Seeking the alternative article

Chris Van Den Berg, senior manager, PwC, believes that staying flexible is the key to a long life for Jersey's alternative funds industry 

Jersey has managed to turn around a legislative development in the funds industry that some first feared sounded the death knell for the industry, into one we can bear, and now even hope to use to strengthen our competitive advantage.

Jersey’s fund industry is one of the three key pillars of Jersey’s success in the International Finance Arena and Jersey has been a prominent player in this industry since the 1960s. From being a predominant retail fund jurisdiction, Jersey has since become a leading jurisdiction for alternative investments which include real estate, private equity and hedge funds.

The Alternative Investment Fund Managers Directive (AIFMD) was issued on 30 April 2009, as a result of the financial crisis and comments in the G20 Communiqué, which called for certain systemically important hedge funds to be regulated. Issued by The European Union (EU), the AIFMD proposed a regulatory framework for alternative investment funds (AIF) and alternative investment fund managers (AIFM). If this draft of the AIFMD was adopted in the 30 April 2009 content, it would have posed serious questions on the accessibility to European  institutional investors  by non-EU AIFM and non- EU AIF (which for example include Jersey, Switzerland, Singapore and the US). Some alternative asset advisers utilising Jersey to manage and promote funds to such investors were concerned about the suitability of Jersey AIF for the European market.

That said the proportion of investor funds raised in Europe is a small relative to overall funds raised.  In some cases the proportion sourced from Europe can be as low as 3%, US investors are by far the greatest contributor to AIF in Jersey.

After 18 months of lobbying and frequently acrimonious debates the AIFMD was adopted on 11 November 2010 with rules to take effect by 2013. Although less dire than initially feared, the AIFMD nevertheless still represents a changing environment for the global asset management industry, bringing AIF and their managers into the regulatory net.

The AIFMD will affect any alternative asset manager, regardless of domicile, seeking to raise institutional capital in Europe. Jersey’s ability to compete in Alternative Investment market hinged on the non-EU or “third country debate” which was the battle ground for the fiercest arguments. The final compromise is not as bad as was initially anticipated and is a substantially better result for the industry than some of the earlier drafts.

So what is the future looking like for our industry? From 2013 until 2018 existing country by country private placement rules governing distribution of non-EU funds throughout the EU will remain in place subject to certain requirements. 

We will see further regulation from 2015 when a parallel passport regime is introduced which will permit non-EU funds to be distributed on a pan-EU basis, provided certain criteria are met.

The exact criteria that third countries, and managers located there, will have to meet under a passport regime are yet to be finally established. However, they’re likely to include the existence of appropriate regulator cooperation agreements, appropriate anti-money laundering and anti-terrorist financing laws and regulations, and a network of OECD model tax information exchange agreements (TIEA) with EU member countries. 

There will also be a requirement for the local manager to fully comply with the AIFMD regime and have authorisation from a member state of reference for the purposes of supervision of EU focused activities.

Within the EU, regulators have publically recognised that getting ready for the AIFMD is a major task. The financial services regulators of France, Germany, Ireland and the UK chair four working groups assisting ESMA, the new European Securities Markets Authority, in defining its recommendations to the European Commission, which will shape Level 2 legislation. It is important to note that there is currently no working group responsible for third country issues.

Our island’s strategy focuses on ensuring that Jersey has a legal, tax and regulatory framework that ensures it can be ‘business as usual’ under AIFMD for the Jersey fund management and services industry and also looks at exploiting any opportunities to improve market access .

There are several aspects to achieving this, falling into two strands. Firstly, a focus on the private placement regime where we’ll engage with ESMA on Level 2 third country provisions and coordinate efforts with other significant 3rd countries – Switzerland, Singapore, Hong Kong, Guernsey, etc. Secondly ensuring we provide a full AIFMD compliant regime by having operational rules and legislation in place by 2013, and make this available as an ‘opt-in’ regime in advance of the 2015 passport.

Jersey received input from relevant stakeholders to formulate its action plan. An AIFMD Working Group has been formed involving Government, The Jersey Financial Services Commission, Jersey Finance, professional advisers, service providers and asset managers based in Jersey. The AIFMD Working Group is looking at different alternative asset models and structures and will put forward recommendations to tackle challenges and explore opportunities that arise from the AIFMD for Jersey’s fund models. The island’s AIFMD Working Group is exploring with the regulator the likely shape of an opt-in AIFMD regime, prioritising the bilateral regulatory co-operation and TIEA agreements.

The AIFMD Working Group also receives input from alternative asset advisors on what they expect from Jersey in relation to AIFMD. The key message was that they’re not looking to replace non-EU AIFM and non-EU AIF with onshore solutions and were confident Jersey will meet the criteria for on-going access to EU institutional investors – more so than other jurisdictions.

They also agreed Jersey should not introduce a mandatory AIFMD complaint regime, but remain flexible and prioritise ensuring ongoing investor access through the private placement regime. 

This is because a majority of alternative asset managers do not rely heavily on EU institutional investors.

The implementation plan is focussed and coordinated to ensure strategic advantages are retained.

The AIFMD Working Group will ensure through early engagement that Jersey will continue to differentiate itself. The strategy is now agreed, implementation of required actions commenced and industry, asset managers, government and the regulator are strategically aligned.

Alternative asset managers are confident that Jersey will ensure ongoing access to EU institutional investors and retain flexibility of fund product options.  The AIFMD Working Group is confident that the island will satisfy the access conditions required under the private placement regime, and will explore an  opt in AIFMD compliant regime in advance of 2013.  

With this and our location, close to Europe, Jersey may provide a better option than many other jurisdictions for promoters looking to access EU institutional capital either on a passive (where investors approach the asset manager directly – not subject to regulation by the AIFMD) or direct marketing basis.