Channel Islands fund regimes promise speed to market, robust regulation and straightforward banking common law. With their focus on real estate, private equity, debt and infrastructure asset specialisms, the uncertain regulatory and political landscape is creating opportunities in Jersey, Guernsey and beyond
There are just over 150 miles between London and the Channel Islands, but as the British government continues to wrangle with the EU over what life could look like post-Brexit – and struggles to get a handle on the global pandemic – the Channel Islands and London feel, on some levels, much further apart.
The islands’ flexible funds regime and their pragmatic regulation – as well as their independence from both the UK and the EU – already hold a strong appeal for investors.
“Part of Jersey’s success is being able to develop and adapt to changes in the industry,” explains James Mulholland, a Partner in Carey Olsen’s Investment Funds team in Jersey. “A key feature is its flexible funds regime.”
Mulholland points to the Jersey Private Fund, which has proved popular with managers looking to develop their products and investment strategy. Jersey’s accessibility has, he says, created a thriving investment community.
“A key attraction for many fund managers is our position outside the EU,” Mulholland continues.
“It means that managers of Jersey funds are not subject to all the onerous and expensive provisions of the Alternative Investment Fund Managers Directive, but have the ability to market within the EU on a selective basis.”
And, rather than competing with European funds, the Channel Islands have developed an offering that often complements them.
“If a manager wants to market on a pan-European basis or to the retail market, they will need to go to an onshore European jurisdiction,” says Elliot Refson, Head of Funds at Jersey Finance.
“However, if they are one of the 97% of all managers who do not market into more than three European countries, then Jersey offers a cheaper, faster and more efficient alternative.
“In today’s environment, businesses and investors are operating across borders and need specialist centres like Jersey to help them operate on a global scale.”
Joining the collective
The Channel Islands have historically been a popular location for inward investment into the UK, both from non-UK entities and from UK entities joining forces in club-like funds.
Philip Hendy, Head of Real Estate at Intertrust, says the jurisdiction offers excellent opportunities for such collective schemes.
“Many pension funds want exposure to certain kinds of property assets, but some of them come in fairly large monetary sizes,” he says. “Even if you’re a large company, you probably don’t want to put millions of pounds into a single asset.
“If you join forces with lots of other pension funds, you can collectively own parts of these types of properties.
“Jersey and Guernsey, through the funds regime, provide an opportunity for those types of pension investors. They have a fit-for-purpose regulatory environment where you’re dealing with sophisticated investors, with no double tax leakage on the way through.”
Company law in the Channel Islands is also based on solvency rather than capital structure rules, as it is in the UK, thereby reducing restrictions around distributable and non-distributable capital.
“From a corporate point of view, it makes the process a lot easier because you’re not having to worry about maintaining certain capital accounts or having to go to court to get permission to distribute them,” explains Norman Amey, a Director at Ocorian.
“It is purely about making a distribution in some way, shape or form, but making sure it is done in a strong judiciary environment where the directors are personally liable if a distribution is made insolvently.
“That in itself is a big plus point for Guernsey, particularly for a fund structure that involves – usually – quarterly distributions. It makes the process a lot more straightforward and streamlined.”
Tax refresh
One area of growing opportunity on the Channel Islands is in debt funds, as a result of the refreshed Double Taxation Agreement set up between Jersey, Guernsey and the UK.
The renegotiated treaty came into effect in 2019, bringing changes to the previous withholding tax requirements.
“Going forward, you’ll start to see Jersey and Guernsey being looked at as a more favourable jurisdiction for these kinds of debt funds,” says Hendy. “While there’s an increasing amount of interest in debt, with interest rates being so low, people aren’t sitting on cash but are looking at different types of investment media.”
In late 2019, in the face of Britain’s looming exit from the EU and before coronavirus had even hit the headlines, Jersey Finance commissioned a survey exploring the key trends in fund domiciliation.
While Brexit, BEPS, substance and transparency had all climbed up the agenda, there was one clear concern among fund managers.
“The number one takeaway was that investors want jurisdictions that can offer expertise and political and fiscal stability with a no-change outlook from a regulatory, legal or economic perspective,” says Refson.
Hendy agrees, illustrating the strong position of the Channel Islands as a result of an agreement drawn up between the UK’s Financial Conduct Authority (FCA), the Jersey Financial Services Commission (JFSC) and the Guernsey Financial Services Commission (GFSC) in 2019.
“It provided a level of certainty that funds from Jersey and Guernsey would still have access to UK investors and capital after Brexit, when effectively EU law would then cease to apply throughout the UK,” says Hendy.
“If you look at where everyone sits in the Brexit scenario, you’ve got funds in the UK that might only be able to access the UK; funds coming from the EU that might be able to access the UK subject to complying with certain changes; or funds from Jersey and Guernsey that have a memorandum of understanding between the FCA, JFSC and GFSC.
“And these funds already have a well-established route into the EU through the national private placement regime.
“What it means is that you probably have a better level of access from Jersey and Guernsey into the UK and EU nexus than you have from the UK into the EU, and vice versa.”
Sustainable future
With political upheaval ahead and an uncertain regulatory future for both the UK and the EU, investment specialists in the Channel Islands believe the jurisdiction is in a position to tap into unique – and possibly unprecedented – opportunities.
“In a post-Covid world,” Refson says, “the importance of centres like Jersey is becoming only more evident.
“We have seen how governments worldwide have had to take extraordinary measures to support their economies with emergency support. And the question those governments will now need to answer is how to finance future growth.
“These measures were necessary but, over the longer term, unsustainable. Investment through equity is clearly what is needed, and our funds industry will be able to demonstrate its important role and will help economies grow.
“Businesses are facing unprecedented challenges and will need expertise and investment. Jersey’s fund sector is ideally placed to help achieve this.”