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HFMWEEK

S P E C I A L R E P O R T

GUERNSEY 2010

DISTRIBUTED WITH HFMWEEK JUNE 2010

ADMINISTRATION

Guernsey offers a winning formula

WEALTH MANAGEMENT LEGAL ISSUES

The jurisdiction continues to punch above its weight

Predicted growth for the next three quarters

FEATURING Appleby // Babbé // Barclay's Wealth // Collas Day // Guernsey Finance // Legis // Louvre Fund Management Limited // RBC Wealth Management //

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RBC® clients enjoy a broad range of value added services and tailored solutions including global custody, fund administration and banking services. Our partnership approach means we can support your strategic objectives by delivering a truly integrated service that fits seamlessly with your business. We take care of administration and other details allowing you to focus on market analysis and delivering top performance to your investors. To find out more, please contact Stuart Mauger, Head of Business Development, Corporate and Institutional Services, RBC Wealth Management:

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Email: [email protected] or log on to www.rbcwminternational.com/ international-corporate-services.html

This advertisement is issued by Royal Bank of Canada (Channel Islands) Limited ("the Bank") on behalf of RBC® companies that comprise the RBC Wealth Management Network in the British Isles ("the BI subsidiaries"). The Bank is regulated by the Guernsey Financial Services Commission to carry on deposit taking and investment business and to act as a custodian/trustee of collective investment schemes in Guernsey and regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. Registered office: PO Box 48, Canada Court, St Peter Port, Guernsey, GY1 3BQ, registered company number 3295. Branch: 19/21 Broad St, St. Helier, Jersey JE1 8PB. Details of the name and addresses of RBC Wealth Management's main BI subsidiaries may be obtained at the following address www.rbcwminternational.com. Services outlined may be provided by a variety of subsidiaries and offices, other than the Bank, either independently or acting together. Some of the services detailed in this advertisement are not offered in all jurisdictions and may not be available to you. This advertisement does not constitute an invitation or solicitation to apply for any products or services in any jurisdiction to any person to whom it is unlawful to make such a solicitation in such jurisdiction. You should note that the applicable regulatory regime, including any investor protection or depositor compensation arrangements, may well be different from that of your home jurisdiction. This advertisement has to the extent required been approved for the purpose of the Financial Services and Markets Act 2000 by Royal Bank of Canada Investment Management (UK) Limited which is authorised and regulated by the Financial Services Authority. ®Registered trademark of Royal Bank of Canada. TMTrademark of Royal Bank of Canada. Used under license. ADV/09/463

GUERNSEY 2010

G

REPORT EDITOR

uernsey's position as a strong, stable and wellregulated jurisdiction has left it on solid ground despite the economic upheaval witnessed globally in the hedge fund industry over the past two years. The jurisdiction holds strong hopes for 2010, and rightly so, considering it will be able to entice funds and managers alike on the basis of its quality. While other domiciles out of the European sphere struggled, and continue to struggle to meet the changing investor and regulator demands of the global hedge fund industry, Guernsey's strength lies in its early foresight, which mapped a strong regulatory regime of high quality long before the advent of the crisis. Since the crisis, Guernsey's regulatory regime has stayed the same, and it does not look like there will be any changes to this in the future. This can only be regarded as a testimony to its integrity and strength in the face of such drastic changes. Its resilience under pressure has encouraged, in recent months, fund migration from domiciles such as Bermuda to the peaceful Channel Island. Furthermore, Guernsey has a strong marketing message which it has secured over the past few years promoting its stability and reputation, further encouraging managers and funds to consider the strengths of the jurisdiction. Though Guernsey cannot remain independent of recent dramatic economic changes, the island's hopes for the future are strong. As one of the jurisdictions which is home to many highly rated qualities for investors, it will be in a key position as the market continues to evolve into a new phase which demands increased investor transparency.

Ruth Gillbe

HFMWEEK

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H F M W E E K . CO M 3

GUERNSEY 2010

CONTENTS

INDUSTRY

06

GUERNSEY: SEIZING THE MOMENT

LEGAL

Peter Niven of Guernsey Finance explains why Guernsey's steady financial improvement, wealth of expertise, robust yet pragmatic regulation and forward thinking are attracting investors to the island

ADMINISTRATION

17

Stuart Tyler of Babbé explains why Guernsey's reputation means he has confidence that the island's market will grow in the next three quarters

ADMINISTRATION

FOCUSING ON A QUALITY SERVICE

08 GUERNSEY'S OPTIMISTIC FUTURE

Ken Bradley and James Sherbourne of Barclays Wealth discuss Guernsey's funds heritage and its lasting appeal as an international hedge fund domicile

CUSTODY AND WEALTH MANAGEMENT

20

BUILDING ON SOLID FOUNDATIONS

Kevin Gilligan of Louvre Management Limited reveals why Guernsey's established regulatory framework and proven track record mean the island will continue to surpass hedge fund managers' and investors' needs

ADMINISTRATION

11

STRENGTH WHERE IT COUNTS

The resolve of this leading financial jurisdiction will continue to reflect that it can punch above its weight, says Andy Creber of RBC Wealth Management

LEGAL

22

KEY FOCUS ON GOOD RELATIONSHIPS

Paul Wilkes and Wayne Atkinson of Collas Day echo that the close relationship between the GFSC and the fund industry help Guernsey maintain its high standing as a hedge fund domicile

LEGAL/ADMINISTRATION

14

THE WINNING FUND FORMULA

Martin Tolcher of Legis Fund Services Limited believes remaining flexible and nimble in meeting clients' needs is the winning formula in fund administration

25

MAKING A SENSIBLE CHOICE

With fund managers having to make difficult decisions after the global economic downturn, Barney Lee of Appleby explains why Guernsey's sensible regulatory systems can give managers all the support they need

4 H F M W E E K . CO M

ANYTHING BUT ORDINARY

With offices in Guernsey and the Isle of Man, the Legis Group provides multi-jurisdictional fund, corporate and trust structures alongside supporting administrative services, to institutional and private clients.

Tel: +44 (0)1481 726034 Fax: +44 (0)1481 726029 E-mail: [email protected] www.legisgroup.com

GUERNSEY 2010

PETER NIVEN OF GUERNSEY FINANCE EXPL AINS WHY GUERNSEY'S STEADY FINANCIAL IMPROVEMENT, WEALTH OF EXPERTISE, ROBUST YET PR AGMATIC REGUL ATION AND FORWARD THINKING ARE ATTR ACTING INVESTORS TO THE ISL AND

GU E RN SE Y: S E I Z I N G TH E M O ME N T

"

Peter Niven

is the chief executive of Guernsey Finance, the promotional agency for Guernsey's finance industry internationally. He is also a non-executive director of several Guernsey-based fund and captive insurance companies.

ncertainty is the only certainty there is, and knowing how to live with insecurity is the only security," mused mathematics professor John Allen Paulos. These words carry particular resonance as the world continues to pick itself up off the floor of the global financial downturn. We have seen the start of renewed confidence in the markets but really this is just the start of a trip down what will be a very long road to recovery and at the moment the general economic conditions remain fragile and will be so for some months to come. Guernsey cannot be completely immune from these worldwide issues, although the island has to a large extent remained resilient in the face of the pressures. Perhaps the most significant fallout for us though has been the increased international focus on so-called `tax havens' or offshore centres. I am pleased to say that the island is consistently recognised as being within the very top tier of international finance centres. There is still uncertainty over issues such as corporate tax rates and the EU's Directive on Alternative Investment Fund Managers (AIFM). What I can say, however, is that we are taking all steps possible to ensure the island continues to be a leading international funds centre. As such, I am extremely confident that Guernsey will build on its solid foundations to remain a leading domicile for the alternative investment community.

U

NOT ONLY IS GUERNSEY AN IDEAL LOCATION FOR CONDUCTING BUSINESS OR LOCATING MANAGEMENT COMPANIES BUT IT IS ALSO ATTRACTIVE AS A RESIDENCE FOR THE MANAGERS THEMSELVES

­ with the KKR effect ­ and hedge funds and funds of hedge funds (FoHFs). Today, Guernsey has an investment funds industry with total business worth £197bn. The island has not been completely sheltered from the global financial crisis but our funds industry has continued to perform robustly. Our performance has outstripped some of our closest competitors and the fact that we have had three consecutive quarters of growth to the end of March this year points again to a slow climb out of the general trough of 2008/09. Guernsey practitioners are reporting a greater level of business than a year ago, with particular interest from promoters and sponsors in harnessing our experience and expertise in the alternative and niche asset classes. This is reflected in the fact that together, private equity, property and hedge funds/FoHFs now account, by value, for nearly 50% of the island's funds business. CENTRE OF EXCELLENCE Leading investment managers of alternatives (such as EQT and Alchemy ­ private equity; Kenmore and F&C ­ property; and Man and Fauchier ­ hedge funds/ FoHFs) have the operation of their funds facilitated in Guernsey. Our administrators do service nonGuernsey funds but a large proportion of their business relates to Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in 45 countries. These can be established through a range of flexible investment vehicles such as unit trusts, the Guernseypioneered protected cell companies (PCCs), incorporated cell companies (ICCs) and limited partnerships. There are a good number and broad range of administrators in the island, many of which have specific expertise and bespoke IT solutions for alternatives. Over the past couple of years Citco, Custom House and Alter Domus have been added to a list that already included globally recognised names such as HSBC, Northern Trust, RBC and State Street (and now also features JP Morgan), which can also act as custodians. Guernsey's funds industry can draw on the services provided by the banking, wealth management and risk management sectors. In addition, it is supported by a comprehen-

THE ALTERNATIVE DOMICILE Guernsey has a strong heritage in providing clients from across the globe with an extensive range of financial products and services. For example, our funds industry stretches back half a century. During the past two decades, the sector has seen a gradual yet sustained shift where the balance of business has moved from being largely retail, equity-traded/ cash-based schemes to predominantly institutional, niche funds. This included significant growth, particularly of esoteric asset classes, through the middle of the last decade. The experience means that the island has built a wealth of expertise and first-class infrastructure for the structuring, management, administration and custody of not just traditional funds but also alternatives, in particular private equity

6 H F M W E E K . CO M

"

INDUSTRY

sive network of investment, legal, tax, audit, accounting and actuarial advisers, including multi-jurisdictional law firms and the `big four' accountancy firms where there is specialist expertise in alternatives. Guernsey is home to the Channel Islands Stock Exchange (CISX), which has more than 3,500 securities listed and also provides access for listings on both London and European exchanges. The Guernsey Financial Services Commission (GFSC) has grown a reputation for its robust yet pragmatic approach to regulation; for example, all Guernsey schemes remain regulated but fast-track routes have been introduced that allow for the speedy launch of funds where appropriate. In addition, Guernsey's skilled workforce not only has access to in-house training but also the Guernsey Training Agency (GTA) University Centre, which works with the Institute of Directors (IoD) to ensure that the island has a pool of experienced and well qualified non-executive directors maintaining high standards of corporate governance. Our pedigree is reflected by the fact that earlier this year BlueCrest Capital Management, one of Europe's largest hedge fund managers, followed in the wake of stockbroker Shore Capital by relocating its headquarters from London to Guernsey. Importantly, having a physical operation in Guernsey provides additional substance to management arrangements. Terra Firma has not only joined fellow private equity manager Permira by establishing in Guernsey but chairman Guy Hands has decided to buy a property and live on the island. This reflects the fact that not only is Guernsey an ideal location for conducting business or locating management companies but it is also attractive as a residence for the managers themselves. This is no doubt helped by the fact that Guernsey has a zero rate of corporate tax as standard, there is still no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no value added or general sales tax, and personal income tax remains levied at a maximum of 20%, with a variety of capping options available depending on individual circumstances. TOP TIER During its 50 years as a finance centre and particularly during the last decade, Guernsey has faced scrutiny from the UK Government, the EU, the International Monetary Fund (IMF), the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD) and G20. The island has always co-operated in these processes and on each occasion been placed within the premier division of international finance centres. This has continued to be the case during the past 18 months: · Guernsey features alongside the UK and US on the

OECD white list that was published at the end of the London G20 summit in April 2009; · The review of British Crown Dependencies and Offshore Territories by Michael Foot on behalf of HM Treasury placed Guernsey in the top division of international finance centres; · Guernsey was ranked 22nd in the latest Global Financial Centres Index (GFC 7, March 2010) ­ within the very top echelon of the so-called offshore centres. There is also every reason to believe that Guernsey has performed well under assessment by the IMF during the first half of this year. However, the island never rests on its laurels but is always looking to the future. We are currently facing challenges in a variety of guises, not least in terms of our corporate tax rates. It is reassuring that Lyndon Trott, Guernsey's chief minister, has said: "The fund management industry's exempt company status is not under threat and indeed its scope could well be extended." Guernsey has also been extremely proactive voicing its position in both London and Brussels regarding AIFM and we are confident that the island will continue to have access to European markets. It is so that we can tackle such challenges most effectively that the island is stepping up its representation within the corridors of power in both the UK and the EU. Guernsey will do all it can to continue to be a leading international funds centre. As such, I am extremely confident that the island will build on its illustrious heritage to remain a leading European centre for alternatives business well into the future. n

H F M W E E K . CO M 7

GUERNSEY 2010

G U E R N S E Y 'S OP TIMI STI C F U TU RE

KEN BRADLEY AND JAMES SHERBOURNE OF BARCLAYS WEALTH DISCUSS GUERNSEY'S FUNDS HERITAGE AND ITS LASTING APPEAL AS AN INTERNATIONAL HEDGE FUND DOMICILE

uernsey has over five decades of experience in the funds industry but how has it weathered the recession and is it still a good place to do business? Barclays Wealth's Guernsey director Ken Bradley and vice-president of the Intermediary and Institutional Wealth Solutions team James Sherbourne examine the past, present and future of the island's funds industry. Recent figures published by the Guernsey Financial Services Commission show that the value of investment funds under management and administration in the island increased by £13.2bn (7.2%) during the first three months of 2010. This was the third successive quarter of growth and takes the total value of funds to £197.4bn ­ a year-onyear rise of £21.5bn (12%). Its place as an international market is illustrated by the fact that Guernsey funds are now promoted or sponsored by leading institutions in 45 countries. Guernsey Finance chief executive Peter Niven recently said that the island can be cautiously optimistic about the funds industry, which was another step down the road to recovery. Barclays Wealth's experience is that the island has every reason to be optimistic.

G

Ken Bradley

is island director for Barclays Wealth and has spent over 20 years in the industry mainly in corporate banking. He has had extensive contact with the funds industry over the past 10 years, particularly in the private equity market.

James Sherbourne

is vice-president of the Intermediary and Institutional Wealth Solutions team in Guernsey and has worked in offshore finance for 18 years focusing predominantly in the investment and fund Industry. Prior to joining Barclays Wealth in 2007, he worked for the hedge fund group VHC based in Jersey.

IN A POSITION TO RESPOND You only need to look at Guernsey's history to know that the island is used to responding. Trust and private banking was predominant in the 1990s but as funds began to grow, the island started to adapt and Guernsey has used this experience to continue adapting. One of the island's key strengths is its independence. As a Crown dependency, yet with its own government, the island has the ability to change as and when it needs to. There is no doubt that Guernsey needs to align itself to the UK but it can operate with some sense of autonomy. Guernsey also has an excellent regulatory environment. The island was the first place to have a regulated Financial Services Commission through the foresight of John Roper and that has enabled us to be creative and flexible as and when it was required.

THE ISLAND IS IN AN EXCELLENT POSITION TO SOURCE BUSINESS PROVIDING IT CAN MEET THE STAFFING REQUIREMENTS AND THAT WILL ALWAYS BE A BALANCING ACT FOR COMPANIES IN THE ISLAND

Guernsey Finance, the States of Guernsey and the Guernsey Financial Services Commission are all very supportive of the funds industry and this strengthens our position. They work incredibly well together for the good of the island. Their goal is to keep business here and develop it. This regulatory environment is complemented by the skills and expertise that can be found locally. The cost of doing business in the island is reduced because of the highly skilled and efficient workforce. This is especially important now because the markets have been contracting, it's harder to deliver returns and there is a lot more focus on costs. The size of the island also helps significantly as we often have existing relationships with the people we need to deal with. We are confident that Guernsey still has a pull and that we will see an increase in business especially from the Cayman Islands who have suffered through their alignment with the US. WHAT DOES THE FUTURE HOLD? From a UK perspective then it's difficult to say what it will look like because of the AIFM. However, from Guernsey's perspective, its expertise and flexibility to adapt will create the opportunities for fund incorporation and fund management. There will be increased outsourcing and this cuts both ways ­ we will lose and gain business through a focus on the things that the island is good at. Providing the responsibility remains in Guernsey, then the island's reputation will not be impacted by outsourcing. Outsourcing has been enhanced by technology and companies investing in technological advancements will be able to work more efficiently and take on additional work. One of the challenges for the island will be staffing. The States of Guernsey has recognised that the funds industry needs expertise but that may not be people who are Guernsey-born. That is positive as the island is in an excellent position to source business providing it can meet the staffing requirements and that will always be a balancing act for companies in the island. In the short term, Barclays Wealth in the Channel

"

8 H F M W E E K . CO M

A D M I N I S T R AT I O N

Islands doesn't believe the spotlight of the new coalition government will fall on the islands, as one of its main focuses will be to keep London as a top business centre. The government will need to protect that and it's important that they do, as Guernsey is tied to London's success. TRANSPARENCY Guernsey as a funds centre is highly regarded as a jurisdiction which goes beyond expectations to maintain standards and transparency. There have been a number of recent regulatory developments which are very specific to the funds industry. REVISED CODES OF PRACTICE The Codes of Practice issued under section 35 of the Fiduciary Law have been updated and can be summarised as follows: · The names of the AML/CFT legislation and the AML Handbook have been updated. · The names of the trust and company laws and related terminology have been updated. · The description of the "four-eyes" requirement has been updated to reflect recent changes to the way that is set out in the Fiduciary Law as follows: · The Codes have been amended to reflect that the AML regime now requires financial services businesses to have in place procedures documenting the risk assessment both of its business as a whole and each of its business relationships and policies, procedures and controls to forestall, prevent and detect money laundering and terrorist financing as follows: · The words "aggregate annual" have been deleted from the description of acceptable professional indemnity insurance excesses as, in practice, licensees have not been held to an aggregate annual excess limit of 3% of turnover and such a limit is not obtainable in current conditions. COB RULES Enhanced regulations came into effect on 1st January 2010 and these include: · Customer categorisation; · Annual review submitted to GFSC annually signed by CEO and compliance officer; · Decisions to postpone execution must be documented; · Opting out of best execution by the client must be in writing; · Best execution policy disclosed to clients and monitored; · Restrictions on allocations to officers and employees; · Monthly (formerly six monthly) valuations for investment management unless customer advises in writing that they require them less frequently; · Mandatory valuation report on at least an annual basis; · Enhanced client money rules; · Conflicts of Interest; · Complaints. CAPITAL ADEQUACY RULES These came into effect on 16 April 2010 and include the following: · Increased capital requirements; · PII cover required for most investment-licensed entities £300k min or 3 x total revenue;

· The introduction of pro forma calculations which take account of risks to which the business of the licensee might be subject; · The introduction of a liquidity requirement; · The recognition that a licensee should not rely on loan support from another group company for the purposes of meeting its capital adequacy; CODE ON CORPORATE GOVERNANCE This is currently in the consultation stage. GUERNSEY AND BARCLAYS WEALTH'S GLOBAL STRATEGY There is no doubt that Guernsey, and indeed the Channel Islands as a whole, is an intrinsic element of Barclays Wealth's global strategy. This has been recently demonstrated by the decision for the Channel Islands to be the first of Barclays Wealth's jurisdictions to launch a new service looking after intermediary clients who have complex and specialist banking and investment requirements. The Intermediary and Institutional Wealth solutions team (IIWS) has been developed following feedback from clients that they require more specific solutions tailored to their complex needs. The IIWS team, which will see a 40% increase in headcount for the team across the Channel Islands, will provide clients with a range of world-class investment and banking products, as well as product and platform solutions which will allow clients to access the full capability of Barclays Capital and Barclays Group. Barclays Wealth is also investing £350m in an infrastructure upgrade which aims to make Barclays Wealth the world's number one wealth manager. It has already been demonstrated that Guernsey is an integral part of that ambition. n

H F M W E E K . CO M 9

"Excellence is not an exception, it's a prevailing attitude."

At Babbé we have developed a range of legal specialisms in tandem with the development of Guernsey as a world-class offshore centre. Today we offer expert legal advice and representation to a wide variety of commercial clients, including multi-national banks, fiduciary companies and insurers. We also act for a significant number of local businesses. Our clients choose us for our responsiveness to their needs, for our close understanding of the industries in which they operate, for our careful stewardship of their interests and, where appropriate, for our forceful and effective litigation. · · · · · · · · Funds Corporate and Commercial Trusts Insurance Commercial Property Intellectual Property Litigation Corporate Recovery

For more information please contact: Stuart Tyler 01481 746174

s.[email protected]

Advocates & Notaries Public PO Box 69, 18-20 Smith Street, St Peter Port, Guernsey GY1 4BL Tel +44 (0)1481 713371 E: [email protected]

www.babbelegal.com

GUERNSEY 2010

C U S T O D Y A N D W E A LT H M A N A G E M E N T

STR E N GTH W H E RE I T CO U N T S

THE RESOLVE OF THIS LEADING FINANCIAL JURISDICTION WILL CONTINUE TO REFLECT THAT IT CAN PUNCH ABOVE ITS WEIGHT, SAYS ANDY CREBER OF RBC WEALTH MANAGEMENT

T

Andy Creber

is the head of the custodian trustee department of RBC Wealth Management's Corporate & Institutional business in the British Isles.

he Channel Islands have weathered the financial storm and Guernsey is now well placed to make the most of its reputation as a wellregulated jurisdiction of choice for the investment funds sector. Its reputation remains top-tier, as evidenced by the scrutiny and reviews it has successfully worked through. Most recently the jurisdiction has been placed alongside Jersey, the UK and US on the OECD's `white-list'. This year the IMF will also assess Guernsey and this review is expected to reflect Guernsey's continuing commitment to be a leading international financial centre. The level of scrutiny will always be high on `offshore' centres and this is viewed as an opportunity to showcase to the wider community that Guernsey is on top of its game. RBC, the ultimate parent of Royal Bank of Canada (Channel Islands) Limited, has a tier one capital ratio of 12.7% and is one of just five non-sovereign banks with a triple-A credit rating from Moody's. INVESTOR SERVICES As a custodian provider in the funds sector, investors are continually comforted by the strength and stability of RBC, which has been paramount to its success during the financial upheaval in the markets.

The custodian trustee role has traditionally been overlooked by promoters, but in recent times has been playing an increasingly important role for the increased transparency which investors expect from a fund which is regulated and sold from a leading jurisdiction such as Guernsey. NEW BUSINESS AND DEVELOPMENTS RBC C&I continues to see an increase in new fund and custody business, and in addition to the traditional hedge fund or fund of hedge fund offerings which have been a long established business line, there is a trend for other alternative products coming to market which require an experienced and well-established fiduciary overseeing the funds' operation. Private equity, property and more esoteric alternative structures such as art, antique, commodity and fine wine funds are increasingly becoming popular as investors look to use diversifying assets to build their portfolios. The aim is to decrease the volatility of returns while continuing to provide outperformance. With its flexible approach to these types of products, Guernsey should be a beneficiary of this new business. In addition, the emerging markets will continue to factor in any new business theme, with the `Bric' countries being a new distribution region for the alternative fund industry in Guernsey. RBC C&I has a significant presence in both Guernsey and Jersey with over 84 staff providing custody and corporate trustee and fund administration services, leveraging the strengths of the RBC Wealth Management division both in the British Isles and internationally. Another development is the increased trend for institutional investors and ultra high-net worth individuals to create their own managed account structure with their preferred investment manager. RBC Wealth Management has developed this growing area. CHALLENGES Guernsey will continue to face ongoing challenges, such as finding a replacement for its zero to ten corporate tax

H F M W E E K . C O M 11

GUERNSEY IS WELL PLACED TO MEET THE NEW CHALLENGES ENSURING THAT THE ENVIRONMENT FOR GROWTH IN THE FINANCE SERVICES INDUSTRY IS MAINTAINED

REGULATION AND TRANSPARENCY RBC Corporate and Institutional (RBC C&I) business segment, through its associated Guernsey company, Royal Bank of Canada (Channel Islands) Limited, is licensed and regulated to undertake the role of a Custodian Trustee for mutual funds. In addition to the safekeeping function it can also provide an oversight `fiduciary' role which safeguards the assets and protects the interest of the `beneficiaries' ­ the shareholders / unitholders. RBC C&I employs a `best in breed' approach so regardless of where the fund is domiciled, the promoter and directors of the fund can be assured of a model which is focused at the top of the regulation playing field.

"

GUERNSEY 2010

C U S T O D Y A N D W E A LT H M A N A G E M E N T

rate, and it will certainly work closely with other jurisdictions to ensure it continues to prosper. External threats, such as the EU initiative in the shape of the Alternative Investment Fund Manager (AIFM) Directive may also challenge Guernsey fund industry. The industry and government will continue to work to gain the necessary regulatory equivalence so that we work on a level footing. The draft provisions require an Alternative Investment Fund (AIF) to employ a `depositary' with responsibility for governance and compliance functions. The appointed depositary must be a credit institution having its registered office in the EU and be authorised in accordance with the EU Capital Requirement Directive. The depositary must act independently and solely in the interests of AIF investors. It may delegate tasks to other depositaries (which may limit the choice of sub-custodians, especially in emerging markets). The depositary will be liable to the AIFM and the AIF's investors for any losses suffered by them as a result of its failure to perform its obligations under the AIFM directive. This liability is not affected by delegation and therefore depositories will need to weigh up the risk/benefit of providing services to Alternative Investment Funds within the EU. It is anticipated Guernsey will obtain equivalence under the directive which will enable AIFM's and their investors to select their custodian of choice based on their own selection criteria of corporate governance, commitment, experience and balance sheet strength. It is too

1 2 H F M W E E K . CO M

ABOUT RBC

Royal Bank of Canada (RY on TSX and NYSE) and its subsidiaries operate under the master brand name RBC. We are Canada's largest bank as measured by assets and market capitalisation, one of North America's leading diversified financial services companies and among the largest banks in the world, based on market capitalisation. We are one of North America's leading diversified financial service companies, provide personal and commercial banking, wealth management services, insurance, corporate and investment banking and transaction processing services on a global basis. We employ approximately 77,000 full- and part-time employees who serve more than 18 million personal, business, public sector and institutional clients through offices in Canada, the US and 53 other countries.

early to predict the outcome with certainty. The changing regulatory environment will continue to present challenges for the island, although it is well placed to meet these challenges, ensuring that the environment for growth in the finance services industry is maintained. Despite the challenges which Guernsey will continue to face, the resolve of this leading financial jurisdiction will continue to reflect that it can punch above its weight. n

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GUERNSEY 2010

MARTIN TOLCHER OF LEGIS FUND SERVICES LIMITED BELIEVES REMAINING FLEXIBLE AND NIMBLE IN MEETING CLIENTS' NEEDS IS THE WINNING FORMULA IN FUND ADMINISTRATION

THE W I N N I N G FU N D FO R MU L A

`

O

Martin Tolcher

is managing director of Legis Fund Services Limited, is a Chartered Fellow of the Chartered Institute for Securities and Investment (CFSI), and has been involved in the fund administration industry in Guernsey for over 20 years.

utsourcing' and `consolidation' are two words that are used fairly regularly whenever one reads about the fund administration business. However, this is nothing new... As far back as four or five years ago, commentators were discussing the need for and relative merits of outsourcing if not all, then certainly at least the `back office' services associated with fund administration. It was also argued that the smaller service providers in particular would need to outsource the valuation and accounting aspects of their work because of the increasing complexity of the funds under their administration, necessitating (too costly) investment in technology and expertise in order to be able to provide such services going forward. More recently, fund administrators, including the global players, are changing their service model by outsourcing to other locations within their own organisations, often to Asia, where it is believed that the technology and skilled personnel are more economical, thus improving profitability without negatively impacting on service levels. Back in 2006, a number of fund managers, among others, were commentating on the anticipated greater demands that would face fund service providers as a result of ever-increasing legal and regulatory requirements, and in order to meet the needs of (in particular) institutional investors. It was predicted that this scenario would result in the smaller firms within the industry being acquired by their larger competitors, and that even larger organisations would be considering very seriously the benefits of combining with each other. Fast forward four years and it is therefore perhaps a little surprising how relatively few fund administrators have gone down this route. Admittedly, in the recent past we have seen a number of mergers and acquisitions ­ for example, Bank of New York with PNC Financial Services, State Street with Mourants and Credit Suisse with Fortis ­ and there does still appear to be continued appetite for further merger and acquisition activity. Such consolidation has also resulted in the effective closure of a number of fund services outfits in the offshore arena.

FUND MANAGERS SHOULD BE ABLE TO FOCUS ON THEIR AREA OF EXPERTISE, BEING THE DAY-TO-DAY MANAGEMENT OF THE ASSETS WITHIN THEIR PORTFOLIOS

The increase in consolidation within the fund administration space may lead one to conclude that there is a continual reduction in the number of firms providing fund administration services, ultimately leading to the likely demise of the smaller service providers. However, it should be noted that this perception does not necessarily represent reality, as such conditions actually present a number of opportunities for the more bespoke and niche fund administrators. It has been stated by observers from within the industry that the larger administrators no longer appear interested in the newer and smaller funds (that is those that are initially under US$100m). Further, fund managers and investors are expecting a more customised and personal service from their administrator, something that, it is argued, the larger players are not able to provide. It is felt that the smaller providers are more nimble at being able to offer solutions of this nature to their clients. The larger providers would counter that this perceived higher level of service is actually simply due to the necessity to make up for a lack of technological capability within the smaller organisations. However, in practice the successful smaller fund administrators have made the necessary investment in market-leading technology. CHANGE FOR THE BETTER? The extensive use of outsourcing certain elements of the administrator's service offering may well represent cost efficiencies for the organisation providing the fund administration services, but often is not so well received by the clients who chose that particular administrator, as at least some of the rationale for their original choice of administrator is seen to be eroded by such a change in the servicing model. Clients may see a loss of the personal service previously provided to them, a lack of cohesiveness and a disjointed delivery of overall service, resulting in a fall in the standards of service that they have grown accustomed to and expect. Fund managers should be able to focus on their area of expertise, being the day-to-day management of the assets within their portfolios, and should not have to worry about non-core aspects of their funds' operation, in par-

"

14 H F M W E E K . CO M

A D M I N I S T R AT I O N

ticular the administration function. Many of these fund managers demand specific, and very differing, services from their service providers, and are not desirous of the servicing model that itself dictates the way in which they are looked after. Some may see this as unnecessary and time consuming `hand-holding', but the truth is it is often essential. Indeed, with recent events in the credit markets and the Madoff scandal, hedge fund managers are looking increasingly to independent fund administrators, particularly for newer, initially smaller, funds, following requests from their investors, fund boards of directors and other service providers. Fund administration service providers need to establish strong, longstanding relationships with their clients, built on mutual trust in order to ultimately be successful. For example, the technology platforms are indeed important aspects of the service, but should be seen as only part of that service; it is the quality and dedication of the fund administrator's team that remains the most important element ­ an excellent team, combined with a market leading system, proves a winning combination!

WE AIM TO BE A SERVICE PROVIDER OF CHOICE, WHERE PROACTIVE AND DEDICATED CLIENT SERVICE IS STANDARD

WHAT MORE CAN WE DO? Legis Fund Services, which is part of the Legis Group, prides itself on the quality of the services provided to clients. We aim to be a service provider of choice, where proactive and dedicated client service is standard, ensuring that both client and regulatory needs are met and exceeded, whilst maintaining the highest standards,

"

reputation and performance. We have over thirty years' experience in servicing complex offshore structures, with a professionally qualified senior team, backed by a `what more can we do?' philosophy. We also recognise the fundamental role of technology in the servicing of such structures, and to that end we commit approximately 15% of our operating expense budget to systems. We are delighted that our endeavours to provide exceptional service are not only recognised by the sponsors/promoters, fund managers and non-executive directors that we work with, but also for the last two years by the judging panel for the HFMWeek European Service Provider Awards, where, on both occasions, we have been `highly commended'. Legis Group is not against the idea of merger and acquisition activity, as we are acquisitive ourselves, and we continue to seek strategic opportunities to expand our business, whether that be to enhance and increase our existing offshore presence (particularly in Guernsey), or to extend our jurisdictional reach. We believe that what distinguishes fund administrators from each other are those that can provide consistently first-class services to clients and those that remain flexible and nimble in meeting individual clients' needs. Within the fund administration ocean, some of the bigger fish continue to eat up the smaller ones as well as taking on each other, but there is still plenty of room for those hungry faster-swimming nimble fish. n

H F M W E E K . C O M 15

TRUST & FIDUCIARY | CORPORATE | FUND ESTABLISHMENT & ADMINISTRATION | UK PROBATE | QROPS PENSIONS

A shared vision

The Louvre Group provides trust, fiduciary and fund services to international private and corporate clients through worldwide offices. Our independence and flexibility are key factors in enabling us to bridge international boundaries with varied regulations and diverse tax regimes to deliver innovative solutions. Our client-centred approach has seen us grow into a strong multi-disciplinary business, providing us with the flexibility needed for the ever-changing business climate. To find out how the Louvre Group can enhance your personal and business wealth, please contact:

Kevin Gilligan, Director Louvre Fund Management Limited Tel +44 (0)1481 748955 or Email [email protected] Geoff Trebert, Associate Marketing Director Louvre Group Limited Tel +44 (0)1481 727249 or Email [email protected]

louvregroup.com

C AY M A N

ISLANDS

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DUBAI

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GUERNSEY

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HONG

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LONDON

GUERNSEY 2010

LEGAL

STUART TYLER OF BABBÉ EXPL AINS WHY GUERNSEY'S REPUTATION MEANS HE HAS CONFIDENCE THAT THE ISL AND'S MARKET WILL GROW IN THE NEXT THREE QUARTERS

FOC U S I N G ON A QUA LIT Y S E RV I C E

T

Stuart Tyler

is a partner at Babbé and head of the corporate and commercial team.He joined the firm in 2007 from leading City of London solicitors Stephenson Harwood, where he was a partner in the Banking and Asset Finance Group. Stuart has nearly 20 years' experience in commercial law.

he marketing message that Guernsey has been putting forward over the past few years, alongside its structural development, has all been geared towards the jurisdiction's focus on quality. There is a strong message being relayed from Guernsey to the fund industry as a whole that the island is a well-reputed and well-regulated jurisdiction and, while that requires a commitment to do business, the quality of the result is worthwhile. "Guernsey is known as a financial centre rather than an offshore tax haven," says Stuart Tyler, of Babbé Legal. In this sense, Guernsey is in an excellent place to ensure that it can respond to the changes in the fund industry. As the market evolves into a new phase, where investor demands are far greater in terms of transparency and reporting, the jurisdiction is home to many qualities which investors, and consequently managers, are looking for to secure a long-term future in the industry. In terms of the hedge fund industry in Guernsey in 2010, it is difficult to judge how the rest of the year will play out. While the information is coming through, for example, asset value has grown by 7.2% in the first quarter of the year, pinpointing and allocating where that growth has come from exactly is a harder challenge. The move of Bluecrest's management business to Guernsey could well indicate a sign of things to come. The reasons for this move were stated to be a response to increasing UK corporate and personal tax. Tyler's view is that an increase in migration is a distinct but not definite possibility. "I suspect we will see more migration of hedge funds to Guernsey," he says. "As to when that happens, we cannot be certain."

IN TERMS OF THE REGULATORY NEEDS OF THE GLOBAL HEDGE FUND INDUSTRY, WHICH CAN BE ASSIMILATED GENERALLY TO INVESTOR COMFORT, GUERNSEY IS EXCELLING

"

successfully anticipated the regulatory requirements for the future. The emphasis on quality across Guernsey over recent years has seen it develop ahead of its competitors, and this need for a quality market meant that Guernsey had already addressed issues that many jurisdictions have been, or are now facing, in terms of investor transparency and security through regulation. "I think the general feeling at the moment is that people are comfortable with the regime that already existed before the crisis," says Tyler. "It is for this reason that there have been no regulatory changes since the inception of the crisis, and there are no changes in the foreseeable future." As a result of this strong underpinning, hedge fund managers are keen to flock to Guernsey under the banner of its well-reputed offering. "You don't come to Guernsey if you want to do something quick, cheap and nasty," says Tyler. "You come to Guernsey because you are creating a product that people will be able to look at while taking comfort in knowing which jurisdiction it is under." Tyler's view is that across Europe, investors and managers alike have a strong belief in the security of the jurisdiction and are aware of its stability. This comes as welcome news, especially with regard to the crisis, and can only stand Europe, and therefore Guernsey, in good stead for the future after the recent turmoil has settled. "All the European jurisdictions are stable," says Tyler. "What this stability gives people is the comfort that they are somewhere where they know what the regulations are, and they know how the regulations work. Essentially, the gaps have been taken out of the structure." THE FUTURE OF GUERNSE Y The year ahead for the island is entirely dependent on the movement of the market, something which is out of Guernsey's hands. There have been a limited number of new funds launching. Where there has been an increase in asset values, this has largely been the result of existing

H F M W E E K . C O M 17

INVESTOR SECURIT Y In terms of new regulations, there has been nothing new on the horizon since the financial crisis. That is not to say that the jurisdiction has not taken note of the problems. It is evident that on a deeper analysis, the reason for the lack of new regulation is that the jurisdiction had already

GUERNSEY 2010

LEGAL

funds selling to further investors, rather than new structures being put in place. "Guernsey's future depends on the general economics improving," according to Tyler. "However, in terms of the regulatory needs of the global hedge fund industry, which can be assimilated generally to investor comfort, Guernsey is excelling." Babbé has experienced a great increase in enquiries from hedge fund managers globally in the past few months. As a result, Babbé has been making inroads with respect to non-Guernsey funds and their management in the jurisdiction, a growing area for hedge funds. "We have seen numerous enquiries and acted in respect to non-Guernsey funds that are being managed here and funds migrating to Guernsey from other jurisdictions," says Tyler. "That's because people like the integrity of the locally regulated managers, regardless of the fact that they have not actually located the fund here." He adds: "On the back of that, I feel some confidence in the market growing in the next three quarters. I am ac18 H F M W E E K . CO M

BABBÉ

Babbé is a leading Guernsey law firm with a well-established international reputation for providing high-quality legal services in the offshore finance sector. The firm aims to provide a better service to clients than any other law firm on the island and in a demanding and challenging business environment; clients value the firm's dynamic ethos and focus on directness and efficiency, combined with a strong tradition of personal service. Babbé fields a team of exceptionally experienced lawyers offering a range of specialist expertise including funds, focusing on understanding and meeting the commercial objectives of individual clients

tually going to recruit senior staff to be ready for that, so that's a testimony to the way we see the immediate market growing in the future." n

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PO Box 140, Manor Place, St Peter Port, Guernsey GY1 4EW t: +44 (0)1481 723191 e: [email protected] w: www.collasday.com

GUERNSEY 2010

KEVIN GILLIGAN OF LOUVRE FUND MANAGEMENT LIMITED REVEALS WHY GUERNSEY'S ESTABLISHED REGULATORY FRAMEWORK AND PROVEN TRACK RECORD MEAN THE ISLAND WILL CONTINUE TO SURPASS HEDGE FUND MANAGERS' AND INVESTORS' NEEDS

BUIL DIN G O N S O L I D FOU N DATI ON S

G

Kevin Gilligan

is a director of Louvre Fund Management Limited and responsible for the day-to-day operation of the company and its clients. Kevin joined the Louvre Group eight years ago and has been instrumental in the establishment and ongoing development of the fund administration business.

uernsey has a successful and stable infrastructure which provides a solid platform for a well-regulated fund industry. While robust regulation is paramount, the approach taken by the Guernsey Financial Services Commission is one that is pragmatic and open to innovation, and it is these strengths which are increasingly recognised by hedge fund mangers globally. ROBUST REGUL ATION Guernsey's approach to regulation, in the face of the economic crisis, has evidently become one of its strengths. In recent years the regulator introduced a fast-track option for both open-ended and closed-ended funds and their associated management entities. However, what Guernsey was careful to avoid, and which now works in its favour as a result of the heightened demand for regulation, is to go down the unregulated route, which could be considered a dangerous path for any domicile to currently walk. "What Guernsey has not done is go down the completely unregulated route," says Kevin Gilligan of Louvre Fund Management Limited. "I think, as a jurisdiction, we recognise regulation, transparency and the protection of investors as key ingredients for a well-run fund industry and in the current climate these are exactly the criteria that managers and investors alike are looking for when considering a new home for their funds or when making an investment decision." Guernsey will become more attractive as a hedge fund industry because of its proven track record and established regulatory framework. A proactive approach over the past decade has meant wholesale changes are not required to react to the current regulatory demands facing the hedge fund industry. It certainly will not rest on its laurels but will continue to

WE ARE ALSO SEEING AN INCREASING TREND OF EXISTING FUNDS MIGRATING TO GUERNSEY FROM MORE TRADITIONAL HEDGE FUND JURISDICTIONS SUCH AS THE BRITISH VIRGIN ISLANDS (BVI) AND THE CAYMAN ISLANDS

"

build on solid foundations, a position some other jurisdictions will now need to work towards. Kevin Gilligan, of Louvre Fund Management Limited, is proud of Guernsey's many strengths, and notes how these play a key role in the development of Louvre itself, as a niche fund administrator. "From our perspective, one of the things that sets us apart is that we are very entrepreneurial in our approach to funds," he says of Louvre. "Whereas a lot of administrators traditionally deal only with a specific asset class, Louvre administer a diverse range of fund structures and strategies including hedge funds, private equity funds and property funds. A complete suite of fund options are available to fund promoters in Guernsey and at Louvre we run an even split of open-ended and closed-ended funds including the highly regulated Class A schemes at one end of the spectrum down to the fast-tracked registered funds at the other." Guernsey performed robustly in 2008 and 2009, and it appears to be heading into 2010 with a cautious sense of optimism too. "Its robust regulatory structure and environment means that it is more than holding its own in comparison to other jurisdictions," says Gilligan. "We are seeing an influx of hedge fund enquiries from fund promoters who previously had funds in the Caribbean. We are also seeing an increasing trend of existing funds migrating to Guernsey from more traditional hedge fund jurisdictions such as the British Virgin Islands (BVI) and the Cayman Islands." He adds: "This year we have migrated a commodities fund from the BVI to Guernsey which will shortly be followed by an FX fund from the same jurisdiction. We have migrated a Cayman-based manager to Guernsey and it is likely that the funds will follow the manager to Guernsey later this year. These are existing clients and what has been interesting, having worked with them for a number of years, is to see that what is really important for them now is a jurisdiction with

20 H F M W E E K . CO M

A D M I N I S T R AT I O N

a firm yet workable regulatory environment, which is not only crucial for them but also their investors." INVESTOR TR ANSPARENC Y Hedge funds have been criticised for their lack of transparency and questions raised regarding the independence of the associated service providers. It has been a common model for the manager to also control all administrative duties including the calculation of the net asset value. Investors have grown evermore wary of such arrangements, putting increasing importance on the independence of the administrator in relation to the manager and in some cases also in relation to the custodian. Guernsey is well placed to meet the growing expectations of investors. All Guernsey funds are required to appoint a Guernsey-domiciled administrator and all open-ended funds must also appoint a Guernsey custodian. In the case of a Class A scheme, the custodian must also be independent from the administrator. The custodian has an oversight responsibility in terms of the duties performed by the administrator, which includes regular on-site visits to check appropriate systems and controls are in place. THE LOUVRE GROUP Louvre Fund Management Limited is a niche, independent fund administrator, which sees a solid, regular inflow of enquiries for funds in the area of £50-100 million. From the fund administration perspective, Louvre covers other areas, such as BVI, the Cayman Islands and Dubai. However, in terms of current business, nearly 100% of new fund launches are coming out of Guernsey. This clearly demonstrates Guernsey's popularity as both a jurisdiction for funds in its own right and also for the administration of international funds. The Louvre Group's head office is in Guernsey, which constitutes the jurisdiction where the company was born. With offices in the Cayman Islands, Dubai, Geneva, Guernsey, Hong Kong and London, the Louvre Group offers international fund establishment and administration from Guernsey and its office in Dubai together with trust, fiduciary and corporate administration from Guernsey, Geneva and Hong Kong. Its offices in Guernsey and Hong Kong also spe-

cialise in providing qualifying recognised overseas pension schemes (QROPS) and qualifying non-UK pension schemes (QNUPS), which have become increasingly popular for UK expatriates as well as people who have lived in the UK, returned to their home country and have amassed UK pensions. The company's London office provides on-shore trust services together with SIPP pensions, will writing and UK probate. "Guernsey has always been the central jurisdiction," says Gilligan. "It is a forward thinking and stable jurisdiction, and for this very reason it is the heart of the Louvre Group, and from here onwards we look at the varying strategic jurisdictions that may be available." n

H F M W E E K . C O M 21

GUERNSEY 2010

PAUL WILKES AND WAYNE ATKINSON OF COLLAS DAY ECHO THAT THE CLOSE RELATIONSHIP BETWEEN THE GFSC AND THE FUND INDUSTRY HELP GUERNSEY MANTAIN ITS HIGH STANDING AS A HEDGE FUND DOMICILE

KE Y FO C U S O N G OOD REL ATI ON S H I P S

hough the hedge fund industry is, it seems, making an impressive recovery from the recent financial crisis, the lessons learnt from those dark days, which not only saw a dramatic fall in returns but also the collapse of Lehman Brothers and the Madoff scandal, are unlikely to be soon forgotten. As such, today the focus on liquidity, transparency and regulation is higher than ever before and it is for this reason that Guernsey is fast emerging as the jurisdiction of choice in an ever-changing hedge fund sector. "Prior to recent events, many investors and promoters favoured the Caribbean domiciles, which took a lighter approach to regulation; that, however, has now changed dramatically," says Paul Wilkes, a senior associate at Guernsey law firm Collas Day. "Today, the appeal of the Channel Islands' model of robust but practical regulation is greater than ever." This wide-scale change in attitudes has seen a number of high-profile funds leave said Caribbean jurisdictions and opt instead to redomicile in Guernsey. "Traditionally hedge funds had largely opted for the Caribbean model and as a result Guernsey has only held a small market share of the hedge fund industry," he continues. "However, dependent on the final outcome of the EU Alternative Investment Fund Managers (AIFM) Directive, though of course, it is very likely that Guernsey may well gain a much bigger share of that market, the possibility is greater than anyone would have anticipated." However, despite this growing interest in the domicile, there is still very much a focus on quality over quantity, Wayne Atkinson, also a senior associate at Collas Day, is keen to point out. "This is one thing the regulator and industry have both always been very clear on," he asserts. "We don't want Guernsey to take a high-volume, low-cost approach to funds and be part of a `race to the bottom', so to speak; that is, to allow the redomiciliation of a huge numbers of funds which aren't properly overseen. We want a good, sustainable industry and today, we are at an advantage because that is now what the rest of the world wants as well." According to Atkinson, finding that delicate balance be-

T

Paul Wilkes'

investment funds practice includes the establishment of open and closed-ended funds using both corporate and limited partnership structures and the listing of corporate funds on the Channel Islands Stock Exchange and the London Stock Exchange.

tween regulation that is strong, but also flexible, has been key to the continued success of the domicile. "Guernsey has always been known for striking what is quite a difficult balance between having robust regulation but also providing funds and fund managers with flexibility to do what they need to do to turn a profit," he says. What's more, the fact that Guernsey's regulatory approach prefigured the changing industry attitude ­ as opposing to arising in response to it ­ is one way in which the island stands apart from other jurisdictions. "Essentially, Guernsey is in an excellent position to respond to the changing expectations of the fund industry because it already was in an excellent position when everything started to change," explains Atkinson. "At the moment, there is a well-publicised global drive towards increasing regulation and increasing transparency and monitoring," he continues. "Not only does Guernsey have a long history of sound regulation but it also has a strong regulatory base to build on in order to meet new and constantly changing expectations." CLOSE RELATIONSHIPS According to Atkinson, a close relationship between the island's regulatory body, the Guernsey Financial Services Commission (GFSC), and the fund industry is also vital to its growing prominence as a leading centre for hedge funds. "There is a consistently excellent dialogue between the regulator and the industry," he says. "It recently published a draft Code on Corporate Governance which received a tremendous response from the industry, something that I think clearly demonstrates the high level of general awareness of the importance of appropriate and

Wayne Atkinson

has experience in a number of different areas of commercial work, in particular in the areas of investment funds and financial services as well as general commercial matters. Wayne trained and qualified as a corporate lawyer with Herbert Smith in London.

WE DON'T WANT GUERNSEY TO TAKE A HIGH-VOLUME, LOW-COST APPROACH TO FUNDS AND BE PART OF A `RACE TO THE BOTTOM', SO TO SPEAK

"

adequate regulation." The draft code aims to provide guidance to directors, not as to what decisions they should be making, but rather how they should be making those decisions with a view to making sure investors are well protected, as well as ensuring that the board is properly composed and kept up to speed with industry developments. "The idea is essentially to make sure that a fund has a strong independent board that is able to provide the over-

22 H F M W E E K . CO M

A D M I N I S T R AT I O N

sight that both managers and investors want or need," says Atkinson. "We also currently have under consultation changes to the Protection of Investor law, which provide the GFSC with a formal role in approving a fund's directors and the overall composition of the board." The combination of these different layers of regulation means that Guernsey provides investors with a triple level of protection ­ managers who look after the investors' best interests, directors who make sure that the managers are doing so, and the GFSC, ensuring that directors are fulfilling their role adequately. "It's a very strong regime and one that is being built very carefully and drawing upon a lot of industry input," says Atkinson. Both Atkinson and Wilkes stress that, despite the growing popularity of Guernsey, the GFSC is far from becoming complacent in its approach to regulation. "Guernsey has always been adept at ensuring that its regulation is kept up-to-date," says Atkinson. "For example, at the beginning of this year, the Licensees (Conduct of Business) Rules 2009 came into effect, which relate to service providers of investment funds which are licensed by the GFSC, amongst other entities, and highlights a number of issues such as conflict of interest disclosure and fair dealing." This, says Wilkes, is not a new focus but rather, an update of an area which was indeed already well regulated. "It wasn't so much the creation of regulation that wasn't there before; it is simply an act of clarifying, improving and building upon," he affirms. A QUESTION OF CONFIDENCE However, while Guernsey is clearly benefiting from the changing attitudes that have resulted from the events of recent years, like the hedge fund industry as a whole, low investor confidence still presents a challenge for future growth. "Confidence at the moment is still relatively low for new structures and as such, these are being launched at a less frequent rate than perhaps they were a year or two ago, as well as raising slightly less money than they were at that time," says Wilkes. "There are positive signs, of course, but the recovery is likely to be a slow one. New funds are key to the continued success of any domicile and so we are hopeful that confidence will continue to improve as jurisdictions like Guernsey continue to respond to investor needs." Atkinson also points to the aforementioned AIFM Directive as both a potential challenge and a potential opportunity for Guernsey. "Clearly the Directive is going to affect everyone in the fund industry, on a global scale, but what the main challenge for Guernsey will be is to take full

advantage of whatever regime comes in and maintain its position notwithstanding that. There will inevitably be a period of adaptation, but I think Guernsey is well placed to do that." Currently operating solely in Guernsey, Collas Day has, over the years, developed substantial knowledge of the local market. That said, the firm is very much an outward looking one, with staff from all over the world each bringing the firm their own experience and expertise from various global jurisdictions. "For example, we have established an exchange programme with a Luxembourg law firm with which we have close ties, which sees us `swap' lawyers for a three to six month period to allow staff to gain vital experience of other jurisdictions," says Wilkes. And while the firm is keeping a close eye on burgeoning opportunities outside of Guernsey ­ in the rapidly developing Far East, for example ­ they are, at the moment, very happy for Guernsey to remain as their key focus. "We acknowledge, of course, that a number of entrants in the market have a global presence, but while this may be beneficial from a marketing point of view, in terms of service delivery, for someone launching a fund in a new jurisdiction, it doesn't really matter if the law firm they are working with has offices in several jurisdictions or just one," asserts Wilkes. "What matters is that the lawyers that they are working with are good at what they do ­ and this is something that we at Collas Day can confidently say is true." n

H F M W E E K . C O M 23

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THE HEDGE FUND SECT OR is edging back towards historic highs, $2.44trn in Octob HFMWeek's latest accord er 2009, and 21% Assets under Admin ing to 12 months, from (AuA) Survey, a record low for in the last istration of $2.2trn as the recent times . of decline to climb industr y reverses a period a massive 21% The revival is testam 12 months and over the last ent to solid post a total AuA of nearly $2.7trn but also to fresh assets from investoperformance, in April 2010. returned to the hedge fund sector rs, who have Published in today's period of cautio following a magazine, the total of single usness. precise vey's manager assets, respondents the According to the sur$2.657trn, puts the industr y just below its Novem win a host of institu industr y has been able to and $200bn off ber 2008 total its $2.9trn record ter due diligence, tional mandates through betin April 2008. high, set back wider move into increased transparency and a new The industry has accounts and Ucits. products, such as managed now enjoyed a of growth, up 9% full in the last six month year The managed accoun ts space s, from of new additions in recent has seen a number months, includ ing Butterfield Fulcru m's new $1bn platSINGLE MANAGE form Altinus, the R AuA GROWTH first from a hedge NOV 2005 - APR fund administrator. 2010 (%) Source: HFMWee recent growth has In terms of Ucits, k European manag been sparked by ers, but, accord ing to BNY Mellon's Marc more North Ameri Russell-Jones, funds are showin ca-based hedge expect to see a g interest. "We $2.93tr n $2.65tr n substan there [North Americ tial increase a] in the coming years," he said. Mergers and acquis $2.19tr n itions involving administrato rs have also hit the headlines since HFMWeek's last survey. BNY PNC in February Mellon acquired for $2.31bn, while Credit Suisse is poised to buy Fortis Bank Nederland's ices unit, Prime hedge fund servFund Solutions. number of private A also shown interes equity firms have t t.grif [email protected] the space. k.com

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GUERNSEY 2010

L E G A L / A D M I N I S T R AT I O N

WITH FUND MANAGERS HAVING TO MAKE DIFFICULT DECISIONS AFTER THE GLOBAL ECONOMIC DOWNTURN, BARNEY LEE OF APPLEBY EXPLAINS WHY GUERNSEY'S SENSIBLE REGULATORY SYSTEMS CAN GIVE MANAGERS ALL THE SUPPORT THEY NEED

M A K IN G A S E N S I B L E CHOICE

t is a difficult time for fund managers at the moment. European sovereign debt problems, uncertain markets and troubling fundamentals in many of the world's major economies make things difficult enough without the need to reconsider what is an appropriate level of regulation for fund products. However, all of these factors (and others) are making investors nervous which means managers are reviewing their domicile of choice. A side effect of the global financial crisis was the flurry of distressed fund activity brought about by plummeting asset values, illiquidity, investor fear and, in some cases, fraud. These issues created sound bites for the mainstream media which in turn lead to hedge fund regulation becoming a daily news item and, consequently, a political issue. Importantly, the key regulatory failings, to the extent there were any, existed onshore rather than offshore. However, the media frenzy, combined with government balance sheets moving into the red, meant that the mythical tax windfall which could be captured by clamping down on the offshore world lured policymakers into focusing their attention offshore (as well as onshore). While it is a welltrodden path to state that certain regulatory responses are populist and do not understand the fundamentals behind the problems to have struck the global finance industry, the question for fund managers is how to identify jurisdictions for their products in light of all that has happened.

I

Barney Lee

is a group partner based in the Guernsey office of Appleby. He advises on all areas of Guernsey funds and financial services business and has established numerous listed and unlisted investment funds.

GUERNSEY'S SENSIBLE LEVEL OF REGULATION, SITTING NEATLY BETWEEN THE JURISDICTIONS THAT ARE NOT AS WELL REGULATED AND THOSE THAT ARE HEAVILY REGULATED, IS LIKELY TO PROVE ATTRACTIVE

"

POLITIC AL GA ME The current negotiations between the European Commission, European Parliament and European Council to reconcile the differing versions of the alternative investment fund managers directive (the AIFM directive) is a case in point. Analysis of the AIFM directive has been done to death but it is expected negotiations will continue until July or August, when a text will be agreed and put to a vote. Guernsey, as the major non-EU offshore hedge fund ju-

risdiction, is clearly concerned as to these developments. Notwithstanding this uncertainty, Guernsey funds under management (both open-ended and closed-ended) have increased 12.2% over the past 12 months. Guernsey has also seen a number of major fund players, the most recent being Bluecrest, move operations to the island. Clearly there is some confidence in the offshore world and Guernsey in particular. The question is, what is the source of this confidence? There is obviously some political game-playing underway between the three EU bodies and it is rumoured that certain parts of the AIFM directive that were required to reach this stage for political reasons may fall away. However, speculating on such machinations is not a sensible way to do business and the managers who are putting their faith in Guernsey have not got to where they are without more concrete grounds for making decisions. Guernsey's appeal lies more in its long-term game. It has always positioned itself as a sensibly regulated offshore jurisdiction. It has avoided the light touch regulation of the likes of the Cayman Islands and has sought a middle ground between that and the more heavily regulated onshore jurisdictions and onshore/offshore jurisdictions such as Luxembourg. In recent times, it has also stolen the march on its like-for-like competitors with there being a perception that the Guernsey regulator is more flexible than counterparts elsewhere and that Guernsey is a more cost-effective place to do business. Further, the introduction in 2008 of the fast-track registered fund regime, which has now been adapted to include open-ended funds, has resulted in a lighter front end regulatory burden while still maintaining sufficient regulatory oversight via Guernsey-licensed service providers. Guernsey is also the home of the protected cell company (PCC), introducing the first such legislation in 1997 and continuing to develop the concept. PCCs, and their hybrid, the incorporated cell company, are a particular favourite for Guernsey hedge fund products allowing reduced administrative costs while providing the flexibility of multiple products in the same vehicle.

H F M W E E K . C O M 25

GUERNSEY 2010

INDUSTRY

BE ARING FRUIT Over the past two years this sensible but flexible regulatory approach has borne dividends. While Guernsey hedge funds have experienced the same issues as elsewhere in respect of gating, illiquid assets and redemptions, these problems were market-driven and the level of hedge fund litigation in Guernsey has been proportionately lower than, for example, Cayman. This reflects positively on Guernsey's fund infrastructure, its service providers and, importantly, the sensible regulatory regime Guernsey has adopted. Guernsey is aggressively looking to new markets. Cayman in particular has long had a significant advantage in Asia and the Middle East in terms of market awareness. This is partly due to the commendable foresight of various Caribbean service providers who were able to break into those markets early. Given the same structures can be established in Guernsey, it provides the option of a product with additional regulatory safeguards, together with the convenience of a far more compatible time zone. Geographical proximity allows board meetings to be held in person as well as access to service providers when required. Market awareness and, consequently, business derived from these areas is increasing. The Latin American market is another which is proving to be more aware of Guernsey than in the past. In these times investors are increasingly looking for comfort from the regulatory regime in which a fund is domiciled. Managers must balance this investor demand

26 H F M W E E K . CO M

with the compliance obligations imposed by the jurisdiction. Guernsey is able to provide investors with a jurisdiction that is known to be well regulated while still providing the fund manager with regulatory and operating costs that are reasonable in the circumstances. The AIFM will almost certainly introduce additional hurdles to offshore funds. However, it is expected that Guernsey's sensible regulatory regime will be able to easily adapt to the proposed equivalence regimes. Guernsey is also cementing its reputation for providing services to non-Guernsey vehicles. The Channel Islands Stock Exchange, which is based in Guernsey, is a good example of this but there are also almost 300 nonGuernsey funds that use Guernsey licensed entities, such as managers, administrators or custodians. While a large proportion of these funds are Cayman Island funds, there are also a number from Luxembourg, the US, Mauritius, Ireland and even Australia. It is probably fair to say that regardless of the form the AIFM takes, Guernsey will have a role to play in the offshore world in respect of funds. If trends continue, Guernsey's sensible level of regulation, sitting neatly between the jurisdictions that are not as well regulated and those that are heavily regulated, is likely to prove increasingly attractive. The AIFM directive may prove to be advantageous to Guernsey in some respects as it is quite possible that many more non-Guernsey schemes will move to Guernsey to take advantage of its sensible regulatory regime. n

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