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, now make
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 US$30bn, 135 were Experienced Investor
Funds.
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 will
come 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 $50.1 billion,
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 Financial Supervision Act 1988 governs
financial services in the Isle of Man, and
established the Financial Supervision Commission
which exercises regulatory powers. The legislation
distinguishes various types of fund:
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.
