Channel Islands: Storm survivors

The sunshine islands of Jersey and Guernsey have long been favored, due to their independent and stable political, legislative, regulatory and tax regimes, being ideally situated close to London and within the European time zone but not part of the European Union, as the jurisdictions of choice for collective investment funds investing in the alternative asset classes of private equity, real estate, infrastructure and debt. Both islands have built an efficient and robust infrastructure to service these alternative asset funds and have been active in ensuring that they adapt to the ever changing regulatory climate affecting the business.

In recent times, black clouds have been gathering on the horizon and the prophets of doom have been chanting acronyms such as AIFMD, BEPS and FATCA, as back-up to their predictions that the end to such favoritism was nigh. Additional storms have also threatened as both islands have been included (wrongly, both have strongly argued) on tax transparency black lists, despite both being within the group of earlier adopters of the OECD Common Reporting Standard initiative.

However, like the first rays of sun breaking through storm clouds, in July the European Securities and Markets Authority (ESMA) issued its initial set of recommended countries for the EU’s Alternative Investment Fund Managers Directive (AIFMD) passport.

On July 30, ESMA published two papers covering the application of the marketing “passport” under the Directive. The first paper contained ESMA’s advice to the European Parliament, Council and Commission on the potential application of the AIFMD passport to non-EU Alternative Investment Fund Managers (AIFMs) and alternative investment funds (AIFs). The second paper contained ESMA’s opinion on the current functioning of the AIFMD passport (currently used by EU AIFMs marketing EU AIFs in the EU) and National Private Placement Regimes (used for marketing by non-EU AIFMs and non-EU AIFs). Of the more than 40 jurisdictions that ESMA is expected to assess in relation to the passport extension, to date it has assessed just six, Jersey, Guernsey, Switzerland, US, Hong Kong and Singapore. It was recently learned that a second wave of countries (Australia, Canada, Japan, the Cayman Islands, the Isle of Man and Bermuda) will be reviewed by ESMA next.

The conclusion of ESMA’s advice was that it is currently only able to recommend that EU lawmakers extend the passport to AIFMs and AIFs based in Jersey, Guernsey and, on the basis of pending legislation, Switzerland. ESMA concluded that it could not recommend extending the passport to AIFMs and AIFs in the US, largely due to a lack of reciprocity that would be available to EU AIFMs wishing to market in the US. ESMA also analyzed Singapore and Hong Kong but stated that it had a lack of sufficient evidence to properly assess the relevant criteria at this time.

Guernsey and Jersey have had their own opt-in equivalent AIFMD regime fully operational since January 2014, but importantly have maintained their own existing regimes. This, together with a Europe wide passport, would permit both jurisdictions to offer dual regimes allowing EU investors to be dealt with under AIFMD compliant rules with parallel structures for non EU investors who can invest in the same investments without incurring the costs of compliance with AIFMD if managed from outside the Europe.

However, ESMA noted that the European Commission, Parliament and Council (referred to as the Trilogue) “may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries” before extending the passport to only a few non-EU countries. If the Trilogue accepts ESMA’s recommendations and delays any extension of the passport, the status quo for non-EU AIFMs will be retained in Europe while ESMA continues to analyze the suitability of other non-EU jurisdictions for the passport.

Clear skies ahead 

Happily, on the tax front, there is a warmer forecast. Both Guernsey and Jersey are within the OECD but this fact has not always been apparent as both islands are included through the UK’s membership of the OECD. Whether or not a fund’s domicile is in the OECD has become increasingly important to the investment funds sector. For example, in some jurisdictions, there are prohibitions on the marketing of funds which do not originate from an OECD country. In June, Guernsey issued a statement confirming that the OECD convention “applies to Guernsey and it is part of UK’s membership of the OECD.” Jersey was given similar assurances, preserving both domiciles’ reputations as internationally compliant and reputable jurisdictions.

Then, over the summer, the EU Commission confirmed its continued endorsement of Jersey and Guernsey as cooperative jurisdictions following a meeting between officials in Brussels.

Responding to the news, Guernsey’s Chief Minister, Jonathan Le Tocq, wrote to European Tax Commissioner Pierre Moscovici, stating that the endorsement: “…recognizes not only Guernsey’s adherence to the OECD and Global Forum international standards on transparency and information exchange, but also that our corporate tax regime has been assessed as compliant with the EU’s Code of Conduct on Corporate Taxation, and hence not containing harmful measures.”

Jersey Finance chief executive Geoff Cook said the endorsement meant it was “business as usual” for fund managers using the private placement route into Europe.

“With private placement expected to remain in place until at least 2018 and the potential to activate the AIFMD passport in Jersey in due course, the evidence all points to genuine confidence in Jersey for the management, domiciliation and servicing of funds across a range of strategies and target markets,” said Cook.

Proof in numbers 

Indeed, according to the latest figures from the Jersey Financial Services Commission (JFSC), 205 Jersey funds are now being marketed into Europe through private placement regimes, an increase of 10 percent from December 2014, whilst 84 fund managers have now received private placement authorization, up 40 percent over the previous six months.

Meanwhile, further statistics collated by the JFSC show that the net asset value of all regulated funds under administration in Jersey grew by around 9 percent year on year (as at June 2015) to stand at £218 billion ($337 billion; €296 billion), and that the fund formation rate remains strong with on average one fund being established in Jersey every week during the first half of the year.

Additional figures from ESMA have underlined the strong relationship between Guernsey’s fund industry and the European marketplace.

Data contained within ESMA’s advice on the granting of third country passports under the AIFMD, reveal that Guernsey was the third largest non-EU fund domicile, behind only the US and Cayman Islands, for the number of non-EU AIFs and non-EU AIFMs marketing into the EU Member States of the UK, Ireland, Sweden, the Netherlands, Luxembourg, Finland, Denmark and Belgium for the nine-month period up to March 2015.

Guernsey Finance chief executive Dominic Wheatley said that “what is pleasing about these figures is that Guernsey’s private placement regime is clearly working well and proving to be an attractive option for fund managers.” As evidenced in a recent KPMG report, “Guernsey’s funds sector plays an important role in Europe with more than £105 billion of assets of Guernsey funds deployed into Europe; funds which are then invested in supporting jobs in businesses of all sizes,” Wheatley added.

The advice received by ESMA, the statement by the EU Commission and the clarification of the position within OECD are positive news for both Jersey and Guernsey. The recognition of the regulatory framework across both islands gives the Channel Islands a positive advantage which could see them strengthening their already strong position when establishing global funds.


Based in Jersey, Spencer Wells is a director at Alter Domus and can be reached at 44 1534 826 000.

Based in Guernsey, Mark Vidamour is a director at Alter Domus and can be reached at 44 1481 742 250.