Written by: Nick Kirby
Posted: 06/01/2014
Vic Holmes, Chairman of the Guernsey Investment Fund Association, and Ben Robins, Chairman
of the Jersey Funds Association, talk to
Nick Kirby about the past, present and future of the funds industry in the Channel Islands
While the finance industries in the Channel Islands have undergone significant challenges in recent years, it's arguably the funds industry that's had the most turbulent ride. Contributing a significant chunk of business to both islands, funds have not only had to deal with the aftermath of the financial crisis in terms of investor reaction, but also legislative reaction, not least in the form of the Alternative Investment Fund Managers Directive (AIFMD) – the implementation date for which came and went in July 2013.
Vic Holmes and Ben Robins, Chairmen of the Guernsey Investment Fund Association (GIFA), and Jersey Funds Association (JFA) respectively, spoke to businesslife.co about a challenging few years, and how the industry could well emerge from it stronger than ever.
In a nutshell, give us one positive aspect of the funds industry in your island and one challenge that isn't AIFMD.
Ben Robins: I think the positive aspect at the moment is the depth and quality of service provision across the board – the availability of administrators, custodians, depositaries, auditors, banks and law firms. I think that relative to any offshore competitors there is a really compelling offering for managers that want ‘substance' on the ground.
I think the challenge is that while our fund regulatory regimes are very flexible, by dint of this flexibility they're very complicated. So the challenge over the next few years for industry is to simplify fund regulations, which is something we are looking at.
Vic Holmes: Guernsey is the same as Jersey in that we're blessed with having a relatively mature funds industry, especially compared to some of the younger jurisdictions such as Dublin or Malta. That brings its advantages – we've got a huge share of the London listed market, plus we have reputation and credibility in certain fund sectors such as real estate and private equity.
Aside from AIFMD, an ongoing challenge is dispelling the myth of what can and can't be done in Guernsey. Guernsey Finance does a great job of getting the message out there and making sure any comments are based on facts rather than an incorrect perception.
Was it a relief to get to the point of implementation with AIFMD, even though there are still elements that need to play out?
VH: It was a relief in that there was certainty regarding a date! Even as we were approaching the July implementation date, there was still some uncertainty that it would hold firm. AIFMD was initially a directive that caused huge concern, and I think both islands have dealt with it exceptionally well – we did everything we could, made all the representations we could, given the circumstances. Now it's a case of dealing with the regulation and positioning ourselves appropriately.
BR: I'd agree there was a sense of relief in that a lot of the implementation work ended then, and that, in our case, the JFSC put a fully compliant regime in place ahead of time. Indeed, right now Jersey is the only third country in the world that has put in place a fully AIFMD-compliant option. Getting to that point involved a massive amount of work by lots of people in the industry, and I have to say what a fantastic collaborative effort it was – there was really good engagement from the JFSC, government, Jersey Finance, the Jersey Funds Association, funds administrators, law firms and local banks all working together.
But as Vic has indicated, we now have to deal with the regulations. And right now there are huge grey areas on how this is going to impact us. And there is the big question of whether we will get the third country passport in 2015. In terms of readiness of legislation, we are as prepared as we can be, but the post-AIFMD world won't become entirely clear for a while yet.
On a scale of one to 10, where does the fund industry on your island stand now; how is it performing; and how does it compare to pre-crisis levels?
BR: I'd probably go for an uncontroversial seven at the moment. From personal experience, activity levels in the last year have definitely picked up and are back near the levels of 2006. Considering everything that's happened in the last five or six years, I think we've come through it quite well.
That said, we're at a crossroads and we have to see how AIFMD pans out, though there is lots of potential. Yes, there is work to do to make ourselves a more user-friendly jurisdiction in the way the regulation currently works, but there's a project underway to look at that.
VH: I'd say the picture for Guernsey is pretty similar, and we're a ‘seven' as well. We do continue to see new funds business, but we haven't been totally immune from the headwinds faced by economies around the world. Since 2008 it's been pretty tough in the finance industry generally, and AIFMD only added uncertainty – however, the crisis didn't impact our business anywhere near as much as many predicted.
I think caution has been the key word in recent years – caution with regard to launching new funds, and caution exercised by overseas promoters and local providers because they are aware of what's happening around the world.
One criticism of the funds industry in both islands is it's too heavily weighted towards private equity and real estate. Do the islands need to further diversify their offering?
BR: A diverse offering would be fantastic, but you have to recognise the history. If you go back to the 1980s and early 1990s, there was a relatively large retail funds industry in Jersey, and we still see some of that. When UCITS came through there was a move to alternative funds. And because Jersey has been able to sell itself as a ‘substance' jurisdiction, that's very much lent itself to the way private equity and real estate funds are structured, and there's core expertise in those areas.
That said, what you're seeing in the global asset management industry is managers dabbling in other areas. Those whose core focus has been private equity are now looking at debt or mezzanine debt funds, real estate managers are looking at infrastructure type investments, and so on. So a natural diversification is already happening quite organically.
VH: I think the key thing is that both Guernsey and Jersey have developed an expertise that's transferable – the promoters have already developed good relationships and a knowledge in a particular sector, so when they want to launch a fund in a different sector, say cleantech, then they will be supported.
What's more, there is something to be said for specialising in areas such as private equity and real estate – it means we're often the first port of call for people looking for expertise in those asset classes.
How important is an ongoing dialogue with your respective regulators?
VH: It's pretty much essential, so we can make sure we keep moving forward. The GFSC [Guernsey Financial Services Commission] is very tuned in to getting things moving very quickly when it's needed. I have a meeting with the regulator and the investment division on a quarterly basis, which is a structured meeting – we go through all the issues on both sides – but between meetings we are in constant dialogue. If I get questions from members I'll put them to the regulator. They're very receptive.
On the new-business front, they've asked us to present them with our strategic vision for the funds industry so they can start to plan and work with us. So we'll be providing them with that information as soon as is possible.
BR: There are always ongoing discussions with the regulators, but as I mentioned before, the relationship has very much developed on the back of the AIFMD implementation projects. Perhaps most significantly at the moment, we've had a lot of collective thoughts about how to streamline the way the regulations work in Jersey generally, and that will be a work in progress in years to come.
As well as streamlining, we have conversations with the Commission to make sure they're providing the right risk management environment, but one that is also suitably business-friendly in what is a very competitive global marketplace.
We have to keep looking forward as well. A certain amount of discussion in the years to come is going to be about emerging markets and opportunities, and making sure that we as industry and the Commission as regulator are comfortable with investments or asset managers emanating from economies we've not interacted with before.
On the subject of opportunities, where do you think the biggest opportunity is going to come from in the future?
BR: I'd say the biggest and most exciting opportunity for us lies in expanding our jurisdictional range – moving out and away from our dependence on Europe towards other regions, most notably Africa and the Middle East. I think, from a time-zone perspective, we have an advantage in those regions over the Caribbean jurisdictions.
The African market appears to be growing rapidly, and the focus on BRICS is starting to shift to other geographical areas. I think the time has come to explore and capitalise on the opportunities in a handful of carefully selected African countries that look like they have growth potential, so we can assist driving international investment through fund vehicles – hopefully where corruption risk is manageable and there is comfort with local regulation.
As an aside, I also think there are opportunities for more hedge fund business as a result of AIFMD and the Swiss, for example, creating a very high internal regulatory hurdle for their fund managers.
VH: While I can see the attractiveness of Africa, I've had experience on African funds and there are cultural challenges to be overcome. I would say that in Guernsey we've developed a dual regime in terms of AIFMD – so you have the opportunity to opt in or opt out, depending on whether you want to target an investor base inside or outside Europe – and I think that will provide real opportunities. There are a number of promoters that will find having that choice very attractive, I think.
And where is the biggest threat?
BR: Regulation still poses problems. AIFMD still has to play out, and FATCA is still a big unknown with exactly what the impact will be generally. So the larger global regulatory and tax-related initiatives may have a cooling effect on asset management generally, but that's going to impact on all jurisdictions. There's the domestic challenge of making sure our fund regulations are user friendly so we can be seen to be competitive – it's a very competitive marketplace for fund domiciles.
VH: I think the biggest threat is a worldwide recession/depression. Look at what happened recently with the US closing down. If that had all gone horribly wrong it would impact us – we're not immune. We might not be at the forefront or be impacted as badly as other jurisdictions, but we would be affected.
Are funds statistics important? Do you set specific goals for your funds industry or are you not that formalised?
VH: We don't set goals in terms of fund statistics. While they can be useful as a guide to how well the industry is doing – and recently they have generally been pleasing – a little too much emphasis can be placed on them. We're far more concerned about reputation and quality of service – if you can preserve that, then business will continue to gravitate towards you.
BR: We do have written specific objectives for the JFA, which we are reviewing at the moment. I tend to agree with Vic that statistics are really only numbers – just because assets under management in Jersey are over £200bn doesn't necessarily mean there is lots of funds admin, audit and legal work going on in the island. Frankly, if anyone is obsessed by that number they're thinking about it the wrong way. The overall number of funds and levels of activity are much more informative – let's not focus on numbers, but on whether everyone is busy.
So finally, what's the outlook for 2014?
BR: It's all about assessing the impact of AIFMD. I think in a year's time, when we've got through the initial transitional period of authorisation for onshore managers, we'll know which ones are biting the bullet and deciding to become onshore, compliant managers in Europe and those who are using or maintaining their offshore management entities. At this moment we're seeing a lot of inertia and we'll get a much clearer picture at the end of 2014.
I also think we'll see internal progress in the island in our debate on how fund regulation can be simplified, which will be encouraging. And I think you'll see a much more aspirational marketing strategy from the JFA and Jersey Finance in terms of the exploitation of interesting new markets.
VH: I agree that AIFMD is going to determine much of what happens this year. But in two words? I'd say we are ‘cautiously optimistic' about 2014.
Nick Kirby is Editor-in-Chief of businesslife.co
Pictured (left to right) Vic Holmes and Ben Robins