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International Wealth Management and Asset Protection

By Lowtax Editorial
21 March, 2013

In this feature we round up key developments in the world of offshore funds, taking in some industry statistics, legislative developments in the areas of tax and regulations, and the potential impact of incoming alternative investment fund managers directive.

Channel Islands Fund Industry Resurgent

It has undoubtedly been a difficult few years for small financial centers which rely heavily on the financial services industry to guarantee their economic health, but statistics announced in recent weeks suggest that things are turning around. For instance, both the Channel Islands of Guernsey and Jersey for example have reported strong interest from investors in their respective investment funds sectors.

Earlier this month, figures released by the Guernsey Financial Services Commission (GFSC) revealed that Guernsey's funds industry expanded by GBP15bn (USD22.7bn) last year.

According to the GFSC, the net asset value (NAV) of funds under management and administration in Guernsey grew by GBP2.4bn (0.8%) in the final quarter of 2012, adding to growth of GBP13bn seen during the first nine months of the year to take the value of funds business in Guernsey to GBP276.8bn at the end of December 2012. This represents a year-on-year increase of GBP15.4bn (5.9%) and growth of GBP19.4bn (7.5%) compared to December 2010 levels. The NAV of Guernsey funds is now 50% higher than it was at the end of December 2009.

The figures from the GFSC also show that the Guernsey closed-ended sector was valued at GBP131bn at the end of December - up GBP0.7bn (0.5%) during the final three months of 2012 and up GBP11.9bn (10%) compared to twelve months earlier. The overall figures were marred somewhat by Guernsey domiciled open-ended funds, which decreased GBP1.1bn (2.2%) during the quarter, and were down GBP5bn (9%) year on year. However, non-Guernsey schemes, where some aspect of management, administration or custody is carried out in the island, grew by GBP2.9bn (3.1%) during the quarter to reach GBP95.5bn at the end of December 2012, which is GBP8.5bn (9.7%) higher than the value at the end of December 2011.

Fiona Le Poidevin, Chief Executive of Guernsey Finance - the promotional agency for the island’s finance industry, commented: “We have now enjoyed four consecutive quarters of growth since the beginning of 2012 which is very encouraging. It demonstrates confidence in Guernsey’s funds infrastructure and services at a time of changing economic conditions across the globe. These figures mean that we have entered 2013 in fantastic shape and we are keen to see this trend continue.”

Earlier in the month, Jersey Finance announced that Jersey's financial services industry recorded  strong growth in 2012 with the value of funds business growing markedly, and banking sector deposits recovering in the final quarter.

Figures from the Jersey Financial Services Commission show that the total net asset value of funds under administration stood at GBP192.8bn at the end of 2012, up from GBP189.5bn in the preceding three month period, and up by GBP3bn on 2011 levels. The value of total funds under investment management increased by GBP300m from GBP20.9bn to GBP21.2bn during the fourth quarter of 2012. The net asset value of funds under administration increased by GBP3.3bn from GBP189.5bn to GBP192.8bn during Q4 2012.

Geoff Cook, Chief Executive Officer of Jersey Finance, commented: “Jersey’s finance industry performance remained steady in the twelve months ending December 2012, and with both bank deposits and the total net asset value of funds under administration increasing in the final quarter there are positive signs for the year ahead. The investment management sector is also showing stable business results."

“In the funds sector, the net asset value of specialist funds saw the biggest increase of GBP2.3bn, with the value of private equity funds growing by 2.2% and the value of hedge funds increasing by 2%,” he added.

Cayman vs. BVI

There is a tendency to think that the world of “offshore” is one amorphous place where taxes are low or non-existent and regulations are light. However, several offshore jurisdictions compete quite fiercely for certain corners of the financial services industry, and this is certainly the case in the funds sector.

The Cayman Islands is the undisputed king of the offshore mutual fund, with US and European-based fund managers in particular choosing the jurisdiction to incorporate their fund vehicles because of its absence of taxes and legal expertise in the area.

In 2008, the number of registered funds in the Cayman Islands broke the 10,000 barrier. However, the Cayman Islands hasn’t had an easy time of it during the financial crisis, and by the end of the year the number of registered funds had dipped below this magical threshold (comprising 9,231 registered funds; 510 administered funds and 129 licensed funds) where it has stayed.

Consequently, even a jurisdiction like the Cayman Islands has to innovate now and again, and this is did earlier in the year when the Cayman Mutual Funds (Amendment) Law, 2012, was brought into effect on January 10, 2013, clarifying registration requirements for some master funds.

The Cayman Islands introduced registration requirements for master funds in The Mutual Funds (Amendment) Bill, 2011, which was passed by the Cayman Islands' legislative assembly in December 2011. The registration requirements impact open-ended master funds, where investors can buy into the scheme directly from the fund on an ongoing basis, rather than purchasing equity off existing investors, as would be the case after the initial offering of shares in a closed-ended fund.

The new law seeks to clarify the definitions of feeder fund, regulated feeder fund and master fund to eliminate any uncertainty as to whether the registration requirements apply to a master fund. It also introduces a provision that requires non-resident mutual fund administrators to file an annual declaration with the Financial Services Authority and pay the prescribed fee before January 31 each year in respect of any regulated mutual fund that that person administers.

Prior to the change in 2011, master funds with fewer than 15 feeders/investors were exempt from having to register with the Financial Services Authority.

Cayman is however constantly looking over its shoulders at rival jurisdictions in the region. While the British Virgin Islands (BVI) is one of the largest offshore corporate domiciles thanks in large part to its International Business Company legislation and 0% corporate tax, it also wants a piece of the fund action, and is now targeting non-institutional investment managers of small and mid-sized investment funds, having just introduced a new licensing regime to attract these types of investment entity.

The Investment Business (Approved Managers) Regulations, 2012 came into force in the BVI on December 10, 2012. The regime, known as the Approved Managers Regulations, will provide eligible investment managers of BVI funds opting to also domicile their investment management vehicles in the jurisdiction with a streamlined regulatory framework, acknowledging both the sophistication of investing into such funds and the lower systemic risk posed by these funds to the global financial system.

Ogier BVI Corporate and Investment Funds Partner, Simon Schilder, who was actively involved in the private sector consultations for these new regulations, commented: "We see the Approved Managers Regulations as particularly appealing to start-ups or smaller investment managers that want to set up and manage funds in the most efficient and effective way possible, given their size and investor base. We believe the new regime will be an appealing product for eligible investment managers and will represent a cost effective option which is, at the same time, in tune with current regulatory requirements and international standards for the oversight of investment managers."

According to Ogier, recent analyses show the small hedge fund market as growing, despite difficulties these funds typically face in securing capital. A report by Barclays Capital identified a trend beginning in 2011 towards an increasing share of allocations going to funds with less than USD1bn in assets. The research also reported investors indicating a preference for increasing allocations to small funds.

In order to be eligible under the Approved Managers Regulations, an investment fund manager must be a BVI company or limited partnership, and act as investment manager or advisor to either a BVI licensed private or professional fund; a closed-ended fund domiciled in the BVI with characteristics substantially similar to either a BVI licensed private or professional fund; or a foreign fund investing substantially all of its assets in a BVI domiciled fund.

In addition, investment managers must maintain, in the case of open-ended funds, aggregate assets under management of USD400m and, in the case of closed-ended funds, aggregate capital commitments of USD1bn.

Applicants must also pass the BVI FSC's "fit and proper" test, and file an application for approval not less than seven days prior to the intended commencement of business.

Hong Kong vs. Singapore

Another significant “offshore” rivalry is that between Hong and Singapore, which are both competing for the accolade of Asia’s premier financial center.

While Hong Kong is the world’s largest banking center after London and New York, and has cemented its position as the conduit for investment into and out of China, Singapore has the edge over its competitor in the wealth management stakes, having exempted funds from tax for some years, and after putting in place an attractive statutory framework for trust management.

Hong Kong is, however, seeking to narrow the gap on both fronts. According to the Deputy Chief Executive Officer of Hong Kong's Securities and Futures Commission (SFC), Alexa Lam, the plan to introduce China-Hong Kong mutual recognition of funds represents a new frontier for the evolution of renminbi (RMB) investment products and the development of Hong Kong’s asset management business.

Speaking at a forum of the Hong Kong Securities and Investment Institute in January 2013, she urged market participants, particularly asset managers, to gear themselves up to capture new opportunities arising from this groundbreaking initiative, which is still being studied and builds upon the experience of the Renminbi Qualified Foreign Institutional Investors scheme.

"I encourage you to start thinking which of your products would be suitable for the Mainland market, why they would be suitable, who your target investors would be, and how your products would help them...this is because the Hong Kong-Mainland fund platform that we are building will likely be Asia's largest and deepest," Lam said.

It is envisaged that qualified SFC-authorized funds domiciled in and operating from Hong Kong would enjoy the status of "recognized Hong Kong funds" and qualified mainland China funds would enjoy the status of "recognized Mainland funds." Those recognized funds could then obtain authorizations and be sold directly in each other's markets.

"If only we get a fraction of Mainland authorized funds to Hong Kong, we would immediately add an exciting new depth and richness to our RMB product pool, boost the appeal of the currency outside the Mainland and move closer to the goal of securing Hong Kong's position as the preeminent offshore RMB center," Lam concluded.

Measures were also outlined by Hong Kong Financial Secretary John Tsang in his annual Budget speech on February 27, 2013, to strengthen Hong Kong’s position as a regional wealth management center. With the total value of fund assets under management in Hong Kong at more than HKD9 trillion (USD1.16 trillion), ranking second in Asia, Tsang promised to provide a clear and competitive tax environment with a view to attracting more funds of various types to base in Hong Kong, to broaden the variety and scope of its fund business. He pointed out that Hong Kong-domiciled funds will drive demand for professional services, such as fund management and investment advice as well as legal and accounting services.

To attract more private equity funds to domicile in Hong Kong, he proposed to extend the profits tax exemption for offshore funds to include transactions in private companies, which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong.

In addition, while investment funds established in Hong Kong can only take the form of trusts at the moment, he believed that, as an international financial center, Hong Kong should provide a more flexible business environment for the industry to meet market demand. To attract more traditional mutual funds and hedge funds to domicile in Hong Kong, the Government is therefore considering legislative amendments to introduce the open-ended investment company.


While the Channel Islands and the Caribbean IOFCs seem to hold the limelight when it comes to investment fund management, back in Europe there is a small but vibrant asset management sector in Gibraltar (funds under management in Gibraltar totaled GBP8.9bn in March 2012), and the jurisdiction’s authorities have recently started to shout about its favorable legal and tax regime for offshore financial services, especially fund management.

On February 28, 2013, the Gibraltar Funds and Investments Association (GFIA) released the territory's first-ever guidebook to assist funds and fund managers considering establishing operations in Gibraltar. The guidebook, drafted with both a local and international readership in mind, aims to cover matters of interest for investors, fund managers, lawyers, administrators, auditors, and other fund practitioners. It discusses Gibraltar's key offerings and tax benefits, and describes the territory's regulatory regime.

In particular, given the recent trend towards harmonization of fund law and regulation across Europe, GFIA’s guidebook highlights how Gibraltar distinguishes itself from other jurisdictions, whilst maintaining full compliance within the European Union framework.

James Lasry, Chairman of GFIA, hoped that the publication of the guidebook would "raise awareness of what is arguably the most flexible professional fund regime in Europe with the quickest time to market."

Earlier that month, Gilbert Licudi, Gibraltar's Minister with responsibility for Financial Services, led a delegation of financial services firms and members of the Gibraltar Funds and Investments Association to the FONDS 13 conference and exhibition in Zurich to create awareness of the territory's funds and asset management offerings. The key fixture attracted some 6,100 financial services professionals and private investors over two days.

Licudi explained that at a time when Swiss asset managers are under pressure because of a material increase in the degree of regulation, Gibraltar’s regulatory regime is no less strict but it affords the rights to passport throughout Europe - a benefit that the Swiss regime does not have.

During the course of the event, Licudi spoke on the topic of "Investing through stable international financial centers in uncertain global markets," and reported that awareness of the Gibraltar offering was well received.


Not many investment fund managers are viewing the incoming the Alternative Investment Fund Managers Directive as a positive development for the industry. However, offshore financial centers see the advent of the new legislation as an opportunity rather than something to be feared, and this sentiment seems to have been verified by a new report.

The AIFMD was drafted by the European Union in October 2010 to impose registration, reporting and initial capital requirements to enhance fund industry safeguards. Under the directive, a European AIFM with a portfolio of more than EUR100m will be required to obtain an authorization from national authorities to operate. This permit will entitle them to market funds throughout the EU single market.

The European Commission and several EU Member States believe the law is necessary to provide better protection for investors in this lightly-regulated segment of the investment industry. The industry itself however, has expressed fear that it will place it in a regulatory straightjacket which will slowly stifle it.

The new report, which includes contributions from Business Bermuda, Guernsey Finance, the Malta Financial Services Authority, Swiss Hedge Capital and Apex Fund Services, highlights the fact that fund managers may benefit from relocating their funds to offshore jurisdictions with more efficient regulatory environments.

According to Cheryl Packwood, Chief Executive Officer, Business Bermuda: "Offshore centers are faring better than some people expected following the arrival of the AIFMD. Their low-cost solutions are giving them a competitive edge over more expensive onshore jurisdictions such as Luxembourg and Ireland. Higher costs are tending to render uncompetitive any onshore fund valued at less than USD100m at a time when the great majority of funds fall into the more modest USD5m to USD100m category."

On re-domiciling closer to home, Fiona le Poidevin, the Chief Executive of Guernsey Finance, pointed out that 24% of managers have their funds serviced from Guernsey, followed by the UK (20%) and Ireland (18%). This trend can be attributed to cost effectiveness, reputation and accessibility to London, le Poidevin explained, adding that another major advantage of using Guernsey entities is that they can be listed on the London Stock Exchange, Euronext Amsterdam, the local Channel Islands Stock Exchange based in Guernsey, and the Hong Kong Stock Exchange.

Emaliese Lofaro on behalf of the Malta Financial Services Authority, highlighted the speed at which a Malta fund can be established. He said: "Malta has all the legal infrastructure in place to help them get AIFMD-licensed from day one."

Guernsey is planning two parallel regulatory regimes for investment funds to compensate for the forthcoming entry into force of the AIFMD.

The regimes will allow Guernsey to simultaneously offer a regime that fully complies with the AIFMD, whilst maintaining the existing regulations in place for investors and managers that will not be impacted by the AIFMD.

Fiona le Poidevin of Guernsey Finance commented: “As a leading international funds center, Guernsey has been closely following the development of AIFMD, has been active in the debate in Brussels and is well advanced in its preparations to offer an AIFMD-compliant regime from as early as July 2013. With the continued delay to the publication of the rules, it is important for existing clients that Guernsey is clear on its intentions now."

“It is our intention that Guernsey will operate a full AIFMD equivalent regime for those EU investors and managers who are obliged to take this route or any investors or managers who choose this as their preferred option. For non-EU investors and managers, investing in the EU and globally, there will remain a parallel regime with its own appropriate set of regulations. This will also be available to EU investors who are able to take advantage of the national private placement regime in the immediate term or those who fall outside the scope of AIFMD."

“What we are planning to do is provide clients with the flexibility to choose a regime which best suits their needs from a jurisdiction that has always regulated managers and funds across all sectors to leading international standards. We believe that this proposition will prove very attractive and as such, will ensure that Guernsey remains a leading global fund domicile in the future.”

Neale Jehan, Executive Director at KPMG in Guernsey and Chairman of the Technical Committee of the Guernsey Investment Fund Association (GIFA), added: “As a non-EU jurisdiction with close proximity and business ties to the EU, it is essential that we seek to comply with AIFMD for those clients obliged to or who wish to take advantage of the regime in the coming years. However, we must recognize that we have clients whose business does not touch the EU at all in terms of management or marketing of funds and it is important that these clients have the choice to elect to fall under the AIFMD regime or remain outside, as is their right. In being able to offer both EU and non-EU solutions from one location, Guernsey will be ideally placed to serve the global fund industry.”


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