As EU Member States prepare to formally implement the Alternative Investment Fund Managers Directive, hedge fund professionals will be encouraged to know that Jersey, as a ‘third country’ non-EU jurisdiction, has been working hard to ensure it can continue to offer them a blend of stability and flexibility.
Whilst the Directive is intended principally to regulate managers of alternative investment funds, the reality is that it will also impact service providers, including administrators and depositories. Its reach is broad and significant for funds that are domiciled in Europe, have an EU manager, or are marketed into the EU.
As one of Europe’s leading centres for alternative funds business, Jersey has been quick to acknowledge this, working to ensure it maintains a strong long-term position in supporting the hedge fund industry. As a popular jurisdiction for alternative fund structures, to do so is absolutely vital for Jersey – the current value of alternative funds administered in Jersey represents 70% of the total (£196.2 billion), with hedge funds alone making up 25% of that overall total.
Business as usual
In legal terms, Jersey is a ‘third country’ for the purposes of the EU single market, despite the fact that, in practice, its finance industry has a long history of providing financial services in the EU market, particularly with London. Overall, Jersey’s strategy in relation to the Directive is to make it clear that it has the right frameworks in place to continue to provide fund establishment, management and administration services on a ‘business as usual’ basis.
With Jersey’s funds industry, government and regulator continuing to be intensively engaged on the Directive, the overwhelming message is that Jersey is committed to continuing to facilitate funds business within the EU through national private placement regimes until at least 2018.
Jersey is also committed to introducing the option of a fully AIFMD-compliant regime and obtaining an EU-wide passport by 2015 – as soon as is possible for non-EU ‘third countries’.
Meanwhile, as a non-EU jurisdiction, Jersey is able to offer a choice by maintaining a separate regime that lies outside the scope of the Directive, for managers who don’t want to access EU capital or operate in the EU. Combined, this range of options means that Jersey will continue to operate its existing fund regime whilst at the same time offering an option that is fully compliant with the Directive, providing managers with the flexibility to market to investors both inside and outside the EU.
The steps and timescales involved in the implementation of the Directive are complex – and this is also the case where “third countries”, such as Jersey, are concerned.
EU Member States will have to be fully compliant with the Directive from July 2013. However, national private placement regimes in individual EU Member States can remain in place from that date, for non-EU funds being marketed into the EU by non-EU managers. That will be the case until at least 2018, without a requirement for non-EU managers to comply with the Directive.
The continuation of private placement regimes will require, amongst other things, individual agreements between Jersey’s regulator and the regulator of each Member State in which Jersey funds are marketed. ESMA are coordinating guidelines on these agreements and Jersey’s regulator is fully engaged with ESMA and Member State regulators to ensure they will be in place in good time.
Beyond private placement, Jersey is also well on track. EU-wide marketing ‘passports’, to allow managers to market alternative funds to investors across the EU, will become available to non-EU managers from 2015, provided they satisfy specified criteria. Whilst EU managers and fund structures will require full compliance with all aspects of the Directive by July 2013, managers in Jersey, as a third country, won’t be able to – and won’t need to – obtain a passport before 2015.
Keen to fully embrace the Directive as soon as possible, however, Jersey intends to have a fully AIFMD-compliant regime ready to go by 2015. Jersey already regulates and authorises alternative fund managers in accordance with IOSCO standards, and has tax information exchange agreements in place with each Member State where alternative funds are to be marketed from 2015 – including TIEAs or DTAs with 13 Member States. In addition, Jersey is able to comply with all required international reporting and transparency requirements, and is more compliant with FATF recommendations than many onshore asset management jurisdictions. With this in mind, Jersey is confident that it will be able to satisfy the criteria needed to comply with the Directive ahead of the 2015 deadline.
For the EU AIFM Directive passport route, in order to satisfy the requirements of the Directive, some of Jersey’s licensing policies and codes of practice will be augmented, with any changes anticipated to be minimal and simple to implement. For Jersey’s ongoing non-EU route, however, no changes are envisaged to Jersey’s existing fund products or structures.
Between 2015 and 2018, non-EU funds and fund managers will have the option to benefit either from an EU-wide passport or to continue marketing through private placement regimes. ESMA are expected to provide guidance on whether or not to continue the national private placement route in 2018.
Whilst there has been some speculation that the Directive may prompt a migration of fund business away from offshore to onshore centres, this is not Jersey’s experience to date or expectation at all. In fact, the Directive may present some opportunities.
The route adopted by Jersey, for example, actually offers managers a choice – of a route that is fully compliant with the Directive, and a route that remains outside of the EU. Some managers may decide that they need an onshore option but it is anticipated that they will maintain a parallel offshore one too for non-European investors. In the current climate, fund managers aren’t just focusing on Europe, they are adopting global strategies. For sophisticated Asian and Middle Eastern investors, for instance, offshoresolutions will remain attractive.In addition, hedge fund managers are still showing an interest in relocating to Jersey, in spite of – and in some cases because of – the Directive. Driven also by high taxation in onshore centres, a prevailing sentiment that they are being unfairly targeted, and a desire for a high quality of living, managers consider the flexibility of Jersey’s approach to the Directive as another real attraction.
Far from being a burden, the Directive could actually pose some opportunities for Jersey as a safe environment and a ‘no-change’ solution.
For managers wishing to remain outside of the EU, the management and administration of Jersey funds will continue without change. Meanwhile, for those wishing to access European markets, national private placement regimes will mean business as usual for Jersey funds and, by creating the option of an AIFMD-compliant model by 2015, Jersey will also allow managers who value the tax neutrality, sterling currency and excellent service standards offered by Jersey, the means to combine those features.