By Simon Gray - The financial crisis and economic downturn of the past three years has fundamentally changed the rules of the game for the international financial services industry in general and the fund sector in particular. The laissez-faire philosophy that prevailed in many countries throughout the boom years of the mid-2000s has given way to a new focus on transparency and oversight at the insistence of governments, regulators and, not least, investors.
It might be presumed that offshore financial centres and the investment managers and service providers that operate in those jurisdictions would be among the principal losers from this change in philosophy. After all, the offshore world and its presumed secrecy and lack of supervision has been widely blamed for at least contributing to the crisis, albeit without a great deal of hard evidence.
But the obituaries written for the industry have failed to take into account the concentration of not just technical expertise but business ingenuity and resourcefulness in offshore financial business. With a speed and deftness that the onshore financial services industry often struggles to match, the offshore industry has responded to the demands of the new environment and to the insistence of the world’s big economies that it not only meet international concerns on regulation but demonstrate willingness to co-operate with efforts to counter tax evasion.
Indeed, in a number of offshore centres this process of adapting to emerging global standards began long before the April 2009 G20 summit in London threw down the gauntlet to offshore jurisdictions, demanding that they fall into line on tax transparency or face the threat of blacklisting. Nowhere is this more true than in Jersey and Guernsey, as international associations such as the International Organization of Securities Commissions, which brings together industry regulators from more than 100 jurisdictions around the world, acknowledge.
Speaking at the recent International Business Summit organised in Jersey by the Channel Islands Stock Exchange, Iosco deputy secretary-general Tajinder Singh noted that the financial services commissions of both islands were members of the organisation, while the exchange is an affiliate member. In addition, the Jersey and Guernsey regulators have signed its Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, designed to set an international benchmark for cross-border co-operation to combat violations of securities and derivatives laws.
The memorandum predates the crisis – it was drawn up in the wake of the September 11, 2001 terrorist attacks against the US, which turned the tide against secrecy in financial jurisdictions. Notably, it requires signatories to share information for the investigation of various financial offences even if those offences are not violations of the law in their home jurisdiction. “The fact that both the Jersey and Guernsey financial services commissions are signatories to the MMoU signals the importance that these jurisdictions attached to international co-operation,” Singh told delegates to the CISX International Business Summit.
According to the Iosco deputy secretary-general, the crisis has highlighted the need to focus not just on the defining of international standards – the organisation has added eight new principles of securities regulation to its existing list of 30 – but to their implementation. “Before the crisis ... there was in some sense a naïve belief in the self-regulation of markets, which was not borne out in practice,” he said.
Financial stability was not necessarily guaranteed by the “piecemeal monitoring” of financial institutions, Singh argued. “While it is necessary to supervise closely financial institutions, especially systemically important ones, it is by no means sufficient to prevent a crisis and maintain financial stability,” because the crisis revealed a degree of interplay between them whose extent and impact that previously had not been fully understood.
Singh’s endorsement of the islands’ commitment to global co-operation echoed the comments of Colin Powell, chairman of the Jersey Financial Services Commission for a decade up to 2009 and now an adviser on international affairs to the States of Jersey. Delivering a keynote address to International Business Summit, Powell noted that the islands had more than passed muster with a succession of international review bodies including the International Monetary Fund, the Financial Action Task Force and the Organization for Economic Cooperation and Development’s Global Forum on Transparency and Exchange of Information for Tax Purposes, as well as the UK government’s own review of British Offshore Financial Centres.
“While these assessments are burdensome in terms of the demands placed on the islands’ resources, the results of such assessments have been extremely supportive of their reputation as international finance centres committed to and compliant with all relevant international standards,” Powell said.
Indeed, in a number of cases offshore jurisdictions have demonstrably gone further than their onshore counterparts in embracing and implementing international standards. Jersey’s most recent assessment by the IMF, published in September 2009, “found that the island met financial regulatory, anti-money-laundering and combating terrorist financing standards better than most, if not all, EU and OECD member countries”, he noted. “Jersey had 44 compliant or largely compliant ratings out of the FATF’s 49 recommendations, and 15 such ratings out of 16 core recommendations. Guernsey has been assessed this year and confidently expects the results to be equally good if not better.”
A point emphasised by Powell is that the Channel Islands have not been dragged into compliance with international standards by the UK but have embraced them as an exercise of their own international identity. For example, in addition to enjoying autonomy on financial regulation, the islands are now able in certain instances to conclude treaties with third countries in their own right. These include notably the tax information exchange agreements that prompted Jersey and Guernsey to be placed on the OECD white list in April 2009 by demonstrating their commitment to implementing international standards on tax transparency and exchange of information.
The crown dependencies concluded framework documents with London formally acknowledging that while under international law the UK government is responsible for the islands’ international relations (and defence), it will not act internationally on behalf of the crown dependencies without prior consultation, and it recognises that the interests of the crown dependencies may differ from those of the UK, particularly in respect of their relationship with the European Union.
The decision by Jersey and Guernsey this year jointly to establish an office in Brussels reflects the need perceived by the two islands for a proactive approach toward monitoring EU activities and especially legislation that may impact the islands, and maintaining direct relationships with European officials and institutions. The need for such a presence has been heavily underlined over the past two years as the EU has slowly and painfully come to a consensus on the regulation of the alternative fund industry.
The Directive on Alternative Investment Fund Managers, the first draft of which was unveiled by the European Commission in April 2009, is now set to take effect in early 2013 after the European Parliament voted through a much haggled-over compromise text on November 11. Although it would be a long stretch to say that the final directive is particularly to the industry’s liking, opponents acknowledge that it is much improved from the first draft, and that what matters as much as anything now is that the uncertainty hanging over the Channel Islands and the rest of the offshore fund sector has been resolved.
“The uncertainty over the European directive has affected not just the islands but all countries outside the EU, even the US,” says Tamara Menteshvili, chief executive of the Channel Islands Stock Exchange. “Everybody was holding back to wait and see [what would emerge from the legislative process]. It was not just to do with us but promoters from other countries that might not have brought their business here because of doubt as to whether we remained a gateway to Europe.”
But, she argues, removal of the market access issue brings even more to the fore – especially in the minds of investors – the benefits a CISX listing can bring in terms of delivering transparency: “We offer a public disclosure regime that delivers a flow of information not only to investors but credit institutions that rely on the status that a security gains from a listing. In the wake of the financial crisis, there’s even more emphasis on disclosure and transparency, which is where a listing comes into its own.”
The legislation agreed last month will allow managers of non-EU funds to obtain a pan-European marketing ‘passport’ that will allow them to access sophisticated investors throughout the 27-member states on the same basis as EU-based managers, albeit two years after the directive comes into effect. In the meantime funds domiciled in the Channel Islands can continue to be sold to EU investors through existing national private placement regimes.
In order for funds based in non-EU jurisdictions to enjoy access to the single market for alternative funds, they must meet various conditions including satisfying the Financial Action Task Force’s anti-money laundering standards, and having agreements on exchange of tax information as well as regulatory co-operation with the member states into which the funds are to be distributed.
The Channel Islands will also have to offer reciprocal market access to EU-domiciled funds, but overall the conditions appear significantly less difficult to meet than once appeared likely, according to Ross Young, the Jersey-based head of sales for the Channel Islands and Isle of Man for BNP Paribas Securities Services. “We will need to meet anti-money laundering requirements and comply with international regulatory standards, but I’m quite comfortable on that,” he says.
“Everyone will continue to beat the drum that the Channel Islands are among the most highly regulated jurisdictions for AML measures – we exceed the level of compliance of many European countries with the FATF principles – and reciprocal market access is obviously achievable for us. There’s no reason why the islands shouldn’t continue to serve alternative fund managers targeting EU markets, especially given our established role in the European financial industry.”
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