ISLE OF MAN: INVESTMENT FUNDS

Isle of Man Investment Funds

The first mutual funds were established in the Island in the mid-1960s and were mainly used by British expatriates. New legislative initiatives in the early 1980s created opportunities for growth and gave rise to a rapid expansion of the Island's fund management industry. The Isle of Man became the first offshore jurisdiction to be granted 'designated territory status' by the UK in 1986, thus enabling Isle of Man funds to apply for SIB recognition in the UK.

Mutual funds can take the form of companies (open or close-ended), trusts, limited partnerships or pure contractual arrangements. Non-Manx source income is free of tax, and there are no withholding taxes, so that non-resident investors will receive income and capital returns without deduction.

As in other offshore jurisdictions, managers in the Isle of Man are more focused on administration than asset allocation. Where a manager chooses not to establish a real presence in the Island, it is a requirement that its business must be administered by a licensed third party fund administrator.

Expansion in the funds sector can largely be attributed to growth in the Experienced Investor Fund and Overseas Fund sectors, reflecting the ongoing popularity of alternative investment/hedge funds.These schemes, launched in October 1999, at one point made up around 63% of all funds notified to the Financial Supervision Commission. By mid-2006, out of 184 investment funds domiciled in the Isle of Man, with total capitalisation of USD30bn, 135 were Experienced Investor Funds. EIFs were however phased out from November 1, 2007 under legislative improvements to the Isle of Man's funds regime.

Introducing a package of measures for the funds industry in his 2003 budget, Finance Minister Allan Bell said: "I am determined to ensure that we continue to provide our finance industry with a sound platform from which to compete for business in international markets. Notwithstanding the current downturn in equity markets, the global funds industry continues to experience significant and sustained growth. I wish to see the Isle of Man competing for business in this vital sector of the global finance industry. To this end I am pleased to announce today a major reform package for the Island's fund industry."

The package announced consists in the main of three core measures:

• Zero Rate Tax for all Third Party Fund Administrators, and for Managers of EIFs and PIFs - representing an extension of the existing zero rate tax regime on fund managers' profits to both fund administrators and to managers of Experienced and Professional Investor Funds;
• VAT Exemption for Experienced and Professional Investor Funds - representing an extension of the VAT exemption on management fees.
• Overseas Funds Exemption in the context of Isle of Man regulation - such that an overseas fund may be administered in the Isle of Man without "dual regulation" where it is incorporated in a jurisdiction having an appropriate regulatory framework.

Oher measures included: changes to the Partnership Act to help attract funds established as Limited Partnerships; and changes to the Companies (Transfer of Domicile) Act to facilitate the easier migration of funds to the Island from other jurisdictions.

The Isle of Man Financial Supervision Commission has welcomed the approval by the Tynwald of a series of orders that will add to the jurisdiction's choice of collective investment schemes.The orders were required to introduce the Specialist Fund and the Qualifying Fund, and to update the Experienced Investor Fund. They came into effect on November 1, 2007.

The Tynwald's approval of the orders is the culmination of an initiative sponsored by the Funds Review Group of Isle of Man Treasury, which looked at the future opportunities for the Island’s funds industry. Amongst its recommendations, the FRG advocated the introduction of two new fund types, one targeted at the institutional funds market and another aimed at non-retail investors. There were also implications for existing Experienced Investor Funds.

The landmark investment figure of USD50.1bn, achieved as at June 30, 2007, is the latest indication of the rapid growth and success of the Island’s funds industry, in which total funds more than tripled between the years 2003 and 2006. The jurisdiction's funds industry took a bit of a battering during the recent financial crisis however; assets under management on the island stood at at USD33bn at the end of March 2009, down from a high water mark of USD60bn in June 2008.

The Financial Services Act 2008 governs financial services in the Isle of Man. This legislation consolidated a number of pieces of financial services legislation, including the Financial Supervision Act 1988, which established the Financial Supervision Commission, the body exercising regulatory powers. The previous legislation distinguished various types of fund, which have been updated and incorporated into the 2008 Act (see Law of Offshore). These included:

Authorised Collective Investment Schemes.

These funds may be marketed to the public in the Isle of Man, the UK, Ireland, Jersey, Guernsey and Hong Kong. The island obtained designation under Section 87 of the UK FInancial Services Act 1986, and has equivalent arrangements with the other countries mentioned. An authorised fund must have independent Manx Manager and Trustee: the Manager must himself be licensed, and the Trustee must have a banking license.

Regulation falls under section 3 of the Financial Supervision Act and there is a statutory compensation scheme, similar to that in the UK.

Recognised Collective Investment Schemes

These are foreign funds which the Commission admits for local marketing purposes if it is satisfied that the level of supervision and regulation is adequate. Recognised funds must maintain facilities on the island where documents can be seen, and payments in or out can be effected. Regulation falls under sections 12 or 13 of the Financial Supervision Act.

Restricted Collective Investment Schemes

All other collective investment funds fall under this heading. Restricted schemes (funds) may be marketed only to Manx professional investors or to existing fund members in some cases, or to overseas investors (if permitted). They must have Managers with Manx Section 3 licenses, and Trustees who are either banks or are authorised to be Trustees in the countries with which the Isle of Man has agreed reciprocal arrangements (UK, Ireland etc as above). Regulation falls under section 11 of the Financial Supervision Act.

Professional Investor Funds

Unregulated funds that are specially designed for the exclusive use of institutional and professional investors.

Exempt Schemes

Unregulated private funds which cannot be marketed to the public and are restricted to having no more than 49 participants.

Close-Ended Funds

Strictly speaking not classified as mutual funds and are used for illiquid long-term investments.

All investment business are expected to exercise a "Know Your Customer" policy in order to minimise the possibility of being used for laundering the proceeds of drug trafficking or other criminal activities.

In October, 2004, the FSC announced Tynwald’s approval of the Investment Business Order 2004. The 2004 Order replaces the Investment Business Order 1991, which defined the term ‘investment’, the activities that constitute ‘investment business’ and the activities that are excluded from the scope of the Investment Business Act 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, which are now 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 1st December 2004.

See the Isle of Man Services Directory for a listing of fund managers on the Island.