Through the storm

Ben Robins says he doesn’t worry about the EU’s Alternative Investment Fund Managers Directive (AIFMD) as much as he once did.

As chairman of the Jersey Funds Association, it’s part of his job to monitor regulatory developments on the EU mainland and elsewhere around the world that can impact the offshore island’s funds industry. And so as EU policymakers and individual member states begin placing the final touches on the AIFMD – Europe’s grand project to harmonize and strengthen fund regulation across the continent, which goes into effect in July – Robins has been keeping close watch.

His assessment today? “Things will be business as usual here in Jersey.”

That certainly wasn’t the case just four years ago. Back then, when EU policymakers were writing the first drafts of the directive in the wake of a financial crisis that prompted a political and regulatory frenzy, there was a real concern that overregulation would effectively erect a ring-fence between EU investors and outside managers seeking their capital. That was an alarming possibility for funds industry in Jersey, an island just 85 miles south of the English coast.

Fortunately, “cooler heads prevailed,” Robins tells pfm. “And we now sit in a position where Jersey can offer GPs some optionality on their European marketing.”

Robins explains that Jersey’s policymakers undertook various preparations and implemented some new rules in order to keep pace with the directive’s requirements as it advanced through the EU’s protracted legislative process. By the end of it all, Jersey was able to create an ‘opt-in’ regulatory regime for managers wanting to market in Europe under full AIFMD compliance and to obtain a Europe-wide marketing passport. The happy result, then, is Jersey can offer GPs a tax-neutral platform – something important to LPs with differing tax profiles – and thus all but guarantee access to European investors in the new AIFMD era.

Alternatively, as a non-EU jurisdiction, Jersey “can be a safe haven for GPs struggling to meet the directive’s requirements,” says Robins. “That’s because Jersey funds for the time being can continue using individual member states’ private placement regimes for marketing purposes in compliance with the directive’s transparency provisions.”

On the horizon

But Jersey isn’t entirely in the clear just yet. For one thing, GPs based in Jersey that go through the hassle of becoming fully AIFMD-approved won’t immediately receive the main benefit of doing so, i.e. a pan-EU marketing passport. It’s not until July 2015 that EU regulators will actually consider allowing non-EU managers the ability to seamlessly hop across EU borders during fundraising, while operating in full compliance with the directive.

There have also been concerns that certain EU member states will ‘gold-plate’ the directive (i.e. make it tougher) when transposing its language into national law. However, as with the directive as a whole, Robins says initial fears on this score were overblown. “The good news is we haven’t seen much evidence of member states making their private placement regimes more difficult to access, or going much above and beyond the directive’s original text.”

Looking ahead, however, Robins warns that may change; he specifically cites France and Germany as two countries that may “possibly show some divergence” from the UK, which is positioning itself as an “enlightened” regulator on AIFMD. If that happens, one possible consequence could be that third-country managers like those in Jersey will have to appoint a depositary to oversee their fund’s procedures and safe-keep assets when they market in Germany, even when they aren’t (yet) provided with that EU-wide marketing passport in order to do so.

Then again, this would not represent a “huge burden”, says Robins. “Jersey has plenty of fund administration firms, both institutional and independent, that the directive suggests could act as depositaries for closed-ended funds like private equity and real estate. It’s really by no means an insurmountable task.”

The other big question on the horizon relates to how non-EU countries regulate their own funds industry. What EU regulators would like is for their counterparts around the world to match the AIFMD’s requirements – or keep their fund managers out of Europe.

This, says Robins, is “where Jersey may have an incredible advantage over other larger and less nimble third-countries like the US, Singapore and Hong Kong.” Because Jersey has already created the option of a fund regime that completely mirrors the AIFMD, they’re sure to pass this regulatory “equivalency test”, he explains.

It’s a big question that seems to have received little attention, at least for now. But next year it’s issues like this that EU regulators will be wrestling with, insists Robins – and it’s not safe to assume that major economies like the US will be given a free pass because of their reputation and size.

“Yes, the US now tells its private fund advisors to register with its Securities and Exchange Commission. But that doesn’t, for example, mean they meet the AIFMD’s requirement for managers to appoint a depositary. It would seem incredible that the EU blocks US funds because of any failure to meet this equivalency test; but you’re going to see a lot of GPs in Luxembourg, Ireland and elsewhere in Europe cry foul that they that they have to meet these strict AIFMD requirements, where GPs coming in from the US or Hong Kong don’t. It would place them at a significant competitive disadvantage.”

More cooperation

Either way, one thing third-country regulators will absolutely have to do is sign cooperation agreements with any EU member state they wish to provide their local managers with access to. Many non-EU countries are still in the process of finalizing these agreements; but Jersey already has them in place “with the vast majority of EU member states, save for some small gaps,” according to Robins. “And those gaps are in places like Spain and Italy, where there is no current private placement regime anyway. Instead, GPs will seek to rely on the status quo of reverse solicitation to admit investors from those countries.”

Importantly, Jersey managers have achieved their ‘business as usual’ status due to their ability to demonstrate substance, notes Robins. Fund managers looking to escape the directive’s reach that set up shop in Jersey must, for local regulatory purposes, actually be able to prove the fund is controlled and managed in the Channel Islands, and not just be a “letter-box entity”, he explains.

Jersey-based managers demonstrate this in a few ways, not least of which is the requirement that a regulated fund’s managing board features at least two experienced Jersey resident directors. What’s more, these directors have primary responsibility for actual portfolio management and risk supervision duties, says Robins – and delegation of functions to third-party service providers is monitored.

“If you take a look at the hard numbers, we’ve got about 1400 regulated funds in Jersey and around 385 individuals locally who, personally or through a financial services employer, are regulated and able to act as fund directors. On a crude, notional application of that ratio of local directors to funds, each director is overseeing fewer than four funds. These are real directors, vetted by the local regulator, who know and understand the asset class well.”

Looking further in the AIFMD future, Robins says the next major milestone will come in 2017, “when ESMA reviews the market and decides if private placement regimes are eliminated.” And while he doesn’t think this will happen, he says – with a note of confidence – that “Jersey will be sure to monitor and prepare for” whatever regulatory moves happen next.