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Regulation and acceleration

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Consultant Nigel Carey (pictured) and Senior Associate Rob Milner of Carey Olsen review the history of the funds sector in the Channel Islands and see an industry that has been helped along by key legislative changes and strong, proportionate regulation.

The funds sector in the Channel Islands has developed significantly in the last few decades. From relatively humble beginnings in both islands, the industry has grown to become the lynchpin of the islands’ finance sector, particularly in Guernsey. It has not happened slowly and gradually over time however. In both islands key changes to legislation, either here or in other jurisdictions such as the UK, have led to an explosion in activity in the markets as new structures or new clients have flooded the sector with investment.

The funds sector remains responsive to regulation and legislation change, and the future of the industry can be seen as very dependent on outside forces: the islands’ regulatory authorities for example, or the imminent EU directive on Alternative Investment Fund Managers (AIFM).

Whether success will continue will rely as heavily on these influences as it will on the skills and expertise of the fund professionals in the Channel Islands.

Early Days
In the late sixties early fund pioneers like Kleinwort Benson or Hambros began to look at Guernsey as a place with potential for a fund sector. Early funds were almost entirely retail focused, their purpose to funnel investments into unit trusts in the UK. The market of investors for many of Consultant Nigel Carey and Senior Associate Rob Milner of Carey Olsen review the history of the funds sector in the Channel Islands and see an industry that has been helped along by key legislative changes and strong, proportionate regulation Regulation and Acceleration these funds was primarily created by the presence of exchange control, meaning that the large British expat community was looking for a place to invest that was tax friendly, but still within the sterling zone.
Guernsey fitted the bill nicely.

The sector was growing, but at this time law firms were creating one or two funds per year, a far cry from the two to three funds per month being established at the height of the global financial markets.


As these funds began to increase in number, so did the number of professionals engaged in the process of developing and establishing them. Advocates were required for the formation of corporate entities, and regulation was required, although at this time this took the form of the Control of Borrowing Ordinance and required ‘permission’ from the politicians of the time in order to form a company and raise money through the issue of shares or other securities.

The politicians came to realise that it was not appropriate for them to assess the merits or otherwise of particular commercial propositions and initially the States of Guernsey appointed an individual with the title of "Commercial Relations Adviser" to undertake this task on their behalf but by the early 1980s it became apparent that in order to support effectively the finance industry generally and the funds industry in particular, an entity separate from government was required, that could license and regulate the funds sector quickly and efficiently. In 1986 therefore, the States resolved to establish the Guernsey Financial Services Commission and the then Commercial Relations Adviser, John Roper, was appointed as its first Director General with the task of establishing the new body as an effective and credible regulator.

Whilst Jersey has a similar financial services regulator, the two jurisdictions retain different methods of working. The principal difference is reflected in the way fund administrators are licensed. In Guernsey, each fund being established is required to undergo a process of authorisation or registration, whilst in Jersey, a functionary applies for what essentially amounts to a licence to practise. A company with this licence is thus normally entitled to act in respect of an unlimited number of funds in Jersey, removing an administrative cost when establishing funds.

Branching Out

Initially the funds being created in both islands were relatively simple affairs.
Investment focused on equities and bonds and not much of anything else. This enabled the sector to build, but real momentum did not appear until new types of funds began to emerge.

The UK’s Financial Services Act came into force in the mid-eighties and proceeded to shake up the market. The Act made it more difficult for Guernsey funds to attract investment from the UK and so the island reacted with the ‘Protection of Investors’ legislation, the ‘A’ scheme of which enabled Guernsey funds to once again market themselves to UK investors.

At the time, some market commentators surmised that this legislation had sounded the death knell of funds in Guernsey, but the changes served to trigger remarkable growth in the sector in the eighties and nineties, with private equity funds being seen in the island for the first time, moving the focus away from retail and towards more expert investors, a trend that was also seen in Jersey some years later.

Tighter legislation and better regulation led the Guernsey sector to a position where compliance and good practise were promoted, and business boomed as a result. Some providers moved away, but those that stayed found that these qualities were valuable selling points and prospered significantly.

Accelerated Growth

A further boost to the Guernsey sector came in 1995, when the Limited Partnerships Law was enacted in the island. Previously it had been necessary to structure Guernsey private equity as unit trusts, a vehicle which was largely unknown outside the United Kingdom, particularly in the United States where private equity funds have from the beginning been set up as limited partnerships. The enactment therefore of the Limited Partnership Law made Guernsey a more attractive proposition to American and other non British investors.

Whilst the initial pace of growth was slower in Jersey, and with no dedicated regulator established until the late nineties it would be easy to see the island playing ‘catch up’ with its neighbour. Recent law changes however have created a very different landscape and one that is now growing as fast, if not faster, than across the water.

The introduction of the Jersey expert fund regime in 2004 in particular led to a marked increase in fund establishments in the island. The regime enabled Jersey to diversify away from open ended retail funds that required strong regulation, and recognised that ‘expert’ investors do not require the same level of protection as retail. This enlightened approach, using proportionate regulation from the Jersey Financial Services Commission, gave the Island’s fund professionals a strong business edge, and with a three day regulatory turnaround time and applications based on self-certification, Jersey became a popular place to establish structures aimed at institutions and high net worth individuals.

In 2008, Jersey passed new legislation to allow two types of ‘unregulated’ funds to be formed on the island. The ‘unregulated eligible investor funds’ regime is a logical step onward from the ‘expert’ regime and enables a fund structure which has sufficient barriers to entry that only very sophisticated or wealthy investors may invest to be established and operate entirely free of regulation. Meanwhile, the ‘unregulated exchange traded fund’ regime is available to closed ended funds which are listed on any one of a number of identified stock exchanges (including the Channel Islands Stock Exchange) and removes the potential element of ‘double regulation’ inherent in many fund structures.


The founding of the Channel Islands Stock Exchange has added a further level of attraction to investors. Listed funds, having already met the requirements to be a listed vehicle, are spared the majority of the burden of regulation and a listed, closed ended fund is practically ‘no-touch’ when it comes to regulation.

The attraction of being able to list funds on a recognised exchange has been a boon for both islands and is a key selling point for the fund companies based here.

The streamlined approach to regulation has enabled both Guernsey and Jersey to be ultimately competitive on the global stage. A combination of low tax and proportionate regulation has attracted many funds to the islands and as a result they are well placed to spot trends in the sector and to look at the future of the industry with some confidence.

What is Next?
Both Guernsey and Jersey expect their fund sectors to continue to grow. As the world begins to manoeuvre its way out of the economic downturn, the regulatory regimes that are in place and the types of funds being established in the islands both point to a bright future.

Global trends indicate that funds are embracing new technologies; the islands have seen an increase in funds specialising in green energy and green technology investments, with wind farms and solar energy plants being recent examples.

Jersey remains a strong performer in property investment. Funds established in the island are responsible for investments all over the world as well as a significant amount of UK property. This is set to continue being a cornerstone of the Jersey funds market, even as the island attracts more private equity investors to its shores.

Outside factors need to be taken into consideration when viewing the future prospects of the market. The AIFM directive will bring changes to the way the sector works. At the current time it is difficult to predict exactly how the directive will look. It could certainly have an adverse effect on the islands, and create the need for new ways to do business in order to fit around the new rules. Equally, there is the possibility that the directive will be beneficial to the fund sector here, and would usher in another period of rapid growth to the industry, further cementing the Channel Islands’ reputation as a leading centre for the establishment and administration of investment funds.

Article originally publised in Issue 18 (Winter 2009-2010) of the Channel Islands Stock Exchange Bulletin Board magazine

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