Our panel discuss tax transparency, the elegance of private placement and why Jersey could do more to promote itself. Chaired by Tom Cowsill in Saint Helier.
Andrew Brizell (head of legal and group head of depositary services, Aztec)
Simon Burgess (managing director, Ocorian)
Mike Byrne (chairman, Jersey Funds Association (and partner, PwC)
Emily Haithwaite (partner, Ogier)
Ged Kelly (managing director, Nordic Capital)
Tim Morgan (partner, Mourant Ozannes)
Funds Europe: In terms of its skill base and regulatory environment, what are Jersey’s strengths as a funds centre and which areas could benefit from further investment or development?
Andrew Brizell, Aztec: I think that Jersey is generally perceived by those in industry as a well-regulated and well-staffed jurisdiction. From a skills perspective, an Anglo-Saxon approach to service delivery, which isn’t always replicated in other competitor jurisdictions, is a clear advantage. On the regulatory side, Jersey has a well-established framework, which is straightforward to understand and caters for a wide range of promoter needs. As a final point, the jurisdiction is politically stable with a pragmatic and experienced regulator. In the closed-ended funds space, which is where Aztec is principally involved, people are looking at making ten-to-12-year investments in a jurisdiction, so they need to be sure that the jurisdiction in which they are choosing to domicile their fund will remain stable over that period. This is often a key consideration in structuring decisions.
Mike Byrne, Jersey Funds Association: Jersey clearly has a strong focus on alternative investments. In other jurisdictions, you might have competition between alternatives and the retail market. But alternatives will never be as big as retail, so if you’re an organisation that tries to do both there’s a danger that, as and when retail grows, you take away resource from the alternatives space. With Jersey’s focus on alternatives, we’ve got guaranteed resourcing. It’s a steadier ship.
Simon Burgess, Ocorian: One of the things I love about Jersey is the international style of our business. We’ve attracted a workforce that is home-grown, which is important, and we’ve got an educational base in Jersey that brings the best out of people, but we’ve complemented it with a group of people that have come to the island with experience outside of Jersey.
I’ve been looking at CVs recently and the person that stood out the most was somebody who was educated in Dubai and spent time in the Cayman Islands, Hong Kong and a number of other jurisdictions, particularly London. She stood out because she had that global outlook. Jersey also has that global outlook. You don’t see that everywhere.
Emily Haithwaite, Ogier: There’s been a huge amount of upskilling among employees and professionals locally. The advisers we deal with in the UK are often surprised by how knowledgeable people in Jersey are, and how adaptable we are to new initiatives. We want to be right there where things are happening and provide people with the solution they need.
We’ve got a new finance centre, which shows we’re open for business. It will encourage big businesses to come to Jersey because we can offer them the infrastructure they need to operate in a high-quality, modern and technologically progressive environment. Air links to London and Europe are good, but they could be better, so that is an area for improvement.
Ged Kelly, Nordic Capital: One of the advantages here is flexibility. It’s implicit in the pro-business nature of the various government agencies or bodies that we work with, whether it’s Jersey Finance, the Jersey Financial Services Commission (JFSC) or the government itself. They are keen to make sure business gets the best out of a relationship with Jersey for the long term.
Tim Morgan, Mourant Ozannes: We’re increasingly seeing Jersey as having a symbiotic relationship with its key other centres, whether it be London, New York or Hong Kong. On the legal side, there is a real partnership there and a pattern that professionals from those centres have seamless relationships with the leading firms here. There is a strong ecosystem here between the regulator, the government and industry. We have a 200-person-strong regulator, which is much more substantial than you would get in most small economies.
Byrne: To answer the second part of the question, one area we could invest more in is telling our story. We probably don’t articulate the strengths of Jersey strongly enough on a global stage.
Funds Europe: With tax transparency and competition still high on the global agenda, how is Jersey positioned and how is it responding?
Morgan: Jersey has tended to take a lead position in this area, for instance in the early adoption of CRS [the Common Reporting Standard] and the active participation Jersey has taken in the OECD’s BEPS [base erosion and profit shifting] agenda. Given Jersey’s position at the forefront of developments in transparency, the jurisdiction is in a position to credibly test and lead on improvements to industry standards across asset classes.
Byrne: If you go back 20 years, we introduced KYC [know-your-client standards] ahead of many international finance centres. Since then, the money coming in has been thoroughly vetted, which is obviously the basis of transparency. If you look at the most recent MoneyVal reports, and compare our findings with those of other fund jurisdictions, we’re way ahead. Our industry is sustainable in view of tax transparency. We won’t have a flight of capital that might occur in other jurisdictions when regulation kicks in.
Burgess: Jersey’s tax regime is simple. You can’t get much more simple than 0%. Other countries operate within a complicated environment. As a fund manager, you want to focus on what you do best, which is deploying your resources and maximising returns for your investors. If you can avoid the myriad of tax rules that exist in a particular country, that’s an interesting proposition.
Kelly: This is where the stability is key. The government knows what it wants out of the tax regime.
Morgan: There should rightfully be a focus on tax being applied at the level of assets, at the level of investors, but it’s paramount when structuring a fund that you’re not suffering unnecessary uncertainty or friction through the structure. Jersey can provide that certainty.
Brizell: A large number of the investors that we see in the closed-ended funds that we administer in Jersey are ultimately investing on behalf of retail clients, so the way in which these funds are structured, to achieve tax neutrality, is actually working for everybody... Jersey tends to meet the highest international regulatory standards. The issue is the perception of Jersey’s position among the wider public.
Haithwaite: It goes back to the point as to what we could do better, which is to effectively impart that information and turn the conversation from one about low tax jurisdictions to one about what we do and how we benefit investors.
Byrne: The key point is that the financial services industry is absolutely core to Jersey’s economy, whereas that’s not the case for many other economies. So while some onshore jurisdictions may have arrived at a zero rate of tax for funds, that may be subject to change due to political pressure. We offer the stability and the certainty that some creative onshore systems don’t.
Brizell: And from an industry perspective, Jersey has repeatedly been recognised. It’s compliant with FATF [the Financial Action Task Force], there’s IMF recognition for transparency, it’s OECD white-listed, FATCA [the Foreign Account Tax Compliance Act] and CRS are implemented, there are multiple tax information exchange agreements in place and BEPS recommendations are currently being implemented. The real issue for Jersey is about perception.
Funds Europe: What is the significance of the Alternative Investment Fund Managers Directive (AIFMD) to Jersey? Is private placement still a robust option and what is the status of ‘third-country’ passporting?
Haithwaite: AIFMD was significant for Jersey because, absent the third-country rules, Jersey would effectively have been locked out of the EU market. We were hot on getting our legislation in place to ensure managers based in Jersey were able to access the EU market under national private placement regimes. We also have introduced an option allowing managers to prepare for a full AIFMD passport, once this becomes available.
In terms of national private placement regimes, those appear to work. Fund managers seem to be able to market their funds within the regimes that are in place, and it’s been a solution for those managers who, for whatever reason, don’t need the full passport or for whom the cost of a passport is prohibitive or unnecessary. Also, the passport has been shown not to be the panacea everyone thought it would be, not only in terms of cost but also in terms of set-up and reporting. Many of our clients who have tried the passporting route have come back to private placement having realised they can market to their target EU investors within the private placement regime, whereas the passport is costly and burdensome.
Byrne: One thing that came out of AIFMD for Jersey is a strong endorsement of the regime we have in place. When Esma [the European Securities and Markets Authority] looked at our regime, they were quick to endorse us and to propose we were in the first wave of passports. For some managers, EU-wide access for alternative funds is not required. The take-up of alternative funds across the 28 EU member states just isn’t there, so the ability to private-place into the handful of EU countries which buy significant alternative products is a valid mechanism for going to market.
Brizell: The approach that the Commission took in drafting AIFMD was to take the basic Ucits principles and apply them to alternative asset funds. From a marketing perspective, this approach misunderstands how closed-ended alternative asset funds are distributed. It sometimes seems that the architects of AIFMD were of the view that in order to market a closed-ended fund, the manager would produce a final form prospectus and then travel round Europe selling the fund to people on the basis of this document, but that’s not how closed-ended funds are marketed. As a result of this, the private placement route, coupled with pre-marketing and reverse solicitation where appropriate, though it has its limitations, remains a valid way to distribute closed-ended funds.
Burgess: Since 2008 we’ve seen a huge growth in club deals where a manager attracts a cornerstone investor from one particular country. Private placement suits that type of arrangement. It goes back to simplicity, and the cost and speed to market.
Kelly: Cost is an important factor because the regulatory requirements, if you’re in an EU jurisdiction subject to AIFMD, are more onerous. Anyone raising a fund under the private placement regime as a Jersey-based fund rather than an EU-based AIF [alternative investment fund] would make admin cost savings of around 20%. We enjoy the fact that there is still a private placement regime. My concern would be that we’re living in the sunset years of the neat arrangement we have.
Morgan: Jersey has always promoted the idea of proportional and appropriate regulation. Because the environment has changed since the Brexit vote, the practical outcome and the benefits of an EU passport may change, but we still believe co-operating with Esma and the other EU regulators was worthwhile.
Funds Europe: I understand private placement works well in terms of the underlying investor base. Analysis done by Preqin said that over 60% of the European private equity investor base came from the UK, the Netherlands and Switzerland, all of which are easily accessed from Jersey.
Byrne: Yes. We’ve got over 250 funds going to market through private placement, from 120-plus managers. Private placement works elegantly and because of the concentration to a handful of countries, it works well.
Funds Europe: How might Brexit affect Jersey?
Haithwaite: Brexit could be good for Jersey. Effectively the UK will become a third country. Jersey is already a third country, so to the extent that the UK is our largest trading partner, it would be a third-country-to-third-country situation. In many ways, it makes things simple.
Many UK managers are hoping that structural solutions to EU distribution will still be available post-Brexit, but nobody knows what those negotiations will produce and what the timing of those will be, so in the interim, Jersey is well placed to service UK fund managers who are thinking about raising funds within this two or three-year period. We are more developed in terms of our third-country thinking than the UK.
Morgan: There are two related factors. The first is that Jersey effectively provides regulatory, structural and fiscal stability in a turbulent time in European politics. The other is that we see the regulatory and tax risk across the EU as having radically increased in light of the UK’s diminished influence on the EU. From a financial services point of view, the EU is perceived as being a riskier place for global managers and global investors.
Byrne: There’s an interesting question as to what Brexit will mean for AIFMD. Lord Hill as European Commissioner had a sanitising effect on the first version of AIFMD. What future versions of EU legislation might look like, without the UK influence, is something to be concerned about. The AIFMD may be less workable in the future, which could be positive for Jersey if we see people looking at alternatives to an EU-based solution.
In the short term, there’s a danger of some panic. There’s a danger of a rush to a Luxembourg-based AIFMD private equity fund when in fact Jersey would offer a better solution through the distribution methods we’ve talked about. The key point, as the UK goes through so much change, is to articulate the value we can add.
Burgess: For investors using Jersey as a staging post to invest into the UK, the Brexit story doesn’t have much impact. We see a lot of non-European investors coming through Jersey to invest into the UK and there’s no reason why that shouldn’t continue.
Kelly: Jersey is absolutely aligned with the UK. As Brexit pushes on and global trade agreements start to unravel, Jersey will probably follow that route, rather than hold separate conversations with main EU jurisdictions. There is probably a technicality around how we resource ourselves in Jersey. We want access to good staff who may have been trained and educated in the EU, so I hope that’s not affected.
Morgan: Brexit is a huge challenge but where Jersey has a pivot is that, to the extent that there are issues involving centres like London, Jersey can perform with flexibility on its future view, whether it is orienting itself towards markets in the US or Asia or whether it is still looking at Europe. It’s got the capability to do both of those things.
Funds Europe: How important are Jersey’s links with emerging markets, for instance in Asia, and how do you see these relationships developing?
Morgan: We are currently looking at structures involving Chinese investors coming into global assets, as well as Malaysian, Korean and Japanese institutions.
Byrne: Jersey has historically been underweight in Asia. Investors in Asia have typically used lower-cost and lower-substance jurisdictions in the past, but those may not look as attractive with changes in BEPS and other regulation, so there’s every reason to believe we’ll have greater prominence in Asia in future. That said, Jersey is the number-one jurisdiction for real estate investment by Asian investors into the UK. London, post-Brexit, will still be one of the top cities in the world, both for living and investing in.
Burgess: The quality of the teams in Jersey is important to our Asian clients. We see many Asian investors investing into the UK real estate space for the first time and they place heavy reliance on my real estate team’s expertise to guide them. Investing in real estate assets in the UK is one of our core competencies.
Haithwaite: It’s not just outward investment into the UK and other markets, it‘s also inward investment. We’ve seen Jersey structures being used for the purpose of Asian infrastructure projects. Because Jersey is outside the EU, we can offer a non-EU regulated product for those purposes. Jersey works well because there’s no requirement for EU regulation or AIFMD application. For the purposes of non-EU investors, it makes sense to have a non-EU product.
Funds Europe: What other regulatory issues, such as BEPS, are occupying your time?
Haithwaite: It’s an interesting question given where the US is going. The easier US regulation gets for fund managers, the more Europe will have to compete on a regulatory basis. At a recent gathering of UK managers, they were asking, ‘Is Paris or Frankfurt the biggest competitor to London, or is it New York?’
Morgan: On BEPS, we as a jurisdiction have engaged heavily in the process and the project of aligning taxation with activity. However, there’s a need to ensure it is carefully implemented. There is a risk of confusing manager substance, which is, rightly, a major focus, with ‘fund substance’, which we consider a misnomer that should instead be focused on transparency and neutrality.
Kelly: I would acknowledge that Invest Europe have done some great work in making sure the OECD understand what a private equity structure looks like and that as long as you have a typical private equity structure, you shouldn’t be treated as a Google or an Amazon.
Morgan: There is a risk for other parts of the European industry that they will be adversely affected by the BEPS process, and therefore jurisdictions which have relied heavily on treaty access planning may need to make more radical changes. We would see our position as being far less affected because we’ve always operated a much more straightforward and neutral platform.
Byrne: Jersey offers that ability to be a place to live and work and raise a family. When you compare it with other jurisdictions that may operate on a fly-in, fly-out basis, Jersey is right at the forefront. When you compare us with Caribbean jurisdictions, we have none of the same characteristics.
We see BEPS as in many ways a positive. We’ve got over 25 hedge fund managers living and operating out of the island, making us the sixth-largest hedge fund centre in the world. That’s because of the quality of the jurisdiction and the quality of Jersey as a place to live and work.
Haithwaite: Another issue is MiFID II. We’re waiting to see what happens with Brexit and the future relationship of the UK and the EU, because the biggest market in terms of advised products is the UK. Jersey is keen to implement legislation if it’s relevant, but if it becomes less significant then we’re not so keen.
Funds Europe: The JFSC have said they will take a strategic decision around the half-year point, but there will be more consultation in due course.
Morgan: The consultation enables the regulator to look at the tangible benefits of a regime such as MiFID II where a lot of work has been done, and it’s likely that there will be improvements to existing manager and adviser regulation, but they won’t be driven by external forces, they will simply be driven by best practice.
Kelly: We rely on good lawyers to do good lobbying to make sure the right solution is found.
Funds Europe: How do you see Jersey evolving as a financial jurisdiction?
Haithwaite: We have a varied toolkit and the changes we’re making mean we’ll continue to be attractive both to EU and non-EU investors and managers. We’re trying to broaden the jurisdictions from which we get business, and hopefully we will provide an infrastructure for all sorts of products, as opposed to just a cookie-cutter approach that certain other jurisdictions have used and which focus on one particular asset class, for example.
Byrne: I see global appetite for alternatives increasing, which will help Jersey. We will continue to have a major concentration in private equity and real estate.
Brizell: It would be nice to see Jersey continue to refine its regulatory offering to make it as competitive as possible. From a Jersey perspective, the EU is unstable at the moment and Jersey needs to remain cognisant of this. Clearly, AIFMD put up a number of barriers to third-country managers raising capital from EU investors, and while they’re not insurmountable, they do present challenges. The impact of Brexit on the European regulatory framework will be interesting to see, as will the elections in other EU jurisdictions over the course of the next year or two. In order to ensure that Jersey continues to function as a fund structuring jurisdiction, it will need to stay ahead of any EU developments and with luck we will see a third-country passport emerging, even if limited to the EU manager or non-EU fund variety, which will help the jurisdiction enormously.
Kelly: Some large asset managers are certainly coming to market and raising funds with Jersey vehicles. There’s a good runway of funds establishing themselves in Jersey again. But we need to stay vigilant, stay flexible and be mindful of what’s going on with Brexit.
Burgess: Jersey has been great over many decades at being nimble, responsive and keeping things as simple as possible in a complex world. We’re going to be faced with further change, but that change creates opportunity.
I think we’ll see a growth in connections with the US, both from investors coming out of the US and also capital flowing into the US. We’ll also see continued growth in capital flows from Asia.
Morgan: What we’ve seen in recent times has been a consolidation of best practice in governance, reporting and regulation. This will primarily be played out in developed economies, however centres such as Jersey also have a role to play in terms of providing structures and best international practice for investing into emerging jurisdictions, whether located in Africa, emerging Asia or other growth economies.
Haithwaite: Ultimately, we’re proud of Jersey’s fund industry and want to protect and enhance it.
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