Waystone reviews fund domicile opportunities

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In a series of four articles for Hedgeweek in recent months, senior executives at Waystone provided expert analysis of the challenges and opportunities facing fund domiciles and asset managers at a time of change across the fund management sector in Europe and beyond.

Waystone, the global governance adviser, third-party management company and provider of specialist services to the asset management industry was formed by the merger earlier this year of DMS, MontLake and MDO. In its first article in October 2020, Why Cross-Border Fund Domiciles are transforming into Fund Management Hubs, Managing Director of Client Solutions, Daniel Forbes explored the post-Brexit regulatory landscape and how countries, both large and small, are jockeying for position to fill what he called “the void left by an increasingly isolated London” ahead of the UK’s formal withdrawal from the EU at the beginning of this year.

He reviewed the impact of a raft of supranational initiatives, as well as European-led initiatives, on fund structuring requirements across all key fund domiciling jurisdictions – including the Cayman Islands, Ireland, Luxembourg and a number of British Overseas Territories.

“Brexit is having a profound impact on the fund management industry, even before the UK formally withdraws from the EU,” commented Forbes. “With the FCA (the UK’s Financial Conduct Authority) no longer having a significant sway on the direction of European fund management regulation, the path is clear for the European Securities and Markets Association (ESMA) to promote a more Franco-German agenda.”

In particular, he pointed to the increased pressure that this new ESMA agenda was having on British Overseas Territories such as the Cayman Islands, Bermuda, BVI, Isle of Man, Jersey and Guernsey – as evidenced by the Cayman Islands being put on the EU “blacklist” of non-cooperative tax jurisdictions in February 2020, a move which they managed to reverse again in October after adopting reforms relating to its substantial private funds industry that were mandated by a combination of the EU and the OECD.

“The swift reaction of the Cayman industry to implement the Private Funds Law and register private funds within an EU-mandated six-month window shows that the message from the EU and the OECD was heard loud and clear,” wrote Forbes. “If you are a small country that relies on access to investors and financial market infrastructure based in larger countries, then non-compliance is not an option!”

Forbes went on to review the impact of the changing regulatory landscape for Ireland and Luxembourg – the two largest and most established EU-based cross-border fund domiciles – and for other European capitals like Paris, Frankfurt, Vienna and Amsterdam as a result of the UK having “veered off course from its position at the heart of the EU finance industry to becoming an outsider with ‘Third Country’ status” and what he called “the scramble to be the ‘new London’.”

With increasing supervisory scrutiny on the key issues of ‘substance’ and ‘delegation’, Forbes’s article also outlines the key items that investment managers need to know and do in this shifting landscape.

“The post-Brexit shake-up has presented opportunity and challenges for all global fund domiciling jurisdictions, with Ireland and Luxembourg closest to the epicentre,” Forbes said. “Brexit means the UK is no longer the logical choice for a cross-border European fund management company.”

Setting up themes to be explored in the following articles in the series, he commented: “The cost of compliance with the ever-increasing substance requirements is prohibitive for most groups to launch their own proprietary fund management company – thereby making the scalable, multi-jurisdictional ‘Third Party ManCo’ the logical partner to navigate these uncertain waters.”

In the second paper, Director Pádraic Durkan expanded on the theme – zeroing in on the opportunities, challenges and changes facing Ireland’s growth as a fund management centre, in an article headlined: Irish fund management companies – time to get serious about substance and oversight.

Giving an overview of the evolution of the Irish funds industry, Durkan highlighted the recent increase in the influx of financial firms either entering the Irish market or expanding their presence in Ireland as a result of Brexit – and the development of Ireland into an increasingly ‘substantive’ fund management centre.

Durkan commented, “The Irish fund industry that was once the preserve of lawyers, auditors, tax advisors, administrators and depositaries to service the funds, is now being increasingly populated by investment management companies to provide local management to the funds.”

He also described the move away from the formerly popular Self-Managed Investment Company (SMIC) structure to the ManCo structure – which is now gathering increased momentum as a result of an intensifying focus by the Central Bank of Ireland on the local substance of Irish management companies and the CBI’s introduction of CP86 (Consultation Paper 86).

According to Durkan, more recent announcements and measures by the Central Bank in relation to substance, governance, oversight, investor protection and delegation of managerial functions further demonstrate that the Irish regulators are serious about the need for managers to have properly staffed, operationally robust and effectively run ManCos.

“These entities will not simply be there to tick a box, but will need to be substantial independent operations with responsibility for oversight,” he wrote. “In concluding whether SMICs or under-resourced ManCos should be allowed to exist, the regulatory and industry view is clear – they should not be allowed to exist in their current form.”

In the third article of the series, David Morrissey, Global Head of Client Solutions, focused on the third-party management company sector, offering a personal perspective on its development in an article called: The evolution of the third-party management company sector: Conflicted.

The piece provides an insightful analysis of the potential for conflicts of interest in the combination of third-party management companies and depositaries in terms of governance and oversight; the changing attitudes and requirements of investors, regulators and the industry itself; the divergent approaches of regulators in Ireland and Luxembourg; the comparative distinctions between ‘one-stop shops’ and ‘independents’; and the prospects for further change and reform ahead.

In the final of the four articles, completing the circle, Managing Director Neil Coxhead analysed the UK’s new Long Term Asset Fund (LTAF) structure – plans for which were recently unveiled by the FCA, with the aim of offering retail investors access to more illiquid alternative asset classes such as venture capital, private equity, private debt, real estate and infrastructure – as a development that he believes gives “asset managers a hint of how UK fund regulation will develop after Brexit”.

Says Coxhead: “It’s clear that the UK Government and regulators wish to seize an opportunity to achieve several of their key objectives with the creation of the LTAF and the Chancellor of the Exchequer, Rishi Sunak, has set an ambitious timeline to have the first LTAF launched in the market by the end of 2021.”

Despite there being a number of technical and legal issues to resolve before the LTAF is launched, Coxhead believes the move underlines the determination of the UK Government to enhance the attractions of the UK as an international fund management location in a post-Brexit world.

He commented: “Waystone is very encouraged by the UK Government’s desire to ensure that the UK remains a world-leading location for asset management, and with an industry that can serve investors’ diverse interests.

“The success of the LTAF depends on a well-designed regulatory regime and on all parties understanding the new vehicle, its benefits and drawbacks. Our experience of supporting funds investing in alternative assets in domiciles such as Ireland and Luxembourg will provide clients with the assurance that they will be working with a provider that understands both the dynamics of the asset class and the UK funds regime.”