The fight for funds business

With big sums at stake, competition for funds business is as voracious as ever – so the Channel Islands must size up the opposition and be ready for a fight

Funds. Not only are they vital to Guernsey’s and Jersey’s financial health, but they’re also key to the islands’ sense of identity as players in the global business world. There’s a reason, however, why there’s a common warning about putting all your eggs in one basket – someone else can always come along with more eggs in a bigger basket… and a hammer. And that’s why the islands have always been, and will continue to be, mindful of where the competition is coming from.

The first source of competition is from other offshore jurisdictions, a traditional area of rivalry, with many having a strength in a specific fund area. The Cayman Islands, for example, still dominate the hedge fund space. Then there are the fund managers – many US managers, for instance, have always gone to Cayman or the BVI for their offshore fund needs.

While habit always plays a part in dictating who uses what jurisdiction – many US managers who use Cayman continue to do so simply because they always have – the issue of reputation is becoming increasingly important, especially in the wake of the Panama Papers. The general trend is towards transparency. 

“There tends to be a flight to quality at the moment,” says Mike Jones, Director of Policy at the Jersey Financial Services Commission. “Yes, people need offshore vehicles for tax-neutral purposes, but they prefer jurisdictions that have had good market assessments. We had a positive assessment from ESMA for AIFMD passporting in July, along with Japan, Australia and the US, so we’re in good company. Cayman wasn’t on that initial list.”

These days, however, there’s an increasingly strong challenge from other sources. Where European business is concerned, AIFMD has had a huge impact. Fund domiciles within the EU have benefited from the AIFMD marketing passport, while those outside the EU are still waiting for final approval. “Realistically, places like Luxembourg and Dublin now count as our competition too,” says Jones.

Indeed, Dublin and Luxembourg are the leading fund domicile jurisdictions within the EU. Along with Singapore and Hong Kong they’re examples of ‘midshore’ jurisdictions – those that are technically onshore but offer offshore characteristics. 

“Midshore jurisdictions don’t have large numbers of domestic investors but are attractive as fund domiciles for a number of reasons – typically, lower tax and regulatory benefits such as access to onshore markets,” says Frances Watson, a Partner at Ogier in Guernsey.

Both Luxembourg and Dublin have an enviable funds haul of their own: Luxembourg has a 65 per cent share of global cross-border fund distributions, while Ireland has 22 per cent. By comparison, Jersey has three per cent, Guernsey even less. Admittedly, much of these figures relate to UCITS, which isn’t a space the Channel Islands really operate in. 

Fighting talk

The Channel Islands are hardly shrivelling in the face of such competition, however. They’re attractive too – they combine the much coveted high standards of transparency and regulation with the flexibility of offshore funds domiciles, while offering strong regimes for marketing funds both to the EU and beyond. 

“Jersey is outside of the EU, which means there’s greater flexibility for fund structuring when it comes to accessing the European investor market,” says Geoff Cook, CEO of Jersey Finance. “While some promoters may want a fully AIFMD-compliant solution, with all the additional requirements it brings, others may prefer a more flexible platform that still offers high levels of oversight but is also faster to market and enables marketing to non-EU jurisdictions. 

“Meanwhile, being at the front of the queue for a third-party AIFMD passport in the future is giving managers real confidence in Jersey’s long-term future.”

Cook points to the “exciting growth trend” of fund managers migrating to Jersey – its funds sector stood at just over £223bn as at June 2016, driven by alternative asset classes, with particularly strong performances in private equity and real estate funds. 

There are now 126 fund promoters operating in Jersey – more than double the number of five years ago – and its reputation is of an asset management hub of substance, handy in these times of BEPS and AIFMD. “The emphasis for Jersey is always on quality, not volume,” says Cook. 

The argument for Guernsey is no different, and it is posting similarly bullish figures, with a net asset value of funds under management and administration of £247.1bn at the end of June 2016, up 12.3 per cent on the year before. 

Even so, it remains important for Channel Island players to keep a close eye on their performance – as well as that of their rivals. Direct comparisons can be tough, because of the differences in types of business done and in how data is gathered. Dublin may have a larger funds industry, but only around a quarter of its assets are in alternative investment funds, the Channel Islands’ speciality, with around 75 per cent in UCITS. 

Still, interested players can always find information. “We track Monterey Insight, which gives a picture of the funds that are active and the stage they’re at, and the levels of assets under management,” says Charles Le Cornu, a Director at Elian. 

“It’s important to keep track of other jurisdictions – the regulations and the overall performance in terms of fundraising and which domiciles fund managers want to use for their funds. We also have offices in Luxembourg, Dublin and Hong Kong – so it’s possible to have a view on anything happening in fundraising.”

Staying relevant

But all the information in the world is useless if you can’t act on it. When competition is this strong, you need to innovate to compete. Both Luxembourg and Dublin have reacted well to changing needs in the wake of AIFMD. They’ve made their regulatory regimes more flexible and wider in terms of the range of products offered. 

Take the Luxembourg RAIF (reserved alternative investment fund). This was introduced at the end of last year in response to concern that the regulation of managers brought in by AIFMD was an unnecessary hoop that fund managers had to go through, given that the funds were already being supervised at product level. 

Luxembourg recognised speed to market as crucial – historically it would have taken the regulator a week to process that kind of product when regulating it at fund level. In the new manager-led product (MLP) world, if the manager already regulates in that jurisdiction and complies with AIFMD, that’s enough.

“The RAIF and similar products should help the funds industry because they reduce regulatory duplication, speed up fund launch and therefore translate into a welcome reduction in overall formation costs,” says Frances Watson. It’s a concept that’s subsequently been followed in Malta and in Guernsey, through the launch of its own MLP. “It’s a perfect example of innovation and evolution within the funds world.”

Jersey is currently consulting on its own similar products, including the Jersey RAIF, as well as making changes to its Very Private Funds regime. 

“One historical criticism of Jersey is that while its regulatory products are very good, the overriding regime has often been too complex,” says Le Cornu. “So the recent move to streamline it for the new world of AIFMD, to make it more flexible and easier to set up and run funds, has been welcome.”

And it hasn’t stopped there. The regulator is also working on measures designed to better enable the development of fintech and Bitcoin funds, as well as ways to make anti-money laundering measures easier in the funds space. “It’s our responsibility to keep the regime up to date and relevant,” says Mike Jones.

Given that there’s a Bitcoin fund on Jersey already (courtesy of Global Advisors), the Channel Islands clearly have the right idea about opening new doors. Of course, rival jurisdictions are going to be opening doors of their own, too. So what’s the best way to protect those eggs? Carry your own hammer. Or remain innovative, and therefore competitive, at least.