmed that the GFSC has signed bilateral cooperation agreements with 27 securities regulators from the EU and the wider European Economic Area (EEA), including the UK, Germany and France.* The European Securities and Markets Authority (ESMA) had previously given its approval for the content of potential cooperation agreements but the fact that they have now been signed means that Guernsey funds will continue to be able to receive investments from appropriately qualified investors in all these EU/EEA countries through their NPP regimes post 22 July 2013, subject to completion of the notification procedure of the relevant national securities supervisor.
However, the Directive does also provide the framework for establishing a full passporting regime and the European Commission is expected to implement this regime for non-EU managers of alternative funds in July 2015. Guernsey intends to fully engage with the consultations on the third country passporting regime to ensure that Guernsey AIFMs will be ideally placed to take advantage of the new benefits of being able to market AIFs on a pan-European basis with a single authorisation, as the regime is currently envisaged to work.
Indeed, the GFSC is expected to shortly issue a domestic consultation on the full AIFMD equivalent opt-in rules which Guernsey will introduce in due course. These opt-in rules should allow bilateral marketing of an AIF product to certain EU Member States prior to the implementation of a third country passport regime.
What does this mean for you?
So, in summary, Guernsey managers and funds with no connection to the EU will continue to be able to use the existing regime. Those who want to be able to continue to access the EU will continue to be able use to the NPP regimes. However, a fully AIFMD equivalent regime for those with an EU connection who need or choose to take this route will also be available. It is expected that this will be introduced early in 2014 so that there is time for it to be fully embedded prior to the full passporting regime coming on-stream from July 2015.
For those marketing into the EU, it is likely that the NPP route will continue to be favoured by many due to the depth and breadth of the requirements that fund managers will have to satisfy for AIFMD. Indeed, it is expected that full-blown AIFMD compliance will only be sought if there are particular reasons to do so, e.g. for investor relations.
For those managers with elements of EU and non-EU business, the potentially onerous and costly compliance with AIFMD will mean that parallel structures are likely to be given serious consideration. It will be possible to break the non-EU business away into a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary. If, on the other hand, it is necessary or otherwise desirable to comply with the AIFMD requirements, then you can do this in Guernsey too.
What we are trying to say is that a one size fits all approach does not suit everyone and Guernsey is able to provide a range of options. We believe that this approach enables us to provide an offering with real choice in servicing both EU and non-EU markets. However, as mentioned at the outset, the real implications of the Directive are still evolving – and will continue to do so post 22 July 2013 – due to the fact that much of the detail is open to interpretation by Member States.
Substance: managers and depositories
A recent survey of European asset managers by fund software provider Multifunds showed that 77% of respondents were considering establishing AIFs for non-EU investors ‘offshore’ as a way to put them outside of the scope of the Directive. However, of course, this can only be truly claimed to be the case if there is sufficient substance offshore. This also applies to managers of AIFs for EU investors who are looking to avail of the continuing NPP regimes.
Indeed, interpretation over what constitutes ‘substance’ goes to the heart of much of the debate about the implications of AIFMD. What is clear is that letter box entities cannot claim to be managers and substance will be required in a jurisdiction where a manger is claiming to be domiciled. Similarly, under the delegation rules, the extent to which activities such as portfolio and risk management can be outsourced must be considered and it needs to be ensured that the real decision making powers lie with the entity that is claiming to be the manager.
Guernsey is at a huge advantage as a fund domicile because of the existing standards we already employ regarding oversight and because of the substance which is already present in structures domiciled in the Island. For example, Guernsey already plays host to a number of major managers, such as Apax, BC Partners, Man Group, Permira and Terra Firma who all have offices and staff here. In addition, we have a range of fund administration groups, ranging from major international names to boutique, independent operations, coupled with qualified Non-Executive Directors, who are experienced in providing management functions.
In addition, AIFMD is introducing a requirement for depositories to provide extra oversight to the fund structure. Guernsey can service depository requirements through its existing range of on-Island custodians who are already used to providing not just custody services such as dealing and settlement but also a fiduciary role played by a trustee – hence the name, custodian trustee. Yet, much of Guernsey’s core business of closed-ended private equity and real estate funds will be able to access AIFMD’s lighter touch regime that permits a wider range of entities, such as lawyers and registrars, to carry out custodian functions.
Therefore, Guernsey is already extremely well placed to meet the requirements for enhanced oversight and substance and yet, many of our AIFs will be able to access a lighter regime in relation depository requirements. In addition, we have the benefit of having opened in early June this year for applications from managers and depositories who want to continue to access the EU market post 22 July 2013.
Of course, providing they can prove sufficient substance to their arrangements, one option might be for a fund to opt to be self-managed. Ben Morgan, a Partner at Carey Olsen in Guernsey, has said that it would be wrong to assume that all existing Guernsey funds will opt to be self-managed and therefore be non-EU AIFM managed. He believes that some will want their UK operation in the EU to be the AIFM and will therefore have the option to be AIFMD authorised but managing a Guernsey fund.
To conclude, Guernsey’s position as a third country, the Island’s planned regulatory regime and its infrastructure and expertise mean that as a domicile it ultimately offers optionality for the international fund community. In dealing with AIFMD, Guernsey has recognised not only the importance of the EU market but also the truly global nature of its investor base.
Guernsey fund facts
Latest figures from the GFSC show that the net asset value of investment funds under management and administration in Guernsey reached £296.5 billion at the end of March 2013 – up £19.7 billion (7.1%) in the first quarter of the year. This represents an increase of £26.4 billion (9.8%) year on year, a rise of £32.8 billion (12.4%) on the same time two years ago and an increase of £99.1 billion (50.2%) since the end of March 2010.
Guernsey AIFMD agreements*
Guernsey has signed cooperation agreements with the following EU/EEA authorities:
• Autoriteit Financiële Markten (The Netherlands)
• Autorité des marchés financiers (France)
• Bundesanstalt für Finanzdienstleistungsaufsicht (Germany)
• Central Bank of Ireland (Ireland)
• Comissão do Mercado de Valores Mobiliários (Portugal)
• Financial Services and Markets Authority (Belgium)
• Financial Supervisory Authority (Romania)
• Commission de Surveillance du Sector Financier (Luxembourg)
• Cyprus Securities and Exchange Commission (Cyprus)
• Czech National Bank (Czech Republic)
• Finansinspektionen (Sweden)
• Finanssivalvonta (Finland)
• Finanstilsynet (Denmark)
• Finan_u un kapit la tirgus komisija (Latvia
• Finanzmarktaufsicht (Austria)
• Estonian Financial Supervision Authority (Estonia)
• Polish Financial Supervision Authority (Poland)
• Financial Conduct Authority (United Kingdom)
• Financial Supervision Commission (Bulgaria)
• Hellenic Capital Market Commission (Greece)
• Bank of Lithuania (Lithuania)
• Malta Financial Services Authority (Malta)
• Národná banka Slovenska (Slovak Republic)
• Pénzügyi Szervezetek Állami Felügyelete (Hungary)
• Fjármálaeftirliti (Iceland)
• Finanstilsynet (Norway)
• Finanzmarktaufsicht (Liechtenstein)