Offshore

Competition Hots Up in Offshore Funds Sector

Bob Reynolds, 17 April 2007

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The financial sector regulator in Jersey – the Financial Services Commission – last week published its plan for the future development of the island’s funds sector. Its principal message is to simplify its regulatory regime for funds which will cut costs and make the jurisdiction more attractive for fund managers.

The financial sector regulator in Jersey – the Financial Services Commission – last week published its plan for the future development of the island’s funds sector. Its principal message is to simplify its regulatory regime for funds which will cut costs and make the jurisdiction more attractive for fund managers.

Jersey faces intense competition from other leading island financial centres such as near neighbour Guernsey, Cayman, Bermuda, the Isle of Man and, in the recent past, Dubai.

The Guernsey and Manx government have recently issued the results of high levels reviews into their funds sectors. These have contained ambitious plans to grow their fund sectors and to build global market share.

At the heart of the proposed reform in Jersey is a move to make the service provider rather than the individual fund the licence-holder. In the current regime, a service provider which wishes to launch a new fund needs to apply for a separate licence for each new fund.

Under the new proposals, the service provider – not the fund - will be regulated. The FSC will need to be satisfied that the due diligence conducted by the provider is high quality but a major weight of regulatory bureaucracy will be eased immediately.

This is a significant change because it makes the financial centre more flexible and will enhance capacity. “Capacity will be key in an increasingly competitive environment,” says Tim Morgan, managing associate at Ogiers in Jersey.

“While this does not announce a significant new product change, it is a major move forward. It makes fund management more cost-effective and therefore more attractive in the island. It will boost capacity which will give Jersey’s financial institutions a further boost in bringing business to the financial sector.”

The Financial Services (Jersey) Law and the Collective Investment Funds (Jersey) Law will be amended. An amendment law will be introduced – it is published in draft form on the FSC website (www.jerseyfsc.org) – to make the changes by the end of the summer.

Figures published in February show that the Jersey funds sector is buoyant. The net asset value of funds under administration in the last quarter of 2006 grew by £9.3 billion (5.5 per cent) during the quarter to reach £179.1 billion. During 2006 the NAV of funds under administration rose year-on-year by 30.3 per cent.

In 2004, Jersey created a class of expert funds. In 2006, the number of expert funds increased by 39 (16.5 per cent) and the NAV of expert funds grew by £4.1 billion during the quarter. During the whole of 2006 the number of expert funds almost doubled to 274 and the NAV increased by £15 billion (103 per cent) to £29.5 billion.

The total value of funds under investment management increased by £3.9 billion (6.7 per cent) to £62.1 billion during the quarter. During 2006 the total value of funds under investment management increased by £12.9 billion (26.2 per cent).

Jersey is one of a handful of international financial centres which is competing aggressively to win market share in the funds management and administration sector.

Competition comes from a tight group of market leading financial centres specialists in their own fund classifications.

Cayman, for example, is the world’s foremost jurisdiction for hedge funds. The Cayman Islands Monetary Authority reports that 8,134 funds were licensed in 2006 up from 7,000 in 2005. In May 2006, it said that assets under fund management in the jurisdiction were $2.5 trillion. Bermuda is fast becoming the most attractive alternative venue for fund managers in the Caribbean and Atlantic region. In contrast, Jersey and Guernsey are often the first choice for private equity funds and most retail business goes to Luxembourg and Ireland.

As of the end of September 2006 the overall value of funds under management and administration in Guernsey reached a new record of more than £120 billion - an increase in excess of 31 per cent year on year. One of the main drivers for this was the root and branch review of investment sector legislation that has been conducted during the past year.

The working party, chaired by Guernsey advocate Peter Harwood, recommended that the focus of regulation should be on the licensed Guernsey administrator, reducing the number and scope of funds that will be regulated directly and therefore making it easier and quicker to do funds business in Guernsey. It has also been proposed that regulatory changes be made to facilitate Guernsey service providers to administer non-Guernsey funds. Proposals for revising the system of regulation will be implemented, through two initiatives, by mid-2007.

An amendment has been made this year to Guernsey's own professional funds, qualifying investor funds. They were introduced early last year to speed up the licensing of funds for experienced investors. The introduction of this self-certification regime significantly shortened authorisation times for investors meeting the criteria. Now the definition of an investor has been changed, providing extra flexibility.

On 20 March – Budget Day in the Isle of Man – the Manx government announced a wide ranging review of its funds sector. This followed a similar exercise in 2002 which led to a freer environment for fund managers. This year’s Smith report identified what it described as huge potential for growth in the island’s funds sector. At the beginning of 2007, the Treasury was forecasting £55bn under management and administration by the end of December. Stephen Beevers at Isle of Man Finance says that the government is hopeful that this could swell to beyond £60 billion before the end of December.

“The Smith report indicates that we should reach £150bn under management and administration by the end of 2009. This would include £100 billion under administration and £50 billion under management.”

The review team was chaired by Paul Smith, who - until recently - was HSBC’s global head of its alternative fund services division. They advocated the creation of a new specialist fund category. This would feature an initial subscription of US$100,000.

The management of funds could be based in other acceptable jurisdictions. There would be no restrictions of investment strategies and the regulator would adopt a light touch in the jargon of such organisations.

Smith also recommended a focus on the target market of front and middle office functions of London based alternative fund managers, as well as managers in other key fund centres. It also advocates a revised offer to fund managers to include a tailored business proposition for location to the island, and a set up assistance package.

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