TRADE TALK: Innovation on the island

A panel of experts in Jersey’s funds industry share their views about setting up Jersey funds, ease of doing business and efficient transactions.


To what extent is the introduction of the Jersey Private Fund (JPF) seen as an innovative development?
The introduction of the Jersey Private Fund (JPF) in 2017 consolidated and replaced three other Jersey private fund products commonly referred to as “very private funds”, “private placement funds” and “COBO [control of borrowing] only funds”.

The JPF is a true example of how government regulations can realise positive effects on innovation while taking care not to jeopardise original regulatory objectives.
The JPF provides institutional and professional investors with a more streamlined and fast-track regime with tailored ongoing regulatory requirements, under which funds for up to 50 investors can be established in as little as 48 hours.

In this era of technical change, speed is becoming a key determinant of the success of business activities.

In providing a more flexible and versatile framework (which has also encouraged the development of niche asset classes), and significantly improving the speed and ease with which a fund can be established, the JPF still ensures continued compliance with international standards by requiring broader due diligence to be undertaken by the fund’s Jersey-based “designated service provider” (DSP).

In practice, the DSP will usually be the administrator of the fund and is responsible for making enquires to ensure the fund meets the eligibility criteria of the JPF, including assessing the eligibility status of investors.

In a buoyant fundraising market, the JPF regime has quickly been seized on by new and existing clients alike as a streamlined and proportionate product for privately offered alternative investment funds. It is no surprise the Jersey Financial Services Commission recently reported that over 100 structures have already been formed using the JFP product.


How will the new Jersey LLC help shape future fund structuring?
Limited liability companies (LLCs) are both flexible and simple in terms of how they operate, being governed by a single bespoke agreement, and being one vehicle whose members each have limited liability. This is in contrast to companies operating under rigid rules set out in the companies law; and limited partnerships, which require a general partner and therefore at least two different vehicles.

The new Jersey LLC is intended to appeal to US-based managers and legal teams who frequently use LLCs in their fund structures. Given their flexibility, LLCs are the most common corporate vehicle in the US, and US managers will soon be able to structure their funds in the way that they are used to this side of the Atlantic.

The draft Jersey LLC law also allows for “series”, each with their own separate legal personality that can be used to keep different income streams separate, or to ring-fence assets, which is a key advantage over competitor jurisdictions.

LLCs are also likely to be popular with managers in the UK and elsewhere. LLCs are used in a diverse range of roles including as carry vehicles, joint ventures, and even a fund vehicle itself.

The Jersey LLC law is still in draft form, and in addition to series, a key characteristic is the ability to elect whether they are tax transparent or tax opaque for US tax law purposes.


How is digital technology presenting future opportunities for Jersey’s funds industry?
Jersey cannot afford to ignore the impact of developing technology and changing consumer preferences. The pressure on firms to report more quickly, and to provide more secure communication channels, will only increase as time goes on.

Many service providers have already made the case for investing in market-leading systems and the debate is now moving on to combined administrator and adviser platforms, and investor portals. Whatever the final decision, a clear IT strategy for the future is essential. It’s also vital to have a clear understanding of how firms’ own technology interacts with their customers’, and an adjustment to people strategy, which recognises the shift in skills that will be needed.

The emerging openings for innovation are highlighted by Jersey’s prominent role in the application of blockchain. While we’ve established an early lead, Jersey must ensure that all its key players are attuned to the opportunities and how to capitalise on them. Our challenge is to take the hype surrounding developments such as blockchain and make this a reality within our marketplace. We’ve the opportunity to be an “innovation sandbox” for many of the large multinational service providers that operate in our jurisdiction.


What are likely to be the biggest digital advancements in the funds arena in the next five years?
Technological advancements come quickly and often faster than governments and even technology professionals can fully understand them. This is particularly apparent in relation to the recent increase in interest in the digital technologies surrounding cryptocurrency, blockchain technology and digital assets. With this brave and complex new world comes a variety of challenges that any jurisdiction will have to overcome in order to be successful, including issues surrounding CDD (customer due diligence) and KYC (know-your-client) collection, anti-money laundering, valuation and custody arrangements.

Jersey is well positioned to become a leader in this area, with the government standing firmly behind its desire for Jersey to be a market leader in the area of fintech. The government’s pro-business approach and fintech-friendly attitude helps to encourage innovation, and the commercially aware regulator that is accessible to industry, are both key elements for encouraging this business to put its trust in Jersey.

The biggest digital advancements in the funds arena are likely to be increasing knowledge and “tooling-up” in relation to the risks of cyber and data security and creating suitable digital solutions to protect against those risks, which will be essential to both enable funds holding digital assets, including cryptocurrencies, to take in new investors and investments and also to protect and monitor the security, and therefore value, of their digital assets.


Can artificial intelligence (AI) revolutionise the alternative funds landscape?
The jury is still out on whether investment funds driven by AI (or “machine learning”) can dramatically increase returns. Some AI-driven funds are certainly beating the market, taking advantage of an infinitely greater ability to process individual pieces of information (such as news articles and company financial statements) in order to detect and benefit from market trends ahead of traditional equity research analysts. As one fund manager commented: “AI-driven funds are only going to get smarter.”

However, the evidence is inconclusive, with other AI funds showing disappointing returns as managers and programmers continue to grapple with teething problems, such as:

  • AI funds struggling to take advantage of historic trading data pre-dating AI
  • The difficulties in applying AI algorithms to trading data
  • An AI fund’s inability to deal with market events without historic precedent, such as Brexit.

Like all strategies, AI funds need to stand the test of time.


Are green funds the new frontier in Islamic finance?
The worldwide trend towards socially responsible investment (SRI) and increasing environmental awareness has seen a marked rise in the appetite for green bonds and within the Islamic finance sector, this s reflected in the potential for green sukuk, or Islamic bonds, which speaks to the underlying purposes of the sector in bringing good and avoiding harmful acts.

Malaysia has been the market leader in the issuance of green sukuk, with guidelines issued in 2014 for SRI. These set out that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.

Jersey has a long history in facilitating sukuk structures, notably the Caravan Sukuk structure which won an innovative product award as long ago as 2004, and we are seeing renewed interest in establishing sukuk structures through Jersey vehicles, particularly in the energy from waste and renewables sectors.

©2018 funds europe



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