Funds Sector is Adapting to a More Regulated World
Monday 1st November 2010
The funds sector in the Channel Islands is adapting to the changing nature of the financial services industry to take advantage of new opportunities.
Companies who have a sufficiently broad range of skills and experience who can adapt their business accordingly are now best placed to benefit from a market that is different to the one we were familiar with prior to the crisis. There is a general acknowledgement that the market today has a more cautious approach to managing risk and seeks to apply good principles of corporate governance.
I can understand the argument that is conveyed by some that an over emphasis on regulation may stifle business in the Channel Islands but at the same time we now live in a world in which international investors require the reassurance of a well regulated jurisdiction. Add to that, Governments are imposing their own criteria for regulation of certain sectors of the global funds industry. The US ‘Dodd Frank’ measures and the EU’s Alternative Investment Fund Manager Directive (AIFMD) will certainly have an impact on the strategy, operational structure and costs generally for fund promoters.
At a Directors Convention recently, an international tax lawyer expressed the view that international finance business will continue to come to Jersey because it is recognised that Jersey is a stable, well regulated, transparent jurisdiction supported by high quality infrastructure and experienced service providers.
But there is a downside for the fund promoter of course, which is that the costs of doing business in Jersey increases and so it is important that we get the balance right.
The good news though is that by most assessments, the global economy has passed the bottom of the current cycle and, as we emerge on the other side, there is a tendency for investors to once more make funds available and to re-visit their investment strategies. The result is that we are experiencing increased new business activity and seeing different types of investment structure coming to market.
For the funds sector, it is encouraging that we are witnessing private equity moving again and the need for fund administration services to support new fund launches, but alongside, we are also seeing increased enquiries for corporate governance services which require the Jersey licenced fund services business to support the management and oversight of investment structures independent of the fund promoter.
Since the introduction of the Codes of Practice for Fund Services Business in 2007 by the Commission , there have been increasing opportunities to provide corporate governance and compliance services to non Jersey promoters seeking to establish a vehicle in Jersey for the purpose of acting for a fund, such as the general partner or manager of an expert fund, a ‘managed entity’. Fund Services Businesses equipped with the necessary controls framework and skills have adapted to the changing regulatory landscape and are able to act as a manager of the managed entity, “MoME”.
The ongoing provision of company secretary and registered office facilities, maintenance of statutory registers, organisation of all board meetings, audited accounts filing, report distribution and other regulatory and statutory functions have to be managed and undertaken to various deadlines. The MoME is able to build these requirements into a relevant operating framework to ensure that the managed entity is able to meet their fiduciary and regulatory responsibilities.
Jersey funds business continues to adapt also to meet the rapidly growing markets in the Gulf, Asia and Far East where there is increasing potential for new business. For example, we are once again seeing enquiries in relation to Shari’ah compliant funds.
In one example in which we have been involved recently, one of the keys to the success of the structure has been the use of a Jersey Protected Cell Company (PCC). The PCC provides a platform for the issue of a Shari’ah compliant Sukuk certificate programme. The Sukuk issue, which is naturally designed to be an attractive opportunity to Muslim investors, is to be used to support the investment in a public finance initiative in the UK and the PCC, which is operated in Jersey, is integral to the whole transaction.
A renewed emphasis on regulation and corporate oversight, and a shift from the more traditional markets in which Jersey has previously secured business to the powerful economies further East are two of the challenges that face the funds business. We have to adapt in order to continue to prosper.
Jersey probably needs to accept that during this period of change, there may be some loss of business. It takes time for fund promoters and investors to understand new regulations and their implications for doing business. In Japan, for example, where we have an office and considerable experience of the funds market, it took some time for the market to understand the requirements of the Financial Instruments and Exchange Law (FIEL) when it was introduced in 2007. In this instance, the funds business in Japan slowed but, recovered once clients in Japan were reassured about the implications of the new rules.
Jersey, in some ways, may experience similar issues around the introduction of the AIFMD but it is a mature and experienced jurisdiction which has adapted before and I am sure can do so again. There is no doubt that the changing global finance landscape has already opened up new opportunities for fund service providers in the Island. Ten years ago I doubt that many firms would have been promoting the quality of their compliance services but this is now a valued part of the mix of services offered by many in the funds industry. These trends will continue as the market evolves and new investment structures and products develop which, of course, will need experienced fund services businesses to manage and administer their operations to meet new standards of regulation.
Kevin Gilley, Managing Director, Moore Group
PR-011110.pdf