Isle of Man: Law of Offshore
Investment Management Law
With effect from May 1, 2010, the Isle of Man Financial Supervision Commission again permits the establishment of Regulated Funds in the Isle of Man, with Specialist and Qualifying Fund types both being relaunched as Registered Funds.
According to the Commission, the move is in response to the new market environment and recognizes the importance of appropriate regulatory oversight for funds.
On the basis of the proposed regulatory structure, the Irish Stock Exchange has confirmed that funds which are Isle of Man Regulated Funds under the Collective Investment Schemes (Regulated Fund) Regulations 2010 are suitable for listing on the Irish Stock Exchange without the imposition of a EUR100,000 (USD133,000) investment threshold criteria.
Commenting, John Aspden, Chief Executive of the Commission, said:
”I am delighted that, following discussion with industry and a review of our fund range, we have developed a modern flexible Regulated Fund. I view this as a flagship product underlining the quality of the fund range that the Isle of Man can offer. We have already had interest shown in the new fund type and look forward to its future success.”
“I am also pleased to announce that we have relaunched the Specialist and Qualifying Fund types as Registered Funds. In doing so we have taken the opportunity to review the regulations and introduce further flexibility.”
“I believe that the Island’s fund offering is first class, balancing appropriate regulatory requirements with the commercial flexibility needed in the modern financial environment.”
Licensing of investment management, including that of collective investment funds, was introduced by the Investment Business Acts 1991 to 1993, with a definition of activities to be licensed contained in the Investment Business Order 1991. The regulatory regime for collective investment funds is now governed by the The Collective Investment Schemes Act 2008 (CIS Act) which came into force on August 1, 2008, having been previously established by the Financial Supervision Act 1988.
Subordinate legislation made under the Financial Supervision Act 1988 continues to have effect as if it was made under the relevant provisions of the CIS Act.
Under the Investment Business Acts, the list of activities requiring a license included: brokerages offering life, pension and investment products; portfolio investment management; captive insurance management; and collective investment fund management. Futures and options were included in the definition of 'investments'; land and cash were not. Exemptions from the licensing regime included banks, building societies, and Manx and UK legal and accountancy professional firms.
Investment Business Order 2004
In October, 2004, the FSC announced Tynwald's approval of the Investment Business Order 2004. The 2004 Order replaced the Investment Business Order 1991.
The government, in partnership with the finance industry, reviewed the 1991 Order to ensure that the definition of investment remained relevant to the current and future business and investment situation on the island.
The following changes appear in the 2004 Order:
- The position of UK and other overseas persons has been refined to allow only UK FSA authorised persons to "legitimately" solicit investment business on the Island;
- The distinction between when non investment-business professionals act in their professional capacity and when they hold themselves out as providing investment business has also been clarified;
- The circumstances in which custody services constitute investment business have been clarified;
- The exclusion relating to introductions has been refined to apply only to introductions made to "independent", permitted persons;
- Relevant CSP activities, regulated under the Corporate Service Providers Act 2000, have been expressly excluded; and
- The definition of futures has been updated and brought in line with the UK approach to achieve greater consistency.
The 2004 Order came into operation on December 1, 2004.
The Companies (Private Placements) (Prospectus Exemptions) Regulations 2000
New provisions to the 1931 Companies Act were approved by Tynwald in 2000 and came into operation on January 1, 2001. Known as The Companies (Private Placements) (Prospectus Exemptions) Regulations 2000, the regulations allow for the exemption of certain private placements of shares or debentures from the provisions of the Act.
The exemptions in the regulations apply inter alia under three circumstances:
- Where the shares or debentures are offered to a restricted circle of fifty or less persons who are acquiring the securities for investment purposes and not for imminent resale
- To persons who are sufficiently knowledgeable to understand the risks involved in accepting the offer
- Or to persons whose ordinary activities as principal or agent involve them in the acquisition, disposal, holding or management of shares or debentures.
Applicants for an Investment Business License must have a 3-year profit record, and the Commission vets ownership and management arrangements. There are detailed regulatory codes; and substantial reporting requirements. All investment businesses need to have explicit policies directed against laundering of illicit proceeds.
Collective Investment Schemes Act 2008
Under the Collective Investment Schemes Act 2008 (CIS Act), a licence to carry on the Class 3 regulated activity of Services to Collective Investment Schemes permits a business operating in or from the Isle of Man (within certain criteria and with specified exclusions) to provide the following services to collective investment schemes: act as a manager, administrator, trustee, fiduciary custodian, custodian, promoter, asset manager or investment adviser.
The CIS Act sets out the statutory framework for the regulation of Collective Investment Schemes (“schemes” or “funds”), more commonly known as unit trusts, mutual funds or open-ended investment companies. The CIS Act sets out 3 classes of scheme:-
- Authorised Schemes under Schedule 1 to the CIS Act;
- International Schemes (including full international schemes and other prescribed classes of scheme) under Schedule 2 to the CIS Act; and
- Recognised Schemes under Schedule 4 to the CIS Act.
Regulatory Framework Reviewed
In October 2009, the Isle of Man Financial Services Commission announced a consultation on proposed amendments to the regulatory framework for Full International Schemes, Specialist Funds, Qualifying funds, and Experienced Investor Funds. The Commission also sought views on options for the future of Professional Investor Funds.
The review aims to update the legislation and bring it wholly into line with the Collective Investment Schemes Act 2008, to modernise the legislation and to build upon the Commission and industry’s experiences in implementing the new schemes framework in 2007.
As part of the review, the Commission proposes updating ancillary legislation which affects collective investment schemes.
As a result of this review, International Scheme have been superseded by the Regulated Fund. The Collective Investment Schemes (Legacy) Regulations 2010 means that no new International Schemes can be established however existing funds may continue. The Regulations also expand the jurisdictions in which a trustee or fiduciary custodian of an international scheme can be located by including Ireland and Luxembourg.
Full details of regulated activities, exclusions and exemptions from licensing may be found in the Collective Investment Schemes handbook. A licenceholder is obliged to comply with any licence conditions that have been imposed by the Commission and which are shown on the licence.
The Collective Investment Schemes handbook also contains links to other legislation relating to licenceholders, including the Financial Services Rule Book 2008, explaining the detailed rules to be complied with by all licenceholders. Guidance on rules and on other regulatory matters may also be found in the handbook.
The 2008 regime for collective investment funds distinguishes various types of fund:
Authorised Collective Investment Schemes
Any scheme established in the Island which is promoted to the general public in the Island (or the UK by virtue of the Island's designated territory status) must be authorised by the Commission under Schedule 1 to the CIS Act. Authorised Schemes are subject to detailed regulation concerning their structure and operation. With regards the investors compensation scheme the Authorised Collective Investment Schemes (Compensation) Regulations 2008 only applies to investors in Authorised Schemes.
N.B. It should be noted that the International Scheme has been superseded by the Regulated Fund. No new International Schemes can be established although existing funds may continue. Specialist Funds, Qualifying Funds and Experienced Investor Funds are now categorized as Registered Funds.
Any scheme established in the Isle of Man which is not an Authorised Scheme or an Exempt Scheme, is an International Scheme under Schedule 2 to the CIS Act. International Schemes may not be promoted to the general public in the Isle of Man.
- Full International Schemes. The Commission does not prescribe the types of schemes which can be full international schemes. The Commission aims to provide a flexible regulatory framework which meets the needs of the market place operators. Full international schemes are not subject to any direct approval or authorisation process, however the manager of such a scheme must have the Commission’s permission to act, and persons comprising the Governing Body of the scheme must be fit and proper persons. The manager and trustee/fiduciary custodian of a full international scheme must be Authorised Persons. In granting permission for the manager to manage the scheme, the Commission reviews the constitutional documents of the scheme. The Commission does not, and is not required to, comment on the investment objectives or strategy of the scheme or its suitability for any investor or any class of investor. Investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
- Specialist Funds. The Specialist Fund (SF) is a sub-category of International scheme which is available only to specialist investors who are generally institutional investors and high net worth individuals. The minimum investment in a SF is USD100,000. A SF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
- Qualifying Funds. The Qualifying Fund (QF) is a sub-category of International scheme which is available only to qualifying investors who are non retail investors. A QF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
- Professional Investor Funds. The Professional Investor Fund (PIF) is a sub-category of International scheme which is available only to professional investors who are generally market professionals and who have net assets in excess of USD1m. The minimum investment in a PIF is USD100,000. A PIF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
- Experienced Investor Fund. The Experienced Investor Fund (EIF) is a sub-category of international scheme aimed at the “Experienced Investor”. From November 1, 2007 no new Experienced Investor Funds can be established. An EIF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
Exempt schemes (as defined in Schedule 3 to the CIS Act) are Isle of Man schemes that must have less than 50 investors and their relevant constitutional documents must expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Exempt International Schemes are regarded as private arrangements and are not subject to regulation.
Collective Investment Schemes which are managed in or authorised under the law of another country or territory outside the Island may not be promoted to the general public in the Island unless they have been granted recognition by the Financial Supervision Commission under Schedule 4 to the CIS Act. Once granted recognition, a Recognised Scheme may be promoted to the general public in the Island.
Taxation of Investment Products
In December 2009, the Isle of Man Treasury released a consultation paper on proposed changes as part of a review on the taxation of investment products, following talks with a number of private sector professionals.
The consultation document outlined proposals for the introduction of a new taxation regime for certain investment products in the Isle of Man, and was primarily concerned with the taxation of insurance bonds and roll-up funds.
The proposed new regime aims to remove this uncertainty by:
- Defining which products will be subject to income tax and which will fall outside the charge; and
- Defining when and how an income tax charge will be raised.
The Isle of Man Financial Supervision Commission (FSC) on March 1, 2009, launched another consultation, this time on amendments to Authorised Collective Investment Schemes Regulations, which have been drafted in order to maintain equivalence with the UK Financial Services Authority’s (FSA's) requirements. Equivalence will allow the island to retain its Designated Territory status, allowing the Isle of Man to market Authorised Schemes to the UK public.
While the FSC notes that amendments to the UK Authorised Schemes regime have tended to be minimal in recent years, as a result of the European Union UCITS III regime the UK has materially updated its regime for authorised type schemes. The Isle of Man FSC therefore considers that a full review of the entire Authorised Schemes Regime is needed in order to update the regime and to assist in preserving the existing business being undertaken in the jurisdiction.
In order to maintain equivalence, the Regulations have generally adopted most of the UK FSA’s requirements but with amendments to take account of the Island’s Collective Investment Schemes Act 2008. According to the consultation document, of the latest revision, the noteworthy points are:
- As the existing UK requirements are significantly different from the Commission’s current Regulations, there has been a major re-write of the requirements and therefore the FSC has said that it has not been possible to produce a “Road Map” of changes.
- Following informal consultation with existing market participants, it would appear that the view of the industry is that, whilst welcoming any initiative to enhance disclosure of key information to potential investors, the UCITS Simplified Prospectus regime is viewed as being of limited success in achieving its aim of improving investor disclosure. The Committee of European Securities Regulators and the EU Parliament appear to have accepted this by proposing a new regime, the Key Information Document, as part of the package of changes for UCITS IV although this has not been finalised by them. It has therefore been decided to introduce an optional simplified prospectus regime rather than require it in all cases.
- The UK FSA is considering whether to permit Authorised Schemes to be structured as protected cell companies (PCCs). If such arrangements are permitted in the UK, the Commission has said it would be keen to allow this. Therefore, as part of the review, the opportunity has been taken to include reference to PCCs to ensure that, if the UK does decide to extend its legislation, it will be possible to maintain equivalence with them. The Commission will be liaising with the FSA on developments in this area and should they not be progressed, then all references will be removed.