Not long ago, there was a feeling that growth in the internationally well-established offshore financial communities of Jersey and Guernsey was at best incremental, and that waves of incoming wealth were falling victim to a reef of competition from Dublin and Luxembourg with the ‘ports’ of Isle of Man, Gibraltar and Malta pushing their credentials.
Going forward, it’s been hard sailing as the Channel Islands’ financial communities have been weathering the world’s tidal heavyweights. Between the European Commission striving to create a single European framework for financial products, the IMF and the Financial Action Task Force reviewing the Islands’ tack and the OECD undertaking a review of preferential tax regimes, Jersey and Guernsey have had to stay their course to avoid the backwind.
Yet, like the Martello towers that dot their shores, the Islands’ sails are still firmly hoisted, invigorated by recent challenges. Today, the offshore financial community is more compelling in its global market standing and Jersey and Guernsey have recorded unprecedented growth. In Jersey, funds under administration are at a record £246.1bn (€312.8bn), marking growth of 37 per cent in 2007, and banking deposits now exceed £212 billion, equalling growth of around 12 per cent. Guernsey has seen a similar rise to £178bn and £119bn respectively.
The Islands’ transformation into what are now considered world-class centres for the domiciling of specialist funds goes some way into illustrating that a touch of low pressure can do wonders – rather like the effect of flying the spinnaker in a strong prevailing wind. ‘When you can handle it, run with it’ seems to be the message from Jersey and Guernsey, and indeed significant developments in place over the last four years are generating some new, larger waves on the Islands’ shores that are in turn powering new activity across banking, insurance, funds business and private wealth management.
Despite the recent turmoil in financial markets, there is a marked stream of new business. London’s influence and proximity provides important flows, but it is the strength of the Islands’ ‘sectorial weave’ and the underlying simplification of its regulatory procedures that is making their success. We can see significant growth in the financial service sectors, particularly funds, where specialist funds, private equity, hedge funds and the like have all distinctly flourished over the last few years, in a sea-fresh climate of user-friendly business practices.
Lightly regulated funds
Underlying the simplicity is an increasing scope of lightly regulated funds. Take Jersey for example, where the Expert scheme provides a ‘fast track’ authorisation process. Since its inception in 2004, over 383 funds have been established with a net asset value of £58.3bn. Regulation is increasingly based around risk warnings in the prospectus, a lower investor entry threshold of $100,000 (€64,000) and more emphasis on the service provider to ensure all the relevant checks are in place.
Evolving rapidly both in terms of classification and the structuring of funds, regulatory practices are welcoming such vehicles as Protected Cell and Incorporated Cells, which deliver alternatives to conventional corporate and unit trust umbrella funds. Designed to assist with statutory ring fencing of assets and liabilities – leading to their increasing use as a vehicle of choice – the cells may cross-invest, spin in and out of alternative structures, migrate between cell companies and reduce the risk of cross-contagion.
Additionally, recent administrative changes allow different boards of directors for each cell, making the cell company even more appealing to investors. Improved flexibility in company law regarding financial assistance plus the use of treasury shares and capital maintenance requirements all cry ‘user-friendly’ to clients. Growth is encouraged by the provision of tax neutral and transparent vehicles that appeal to a broad range of investors and asset managers, in turn supported by a framework that can cater for the highly regulated retail schemes, institutional ‘Club’ arrangements and the increasingly sophisticated private investor.
Significantly, there is of course the inclusive mandate the Islands hold with the international regulatory bodies, one that is based on utter fair play and a level playing field. Added to that is the Islands’ contributions in matters of international finance, helping to shape world-class standards and provide a conduit for international capital. And acting as ‘chief watch’ (especially towards each other) has also ensured that Jersey and Guernsey maintain their individual market momentum.
While both islands are adopting similar approaches, if we look at Jersey in a little more detail, the regulator’s adoption of a risk-based approach has led to the introduction in 2008 of the Unregulated Eligible Investor Fund (Eligible) and the Unregulated Exchange Traded Fund (Exchange Traded). While the expert scheme is lightly regulated by the Jersey Financial Services Commission (JFSC), these latter funds are not. Instead, eligible investors (investing a minimum of $1m) are deemed both able to evaluate the financial risks of the fund by themselves and bear the economic loss of the entire investment. Eligible funds may be listed on the stock exchange but still require the transferee to accept the prescribed investment warning. And, being either open- or closed-ended, they can take the form of any recognised vehicle under Jersey statute.
On the other hand, exchange-traded funds, which can only be closed-ended, are not subject to investor criteria or restrictions on transfer, and may be listed on a wide range of exchanges outlined within the statutory exemption.
Both the eligible and the exchange-traded funds take their place among the ranks of ‘fast track’ authorised listed funds, introduced this year, which is a real quantum leap towards more flexibility. This further adds to the Listed Funds guide introduced in 2007.
Previously, such authorisation was limited to funds with the requirement that the service provider, director or administrator be a resident of Jersey. Effectively, notification to the JFSC is now the only condition for authorisation. This said, with quality practitioners on the doorstep, it is expected that service provider business will stay in jurisdiction despite this increased flexibility. With a clear outsourcing policy and the ability for functionaries to service non-domiciled schemes, these latest changes mark a significant extension in the service proposition.
International recognition
These are not the only developments behind the rise of the Channel Islands’ dominance. The Channel Islands Stock Exchange is increasingly buoyant and internationally recognised; Jersey Funds are equally recognised by the FMA in Holland, meaning that they can be listed on Euronext with no need for a licence. And further simplification in regulations and a plethora of consultation papers in progress mean that development is set to continue.
All of these changes have served to alter the course in European investment, where Cayman has traditionally been ‘the’ domicile for alternative funds, particularly hedge. Now, thanks to accreditation by leading London professionals as one of the ‘top three financial centres’ and a forward looking business development mandate in Europe, Eastern Europe, the Middle East, the Far East and Bric (Brazil, Russia, India, China) countries, Jersey is promoting its sectorial wares across a widening geographic landscape.
‘Flying the spinnaker’ (or going for it) in a global context is thus behind maximisation of intellectual capability on the Islands, where a drive to quality, alignment and co-ordination in jurisdiction plus a responsive market all provide interested parties with a clear, detailed and cohesive picture of what these offshore financial communities can offer. It is no wonder that some of the best names in the business are coming to port, as evidenced by BNP Paribas Securities Services’ own acquisition of the offshore-based RBS International Securities Services in 2007. In just a short time, we have been able to establish a significant footprint in both Jersey and Guernsey, servicing an increasing funds business to supplement our already existing trust, intermediary and private wealth management business.
High standards
As clients look for jurisdictional hubs from which to support their distribution, it is imperative to find operators that are strong in both geographical presence and good inter-jurisdictional connectivity. To further succeed, especially in execution and innovation, these prerequisites ought to match the Islands’ own shared philosophy, i.e. be supported by vision, ambition and investment in people and technology. High standards are the name of the game for clients and other third party providers on Jersey and Guernsey.
Many securities service providers conceive that, with rising volumes and increasing regulatory flexibility, client solutions must reflect the ambitions of each jurisdiction, not least the building of a business network and the provision of fully-partnered client-focused solutions.
Jersey Finance, the promotional arm of Jersey established in 2001, identifies along with other key stakeholders, strategic imperatives to increase market share of the global financial services industry. While not exhaustive, the initiatives include:
- an industry focus on high value, low footprint business
- a drive towards quality in all market sectors to ensure a leading position in the global finance sector and effective use of skills
- high priority within the industry on innovation and service to ensure appropriate responses to market trends, especially concerning risk management and the optimisation of economic and regulatory capital
- prioritisation of the Islands’ legislative requirements and framework to meet the growing complexity of financial assets and the sophisticated investor
- access to high quality and skilled labour
- stakeholders’ contribution to the development of international relations and Jersey’s place in the international financial community
- co-ordination between the government, the regulator and practitioners in the finance sector with clear internal and external communication
IN ASSOCIATION WITH BNP PARIBAS
BNP Paribas Securities Services is one of the world’s leading providers of middle- and back-office post-trade administration solutions. We serve institutional investors, investment banks, broker-dealers, large corporates, issuers and agents. With award-winning operations in 30 locations, we deliver a wide range of services based on unrivalled local market expertise. We also pride ourselves on our innovative solutions and excellence in client relationship management. We are an integral part of the BNP Paribas group, so our clients benefit from the strength, resources and risk-management capabilities of one of the world’s leading financial institutions.
www.securities.bnpparibas.com
