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Given the ongoing uncertainty over the nature of UK’s relationship with the European Union following 31 December, fund managers that invest in or attract investment from Europe are in a state of flux when it comes to formulating long term strategic thinking. Anyone considering setting up a new fund structure may want to consider the Channel Islands, which offer a proportionate regulatory structure and, crucially, being already outside of the EU, will be unaffected by the twists and turns of the UK’s trade deal with the EU.
Jersey and Guernsey are neither a member nor an associate member of the European Union and as such are both classified as a third-country. The AIFMD therefore has no application to Channel Island funds or fund managers when they are not marketed into the EU. Brexit should have no impact on the marketing of a fund to UK investors, following the signing of a Memorandum of Understanding between the governments in March 2019.
Channel Island based funds have continued to raise significant amounts of capital from EU based investors through the national private placement regimes. These are now thoroughly tried and tested routes to market which typically require only partial adherence to the provisions of the AIFMD, which can result in lower running costs and consequently higher investor returns. In addition, with Jersey and Guernsey having been given an “unqualified and positive assessment” by ESMA, Channel Island funds are best placed to benefit from the full passporting regime once activated. It remains to be seen what level of access the UK is granted to the European market following Brexit but it seems likely that they will not retain the current flexibility of the passporting regime; as a “third country”, managers of UK funds will need to adjust to the life under the private placement regime. Therefore, following the end of this year, there will likely be a level playing field between the UK and the Channel Islands.
So what then are the potential benefits of establishing a fund in the Channel Islands?
Both Guernsey and Jersey maintain a proportionate, flexible and competitive funds regulatory regime, adopting a risk based approach to ensure that appropriate levels of investor protection are maintained, whilst at the same time avoiding unnecessarily complex or burdensome regulation.
This flexibility also extends to the structures available for funds under Jersey and Guernsey law. For example, companies can make distributions of capital to investors based on simple solvency tests, whilst limited partnerships are able to elect to have their own separate legal personality, and have specified “safe harbours” to avoid limited partners losing their limited liability status by conducting the management of the partnership. These features are all very attractive compared to their UK equivalents.
The Channel Islands also both provide an uncontroversial tax neutral environment for funds and fund managers. Funds structured as limited partnerships are tax transparent and those structured as companies or unit trusts should be charged income tax at 0%. Neither Jersey or Guernsey levies any form of VAT, and so management fees charged or transaction/deal costs incurred by a Jersey or Guernsey based manager should not suffer any VAT leakage. Finally, there is no capital gains tax or inheritance tax, nor stamp or document duty, or transfer tax payable in respect of companies, unit trusts or limited partnerships that are funds.
One critical feature of Jersey and Guernsey funds is that they must appoint an administrator or manager which is regulated and has staff and a physical presence in Jersey. This is a experienced and developed industry in the Channel Islands and there are a number of providers of these services. The administrator will be required to monitor the compliance of the Investment Manager or Adviser with any investment or borrowing restrictions set out in the offer documents and will require access to appropriate records of the Investment Manager/Adviser to enable it to carry out such monitoring function.
In Jersey, there are a number of fund structures under the Collective Investment Funds (Jersey) Law 1988.
Jersey Expert Funds were introduced to enhance Jersey’s attractiveness as a jurisdiction for the establishment of funds aimed at institutional and high net worth investors. Expert Funds can be established within a matter of days on the basis of a self-certification approach without the requirement for any formal regulatory review of the fund or its promoter.
Each investor must sign an investment warning and confirm that they fall within one of the following categories:
An Investment Manager/Adviser must be appointed, which satisfies various requirements, including being FCA regulated and have relevant experience in managing or advising on investors’ funds. The fund company, general partner or trustee, as applicable, must have at least two Jersey resident directors with appropriate experience.
A listed fund is suitable for corporate closed-ended funds that are listed on certain recognised stock exchanges or markets. Otherwise, the requirements and application process are very similar to the Expert Fund described above, save that there is no requirement for the investors to meet any of the criteria as an Expert. This may be worth considering if you are looking to attract a broader range of investors.
Eligible Investor Funds restricted to “eligible investors” (which, among other tests, includes a person committing at least US$1 million (or other currency equivalent) to the fund). Given the restricted nature of the investors, they are subject to a streamlined approval process and a lighter degree of regulation than either an Listed Fund or an Expert Fund. Otherwise, the requirements and application process are very similar to the Expert Fund and Listed Fund described above. This would be worth considering if you are looking to market the fund to highly experienced and/or wealthy investors.
Unless the fund is able to fall within the Expert Fund, Listed Fund or Eligible Investor Fund regimes, where there are more than 50 investors or the fund intends to seek a listing, it will most likely be an unclassified fund. In this situation the JFSC will regulate the fund in accordance with its own policy and will review the offering document, constitutional documents and material agreements relating to the fund. This is a considerably slower application process than the three routes described above.
Funds of this type may be marketed directly to “retail” investors in the UK under the United Kingdom Financial Services & Markets Act 2000. Recognized Funds are more highly regulated and provide investors with access to a statutory compensation scheme.
In Guernsey, there are two types of fund that are available under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 for those looking to attract over 50 investors into a closed-ended structure: (1) Authorised Funds and (2) Registered Funds.
With Registered Funds, responsibility for ensuring that the promoter of the fund is fit and proper and that the fund documentation complies with the relevant regulatory requirements lies with the “designated manager” of the fund, who must be a locally licensed fund administrator. The designated manager must provide warranties to the GFSC verifying those matters and in reliance upon those warranties, the GFSC will issue the necessary registration within three working days, which is similar to the Listed Fund, Expert Fund and Eligible Investor Fund structures in Jersey outlined above.
Registered funds offer a significantly more efficient means to market than Authorised Funds (save for QiFs, described below), given the lighter regulation and three day approval timeline regardless of the categorisation of the investors to whom they are marketed.
For authorised funds, a traditional three stage approval process must be followed. The overall timing for this process is usually in the region of six weeks.
However, this is considerably quicker where an Authorised Fund will only be offered to professional or experienced investors, knowledgeable employees or persons willing to invest a minimum of US$100,000 or equivalent, it may take advantage of the Qualifying Investor Fund or ‘QIF’ fast-track application process. A Guernsey administrator must provide certain confirmations to the GFSC, including in relation to the promoter, the marketing.
1 December 2020