BL’s recent Channel Islands Funds Forum brought together leading figures from the funds industry for some insightful, thought-provoking discussions
Brexit and the Panama Papers have dominated the media over the past year and caused people to question the value of international finance centres like Jersey and Guernsey. With the focus on one of their most successful sectors – the funds industry – speakers at BL Global’s annual Channel Islands Funds Forum attempted to determine whether the islands really are making themselves heard above all of the noise.
Held at the Radisson Blu Hotel in St Helier, Jersey, on 28 September, the Forum, organised in partnership with PwC, was attended by 150 leading members of the Channel Islands’ funds industry. The event was sponsored by Appleby, Hawksford and Optimus Group, and supported by Altair, Puritas and Rossborough Professional Risks.
The day kicked off with a session examining the past 12 months in funds. Ben Robins, Partner at Mourant Ozannes, acted as moderator to a panel of experts comprising:
• Fiona Le Poidevin, CEO of the Channel Islands Securities Exchange
• Mike Jones, Director of Policy at the Jersey Financial Services Commission
• Simon King, Private Equity Director at Aztec Group
• Andrew Whittaker, Chair of the Guernsey Investment Funds Association and Managing Director of Ipes, Guernsey.
When asked about the response towards the islands following both the Panama Papers and Brexit, Fiona Le Poidevin felt the issue of communication was paramount. “Jersey and Guernsey are still well respected, but Europe doesn’t necessarily understand our relationship with the UK,” she said. “It’s tough. Brexit isn’t helping and there’s no doubt that we need better engagement.”
The need to engage and communicate was also at the forefront of the panel’s thinking when Ben Robins sought their views on cybersecurity in the wake of the Panama Papers revelations.
“There’s no doubt that cyber threats are there,” said Simon King. “As an industry, we’re dealing individually with the threat, but this is something for which we should come together and work together to be as well prepared as we can.”
International threats
Following a brief discussion about cybersecurity, it wasn’t long before the conversation switched to an analysis of the threats posed by a range of international pressures.
Robins asked whether there was increased evidence of pressure coming from the onshore world. The consensus was that Luxembourg poses the biggest competitive threat to the Channel Islands funds industry, but Andrew Whittaker said the small European state also came with drawbacks for fund managers.
“Whilst the market is pushing towards Luxembourg, there are problems on the tax side, which we hear clients talking about,” he said. He suggested the Channel Island’s funds industry “needs to create more cost-effective propositions over here” to increase the islands’ attractiveness vis-à-vis Luxembourg.
Brexit reaction
Robins then brought the conversation back to Brexit, asking whether the UK’s leaving the EU will be a shock to the Channel Islands.
In general, the panel felt that Brexit fitted into the category of being a serious challenge that held the potential for many opportunities, particularly once the issue of passporting is resolved. “The passport is in the lap of the gods. Whilst the second wave [of applications] went well, it is down to politics now,” explained Mike Jones. “They’re not just looking at AIFMD and AML processes, in which the islands have stellar scores, so we must engage with them in order to make our case.”
After the Brexit discussion, the conversation moved on to the new products being introduced to the islands, including Jersey’s new private funds regime and Guernsey’s manager-led product, both of which the panel felt should benefit the existing product portfolios by giving fund creators greater flexibility in the range of options available to them.
The conversation then moved to regulation with King saying that it can be difficult “for some people to understand our high regulatory standards”. This prompted Whittaker to say that a practical approach to regulation was needed to ensure standards are maintained whilst remaining understandable to clients.
Robins rounded off the discussion by suggesting that the islands’ funds associations may be needed to make the case for using the Channel Islands because larger, multi-jurisdictional companies have to maintain a neutrality in order to provide their clients with the services they need.
Current trends
Evelyn Brady, Partner at PwC in Guernsey, and Stuart Pinnington, Group Head of Institutional Client Services at JTC Group, followed the opening panel with a presentation on current funds industry trends.
In a world of political uncertainty, both speakers felt Jersey and Guernsey are well placed to continue developing their funds industries because of the quality of the “people, the service and the environment” in the Channel Islands.
Brady felt that Brexit offers an opportunity for the islands to move their focus from Europe to the rest of the world and, whilst agreeing with this, Pinnington added that the strong progress with European passports will mean the islands are particularly well placed to benefit from Brexit.
This line of thinking was extended to take into account last year’s launch of a number of ManCos (management company solutions) within the islands’ regulatory regimes, with Pinnington saying the islands could “exploit the non-EU/EU split. When we receive our passports, the islands could go head to head with Luxembourg”.
Looking at trends in interest that they are seeing in the islands, Brady explained that whilst “some bumper funds have launched in Guernsey, we can’t expect others to automatically follow because every fund considers its jurisdictional options. We are seeing particular sectors like healthcare and smaller niche funds coming through”.
In Jersey, Pinnington said that “real estate business continues to flow into the island but the flow of expert funds isn’t happening in the same way”. He also said that private equity funds are “still strong in Guernsey, which has a great background in the area”.
Regulation, legislation and tax
The day’s third session provided an update on regulation, legislation and tax. Opening this session, Andrew Weaver, Partner at Appleby in Jersey, gave an update on the past year’s regulatory developments.
In what had been a busy year, highlights included ESMA’s announcement that there should be no obstacles to the islands receiving their AIFMD passports and the Moneyval reports which showed the Channel Islands have “mature legal and regulatory systems”.
Weaver noted that both islands have issued guidance on their approach to risk-based supervision and there are slight differences between them. Whilst Jersey sees the potential impact of a risk being a function of its footprint and its severity, Guernsey also factors in the probability of a risk occurring.
Interestingly, cybersecurity has been identified as a growing threat, with areas of risk being identified as the potential for data loss, financial loss and DDOS attacks that affect the ability to do business.
Robert Mellor, European Alternatives Leader at PwC in London, followed on to cover the tax issues. In his update, he said BEPS had become a reality and, along with new ‘anti-hybrid’ rules, would naturally affect the ability of firms to limit tax losses. As a result, “you’ll see more tax leakage at the portfolio level”.
In general terms, Mellor explained, “there’s a huge amount of legislative change going on at the moment” and that companies “have to be on top of these changes”.
“Tax authorities are sharing data a lot more, so you need to have a consistent view of your business,” he warned. “If what you say to investors, the market and the regulator is inconsistent, then you’ll be on the back foot.”
Risk management
The next panel – and the close of morning sessions – looked at risk and risk management, and comprised:
• Sarah Sandiford, Compliance Officer at Langham Hall Jersey
• Pippa Davidson, Head of Funds at Fairway Group
• Brett Allen, Head of Product and Client Solutions at BNP Paribas Securities Services
• Justin Partington, Global Head of Funds at Sanne Group, who acted as moderator.
Partington began by saying that there are three main areas of risk within a business: AML compliance, the integrity of any given tax structure, and staffing and recruitment.
Sandiford followed by complimenting Jersey’s compliance standards. “In Jersey, we’re pretty good at AML/CFT controls and should remember this ourselves,” she said, before Allen made a point about the need to automate processes wherever possible.
Whilst automation is important, risk assessment will always have an element of subjectivity and Davidson suggested it can often be easier for smaller firms to be flexible and make quicker decisions.
The panel agreed that people are vital to effective compliance. In response to a question about the effect of NEDs on compliance standards, Sandiford said third-party NEDs are a risk and therefore compliance officers should take the time to get to know them.
Davidson added that someone external with the relevant industry experience can be a great help, but that doesn’t mean Jersey-based people aren’t suitable. “We shouldn’t undersell ourselves; our experience in Jersey is important,” she said.
Investment opportunities
Brexit and the US elections weighed heavily in a presentation by Mark Rawlins, Group Partner at law firm Collas Crill, and Scott Spencer, Portfolio Manager for Ravenscroft Investment Management, which looked at where the money flows are coming from in the coming year.
Again, the feeling with regard to Britain leaving the EU was one of opportunities being created. “There’s the possibility of, let’s call it a ‘Brexit Opportunity Fund’ that takes advantage of currency volatility,” said Rawlins before Spencer pointed out that “if you’re a dollar investor in the UK, you’ve just been given a huge discount on your purchases.”
Spencer suggested one reason for the slowdown in IPOs during 2016 was the upcoming US election. “We can’t invest on a political outcome, we just have to work with the existing conditions. Post the US elections, 2017 could be a very active market for IPOs,” he said.
Looking at the EU, Rawlins made it clear that the Channel Islands need to make sure they are close to both the UK and the EU following Brexit.
The presentation then moved to Asia and the Middle East, which were characterised as being the regions in which new wealth is being created. China’s infrastructure was highlighted as being a key driver for growth, with it being 20 years ahead of India and 50 years ahead of Africa.
On Africa, the pair explained that there are opportunities but that a trust issue had slowed investment. However, the growth in transport links is “opening up opportunities” and “Africa should be on everyone’s radar.”
Island innovation
The penultimate session of the day focused on innovation in the funds sector. Mike Byrne, Chair of the Jersey Funds Association and Partner at PwC in the Channel Islands, and Frances Watson, then a Partner at Ogier in Guernsey, examined the sectoral landscape.
Luxembourg and Ireland were noted as threats to the Channel Islands’ funds industry because they can compete on both people and scale. That said, Byrne noted that the Channel Islands still have “five or six times the value of private equity funds” compared with Dublin. Watson pointed out that the “Channel Islands have always been innovative”.
The role of the regulator as a catalyst for innovation was brought to the fore, with Byrne saying: “We’re unique in our ability to interact with the regulator.” This was reinforced by Watson, who said that “for innovation to work, you have to have clear regulatory guidelines”.
Fund administrators were praised for their ability to “turn regulatory burdens into opportunities” and KYC was highlighted as an area that could become “a huge competitive advantage” if a firm found a way to “crack the nut of clients having to give their KYC to every service provider”.
Debt funds were described as “having their moment” and sympathy was expressed for the regulator faced with pressure to move quickly in the untried and untested cryptocurrency space.
What next?
The day’s final panel session saw Lisa Cawley, Partner at Kirkland & Ellis LLP in London, moderate a discussion entitled What Next for Funds? Other participants included:
• Gavin Farrell, Partner at Mourant Ozannes
• Giles Johnstone-Scott, Director at Elian
• Amy Bryant, COO at Jersey Finance
• Dominic Wheatley, CEO of Guernsey Finance.
Whilst Wheatley saw Brexit as making it possible to become “more aligned with London”, Farrell pointed out that in fact London could become one of the Channel Islands’ competitors but, reiterating a theme of the day, Luxembourg was currently the main competitive threat.
In response to a question from Cawley about costs, Bryant saw wage inflation in small jurisdictions being an issue but also explained that regulatory costs may rise among the Channel Islands’ competitors as they tried to achieve the same regulatory standards.
On products, Johnstone-Scott said the Jersey RAIF (reserved alternative investment fund) would be very marketable, a point backed up by Bryant, who also mentioned that Jersey Finance is constantly “scanning our competitors to see what they are doing and whether we are doing enough”.
When asked why clients should see the Channel Islands as being the right place to set up funds, Johnstone-Scott pointed to the “good people, systems and processes”. Farrell said: “Our track record, high intellectual capital and the fact that we are a well-trodden path are all qualities that are valued by fund managers.”
Wheatley highlighted tax neutrality as well as future-proofing. “Not only do we have a good track record but we’re currently in a great place and will continue to be in the future,” he said.
Answering a question about how she pitches the Channel Islands to clients, Cawley rounded off a highly informative day by saying: “The islands are perceived as a great place to do business. Ultimately it comes down to whether there is enough of an upside to deal with the islands rather than lower-standard regulatory regimes.”