Guernsey and the AIFMD: Directing the Directive

One of the biggest challenges facing the Island's regulators is to prove to this sector that it can position itself in a way that will satisfy Europe.

In many ways, third countries like Guernsey are currently restrained from breaking down potential regulatory barriers, as it won't be until 2015 when the full criteria of assessments for third-country passports are announced. Meanwhile, as the European mandarins preoccupy themselves with yet more legal bureaucracy, Jarrod Cowley-Grimmond, who heads up Guernsey's Finance Sector, confirms that there is a raft of existing legislation that already places the Island firmly on the road for compliance at all levels. "If you look at the compliance with the FATF standards, Guernsey has the highest compliance of any jurisdiction in the world. That's what the IMF said in January." He goes on to say that the industry as a whole has yet to see what the regulatory co-operation agreements will demand of third countries as that's a matter for the Directive's Level 2 discussions, but Guernsey continues its work with ESMA to ensure its readiness of compliance with the next round of implementing conditions.

Rannaleet confirms this readiness. She cites the evidence of Guernsey's active engagement with the whole process, and how it's been "very clear that they want to be an accepted partner to the EU". Ms Rannaleet holds the opinion that Guernsey needs to continue its work professionalising the industry, by training the people involved and "perhaps being a little more open to bringing in additional managerial capacity from outside". She believes the industry will expect such training developments along with the government's work in setting up all the co-operation agreements so that fund managers "do not have to put a Luxembourg holding company in between them when wanting to invest in one or the other country".

Earlier this year, Guernsey and Jersey joined forces to open and maintain an office in Brussels – a place from which their combined industries' voices may be heard. This April, Steve Williams, former British Ambassador to Bulgaria, stepped in to head up the office and will concentrate on developing the Islands' influence while advising on both European and international matters. The whole process of the AIFM Directive is expected to continue to be an issue under the spotlight.

A step ahead
It's clear that Guernsey is doing what it's best at – proving itself to be fleet of foot when it comes to enabling legislation and regulation to ensure it doesn't get locked out of any marketplace – especially one as big and as profitable as Europe. The areas within the alternative investment sector, which Guernsey has made something of a speciality, include private equity funds, fund of hedge funds and closed-end listed funds. Guernsey led the way with its innovative fund structuring solution – the Protected Cell Company (PCC), since copied by many other jurisdictions around the world. And followed PCCs by adopting the Incorporated Cell Company (ICC) structure, which affords added protection and flexibility.

Jarrod Cowley-Grimmond believes the upcoming legislative changes shortly to be introduced will give its fund industry a particular boost. So what's on the slate? To begin with, there's a round of consultation on new legislation that will create the possibility to migrate a limited partnership between two jurisdictions, which can't be done at the moment. Guernsey is also looking at introducing protected cell limited partnerships and the ability to merge limited partnerships or amalgamate them. All of these changes, says Cowley-Grimmond, will make Guernsey the first European jurisdiction to offer them. "And that's an evolution of the concept we've established on protected cell companies that will give Guernsey some flexibility and some different structuring options compared to other jurisdictions."

Of course, this enforced period of waiting only holds the door open for doubt and uncertainty to creep in and undermine Guernsey's efforts. Guernsey is every bit as aware as the next jurisdiction that its fund managers are weighing up the risks versus rewards of remaining domiciled in Guernsey and so potentially exposing themselves to the worst-case scenario of being refused a passport to Europe – or leave this jurisdiction, which they feel has, until now, served their purpose very well.

Perhaps Guernsey's regulators, as well as its fund industry players, will derive comfort from EVCA's assessment of just how much progress has been made since the AIFM Directive first loomed on the horizon. As Rannaleet reminds when its proposals were first placed on the table: "All third countries were basically going to be persona non grata for three years without any ability whatsoever to market into the EU." What's more, Rannaleet recalls that EU-based investors were forbidden to even approach non-European funds for investment. "This was the opening position and now we have freedom both ways. It remains to be seen how the final conditions work out in Level 2 but we are definitely able to come into Europe."

So, while not quite on terra firma, this plucky little jurisdiction can take some pride in its ability to negotiate itself away from the quicksands of a total lock-out.

This is part of an article originally published on IFA Online.

 

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