After what has been one of the wettest winters on record, there looks to be some blue skies ahead (literally and metaphorically).
The promise of summer brings with it the annual migration of my wife’s family from the north of England as they seek sunnier climes in which to recharge their batteries and try to put another dreadful season of North East football behind them. After the initial excitement of landing and making themselves at home in our home, the questions about what I do for a living (“What do you do again?”) are trotted out. In the past, I have answered with a simple “It’s complicated”. Occasionally I will go a step further and add “I work in the finance industry” or “I am involved in funds”. However, with the Panama Papers making headlines even in the small Durham village where my in-laws reside, I feel it’s time to explain once and for all “Why funds and why Jersey?”
In preparation for that conversation, I thought I’d take this opportunity to look back on the evolution of the funds industry in the island and understand its place in Jersey’s economy.
Jersey was first seen as a potential location for offshore funds and fund administration in the mid-1960s when fund managers started to utilise the island’s beneficial regulatory regime for fund structures to develop and promote open-ended retail fund products. These offshore retail funds (structured as unit trusts) allowed the UK expat community and other international investors to invest in a much wider range of assets than their onshore counterparts. The structures themselves were tax neutral; although tax was payable by the investors, who remained responsible for their own income and capital gains tax in their home residence and domicile.
In the early 1980s, the advent of the Undertakings for Collective Investments in Transferable Securities (UCITS) regulation in Europe marked the beginning of the end of this form of fund business in Jersey. UCITS provided a simplified route for EU fund centres to establish and market investment funds aimed at retail investors across the EU. Unfortunately, Jersey was excluded from the scope of this legislation due to the constitutional relationship of the Channel Islands with the EU. Consequently, first Luxembourg and then Dublin emerged as pre-eminent investment fund centres for retail funds within the EU.
This was an early indication that the world’s funds industry would evolve and adapt to investor demands and that the offshore industry in Jersey would have to anticipate those changes if the island wanted to remain a funds location of choice. Jersey’s fund service providers and legislators rose to the challenge and responded to the migration of retail funds by diversifying into the “new” alternative funds sector.
Roll forward into the late 1980s and early '90s, and the “not so new” alternative fund industry was really starting to gather momentum - and its own sophisticated followers. Private equity, recognised as one of the early alternatives, started to deliver significant returns for investors. Moreover, Guernsey seemed to have stolen somewhat of a march on Jersey by attracting the then smaller fund managers and start-ups that were focused on closed-ended alternative funds. What became increasingly apparent during those years was that the alternatives industry was starting to grow exponentially, with enough business for both islands.
Never known to be overawed by Guernsey dominance (as our 2015 Muratti win can attest), Jersey set about ensuring that it too could attract high numbers of alternative managers with the extensive fund experience and expertise embedded within the island’s legal, tax, audit and administration firms. At that time, Jersey also revised its regulatory regime to conform with the industry requirement for a more streamlined approval processes for real estate, hedge and private equity funds.
The changes were timely. The expert fund regime was launched in the middle of the 2002-2007 boom years when Jersey plc played host to a large number of European fund managers seeking to establish offshore structures. Business was good and the living was easy but, unknown to all but a few, storm clouds were gathering on the horizon.
The island’s fund industry was not immune to the global economic and financial crisis that followed. The immediate impact—a severe fall off in new fund raising as investor allocation and appetite waned—was obvious to everyone involved in funds. Fortunately, the diversification of fund structures in Jersey and the longevity of those structures meant that the industry did not descend into crisis, and hunkered down to weather the storm.
No sooner had the clouds cleared and the industry dusted itself off, when it was faced with further challenges in the form of the EU’s introduction of the Alternative Investment Fund Manager Directive (AIFMD). For some, the AIFMD sounded the death knell for the island’s funds industry but, in typical “adapt or perish” form, Jersey amended its regulations to ensure it remained a competitive and attractive jurisdiction for fund managers.
This steadfast resilience will see Jersey’s fund industry survive the latest round of challenges: negative press from the Panama Papers, the future complexity of jurisdictional tax laws and the wider effects of the introduction of EU regulation including BEPS (Base Erosion and Profit Shifting and CRS (Common Reporting Standard). Although the outcome is uncertain, one thing is assured: Jersey is well placed to capitalise on fund managers’ increasing preference for establishing structures in politically stable jurisdictions with a solid track record of providing supportive legislation and high standards of supervisory oversight. I have no doubt that in the anticipated “flight to quality”, the abundant fund expertise and experience on the island will prove more than equal to the task of managing and administering funds in line with growing regulatory and corporate governance demands.
So this summer when my in-laws ask once again what their favourite (and only) son-in-law does for a living, they may be surprised when I sit them down and explain exactly what my job entails and why, come rain or shine, Jersey is rightly recognised as a leading centre for fund management and administration.
(Article originally printed in Jersey Evening Post Funds Review May 2016.)