Guernsey: Law of Offshore
Investment Fund Law
Collective Investment Funds are supervised by the Financial Services Commission (FSC) under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) and the Collective Investment Scheme Rules 1988.
Open ended funds may be established as Class A, B or Q funds and are constituted as companies, protected cell companies or unit trusts. Closed ended investment funds are constituted as companies, unit trusts, limited partnerships or protected cell companies.
Open ended schemes are authorised and entities involved in controlled investment business are licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. The Commission has made a number of rules under the Law which set out the detailed requirements to be followed by all authorised schemes and licensees. These include:
- The Collective Investment Schemes Rules 2002 (which cover Class A schemes); The Collective Investment Schemes (Class B) Rules 1990 (which cover Class B schemes);
- The Collective Investment Schemes Qualifying Professional Investors (Class Q) Rules 1998 (which cover schemes designed for qualifying professional investors);
- The Collective Investment Schemes (Designated Persons) Rules 1988;
- The Licensees (Conduct of Business and Notification)(Non-Guernsey Schemes) Rules 1994.
Class A schemes are those which meet the Commission's Collective Investment Schemes Rules 2002 and are therefore eligible for recognition by the UK Financial Services Authority for sale to the public in the United Kingdom under section 270 of the Financial Services and Markets Act 2000.
The rules for Class B schemes incorporate a measure of flexibility. This policy recognises that Class B schemes range from the retail fund aimed at the "general public" via institutional funds to the strictly private fund established solely as a vehicle for investment by a single institution. Their investment objectives and risk profiles are similarly wide-ranging.
The Class Q Rules seek to provide a clear and concise set of requirements for the operation of professional investor funds and have been designed to encourage innovation.
A Qualifying Investor Fund (QIF) regime was Introduced following consultation with the financial services industry in the latter half of 2004, and was welcomed by the island's fund industry. Under a streamlined application process, the Commission undertakes to grant fund approval within 3 working days provided that an appropriately licensed Guernsey applicant has certified that: the fund will be restricted to professional, experienced and knowledgeable investors; the applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; and the applicant is satisfied as to the fund's economic rationale and the disclosure of any risks associated with the investment vehicle.
New criteria for Qualifying Investor Funds released by the Guernsey Financial Services Commission in 2006 met with support from the island's finance industry.
Chief executive of GuernseyFinance, Peter Niven, suggested that the move "will serve to bring more business to the island", whilst Chairman of the Guernsey Investment Fund Association, Mike de Haaff, announced that:
"GIFA welcomes the change in criteria as it brings Guernsey in line with other offshore jurisdictions. The change in definition of a professional investor will encourage more take up of QIFs and can only be seen a positive move for the island's fund industry."
Under the new rules, the definition of Professional Investor has been widened to include an individual investor who invests a minimum of USD100,000 in such a fund.
The revised guidance note issued by the FSC also re-emphasised the due diligence obligations which Guernsey Licensees undertake when submitting applications for Guernsey Qualifying Investor Funds.
The growing use of Guernsey structures as vehicles for hedge funds has highlighted a number of areas where the existing investment fund framework can create problems, leading the Guernsey Financial Services Commission to issue a consultation document: ‘The regulatory framework for Hedge Funds in Guernsey’ in November 2003, setting out a range of practical issues, and seeking views from interested parties on those issues and the solutions which may be available.
The Guernsey Financial Services Commission also issued guidance on the disclosure regime for closed-end investment funds. That guidance re-emphasised the flexible nature of the Commission’s approach. Guernsey domiciled closed-end funds are subject to Guernsey company law and the Control of Borrowing regime, and it is clear, from the closed-end hedge funds already established under those arrangements, that few structural problems arise.
In the open-ended sector, the position is more complex. Open-ended funds are subject to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, (“POI”) and to rules and regulations made under that law. POI provides, inter alia, that all Guernsey open-ended funds must be authorised by the Commission - there is no provision for “unauthorised” funds – and that each fund must have a designated manager and a designated trustee or custodian.
In mid-2004, the GFSC published a document setting out its main conclusions regarding hedge funds. The findings are directed at the funds industry for vehicles which are popular with institutional investors, said Fiona French, the commission's assistant director of investment business: "We always had the power to waive our rules. Now we're saying publicly to hedge fund managers that these are the ones we're prepared to waive to establish funds here. We're technically not changing the rules because some elements we've always waived."
Areas where the commission will show flexibility include: not requiring a Guernsey-domiciled and licensed custodian to fill the role of a suitably qualified prime broker; no need for complex segregation requirements for prime brokers holding fund assets; waivers for funds which can demonstrate a need to use estimates of net asset value in advance of final NAV determination; and where estimation is permitted, there may be waivers of client money rules requiring segregation of subscription and redemption monies.
In May, 2006, the report of a Committee appointed in 2005 to consider investment sector legislation and regulation and to report to the Guernsey Financial Services Commission and to the Commerce and Employment Department recommended the creation of a "registered" fund sector, alongside the existing "regulated" sector. Unlike regulated funds, registered funds would not need prior approval from GFSC.
The report suggests that the same framework should apply to both open and closed end funds, which should be subject to a dedicated Funds Law, leaving the existing Protection of Investors Law to deal with other aspects of investment business.
It also recommended that public offers should be made subject to specific Prospectus legislation, rather than to the current Control of Borrowing regime, and that provision of services to certain funds domiciled outside Guernsey should also be liberalised.
The report additionally recommended that definitions of investment business in the POI Law be reviewed, that economic benefit should be abandoned as a criterion for licensing investment firms, and that some of the sets of rules made under the POI Law should be merged.
The report further reflects on the importance of expanding Guernsey's intellectual capital by attracting new service providers in areas other than fund administration, and notes the significance of personal tax rules and housing policy in achieving those objectives.
Peter Neville, Director General of the Guernsey Financial Services Commission, announced following publication of the report that:
"We very much welcome the proposals put forward in the Harwood Committee report. Streamlining authorisation and licensing processes will benefit: the investment sector by allowing faster responses; the Commission by letting its dedicated staff extend their monitoring of licensees rather than on pre-vetting funds; and Guernsey in general by ensuring that the service delivered by Guernsey investment firms continues to support and enhance our established reputation."
"Recent trends have seen new businesses - stockbrokers, asset managers and private wealth managers - outside the pure funds sector establish themselves here in Guernsey. We also endorse the report's recognition of the importance of expanding the widest range of investment activity in Guernsey."
"Once we have seen how the investment sector responds to the consultation, we look forward to working with them, with the Finance Sector Group and the Department of Commerce and Employment to bring about agreed change as soon as possible."
In May 2008 the Guernsey Financial Services Commission commenced a public consultation on a proposal to fast track the application process for specified licensees associated with Qualifying Investor Funds or Registered Closed-ended Investment Funds.
The main thrust of the proposal is that a Licence Assessment Committee will be convened to consider the issue of a licence under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the POI Law) within 10 business days of receipt of a complete formal application, together with confirmations from an appropriately licensed Guernsey service provider to the Commission that:
- They have performed sufficient due diligence to be satisfied that the beneficial owners or controllers of, and relevant parties to, the applicant for a licence are fit and proper and meet the requirements as set out in the POI Law and that in this respect consideration has been given to all of the issues set out in the Guidance Document issued by the Commission;
- They have undertaken sufficient due diligence to confirm that the application for a licence under the POI Law which includes the relevant application form and supporting documentation and information, is complete and accurate.
The introduction of the Qualifying Investor Fund regime in February 2005 and the Registered Closed-ended Investment Fund regime in February 2007 provided fund promoters and their Guernsey regulated service providers with two fast track application processes for defined investment funds, giving a guaranteed response time from the Commission.
Since the introduction of the two regimes, a significant number of fund applications have been made under them, and at the same time associated licence applications under the the POI Law have been made for parties seeking to provide management services to the funds.
Due to the statutory obligations imposed on the Commission when considering applications for licences under the POI Law, which do not apply in the same way to fund applications, the Commission said that it is not possible to guarantee considering applications for licences in the same time scale that apply to the two fast track fund application processes.
The Commission has acknowledged that this apparent “mis-match” in timescales is not ideal and proposes to introduce a regime which will reduce the timescale for the consideration of licence applications in specified cases.
Due to the statutory obligations referred to above it is not possible to reduce the relevant timescale to that applying to the associated fund applications, but it is considered that the proposed regime will introduce certainty of response in respect of licence applications made to the Commission.
The Commission proposes to introduce a framework applicable to licence applications under the POI Law for parties seeking to provide management services to Qualifying Investor Funds or Registered Closed-ended Investment Funds.
Parties seeking to conduct activities such as administration or custody for such funds or who intend to conduct restricted activities in connection with other types of investment fund business and/or non-fund business will need to apply and be assessed under the Commission’s standard licence application process.
In April 2009, it was announced that the Guernsey Financial Services Commission, in conjunction with a Working Party representative of practitioners across the investment industry, has been preparing new Conduct of Business Rules mandatory for all entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended.
The Conduct of Business Rules are the first, and major, part of a process to replace the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules, 1998 and the Collective Investment Schemes (Designated Persons) Rules, 1988. The second and final part of the process is a revision to the Capital Adequacy Rules, which went into effect in April 2010 (see Banking above).
The Conduct of Business Rules recognise the very different activities undertaken by the population of licensees under the Law. The main highlights of the Conduct of Business Rules include:
- a comprehensive set of rules outlining the Board of a licensee’s responsibility for the compliance function;
- a recognition that the term 'designated manager' applies to administrators of open-ended and closed-ended collective investment schemes;
- the proposed rules do not impose MiFID-style provisions on licensees; nevertheless, the Rules recognise that group requirements will apply to some firms and do not, therefore, conflict with MiFID provisions;
- the client money rules have been made more rigorous.
In October 2009, Guernsey’s Chief Minister, Lyndon Trott, expressed confidence that discussions between the jurisdiction and key players in Europe will secure the future for the funds industry in Guernsey.
Trott said that he was fully aware and had been for some time of the serious threats posed by the EU Alternative Investment Fund Managers Directive, which seeks to regulate all alternative investment funds including private equity and closed-ended listed funds, where the island is a world leader.
Guernsey’s political and industry response, being led by the Commerce and Employment Department with the Guernsey Financial Services Commission and the Guernsey Investment Funds Association, has involved a series of meetings in Brussels.
Deputy Trott said:
“This development demonstrates just how vital it is that Guernsey continues to build relationships with Brussels.”
“Brussels is increasingly influential in setting global regulatory standards and our continued prosperity will increasingly depend on our relationship with them.”
The States team has held discussions with the European Fund and Asset Management Association, a number of financial institutions in Europe, and other key individuals involved in this debate.
Commerce and Employment Minister Carla McNulty Bauer said that the purpose of discussions in Brussels were four-fold:
- To ensure that there is a clear understanding among decision-makers of Guernsey’s current regulatory regime;
- To obtain information on how the directive is likely to be amended and when it is likely to be finalized;
- To offer suggestions on how the directive could be amended to ensure that it meets the objective of better regulation but also ensures that European professional investors can continue to access global capital markets; and
- To develop appropriate contacts within the various European institutions to build relationships and understanding about Guernsey.
Deputy McNulty Bauer said: “There is no doubt that this directive has the potential to have a significant impact on the global alternative funds industry. Guernsey is not immune from those effects.”
“But the directive also presents a significant opportunity for us. Our standards of regulation of alternative funds are high and stronger than that of many EU Member States. My Department is confident that Guernsey is well placed to achieve equivalence under the directive at some time in the future, though that will depend on how the directive changes during the coming months.”
The directive is unlikely to be finalized until the summer of 2010 and will then not come into force until 2014 or 2015. Until that time the status quo remains and Guernsey’s fund industry can continue to enjoy its current market access for the next five years.
Guernsey Finance, the promotional agency for the Island’s finance industry, has assured that, despite the European Union’s continued steps towards introducing the controversial Alternative Investment Fund Managers Directive, the future of Guernsey as a leading funds domicile is not in jeopardy.
Peter Niven, Chief Executive of Guernsey Finance, said:
“I am confident that no matter which approach is finally adopted by the European Union, Guernsey is well positioned to remain an attractive and competitive jurisdiction for European professional investors.”
“Under the latest proposals any third country hedge fund or private equity group will be able to gain an EU passport if it complies with the new rules and its home country applies global standards. We certainly believe that Guernsey meets all the relevant criteria, not least through our long-standing commitment to adopt international standards on regulation, transparency and information exchange. This has been recognized by the Island’s inclusion on the OECD ‘white list’ and the findings of the Foot Review.”
Niven added: “Guernsey’s government, industry and regulator will be continuing the joint work to understand the implications of the Directive, lobby for changes to the proposals, and promote a better understanding of our regulatory regime and alternative funds industry to ensure we have the best possible outcome for the island.”
In May 2010, European Union finance ministers reached an agreement on a mandate for the Spanish Presidency of the EU to negotiate with the European Parliament on a directive establishing an EU framework for managers of alternative investment funds. A final vote on the draft directive by the European Parliament was scheduled for July, 2010.
The Directive was published in the Official Journal of the European Union on July 1, 2011. EU Member States are required to implement the Directive by July 22, 2013. The Directive is one of several pieces of EU and domestic regulation that firms, especially fund managers, will need to consider over the next 18 months.