In September 2006 the Funds Review Group (the FRG) was established and charged with of reviewing the Isle of Man’s investment funds industry.
The group, which comprised leading members of both the public and private , published its report in February 2007 and since then both the public and private sectors have been working hard to progress and implement the initiatives identified by the group.
The FRG’s aim is to position the Isle of Man as a preferred location for the establishment of front and middle office operations for global fund managers and as a premier location for the domiciliation of specialist institutional funds in the alternative and closed-ended fund sectors and further. To this end the group recommended two new types of fund, the ‘specialist fund’ and ‘qualifying fund’, and for the phasing out of the experienced investor fund classification.
The licensing regime
The Isle of Man has a rigorous licensing regime for those carrying on investment business in or from the island. As the law presently stands, an applicant for an investment business licence must have a real presence in the island, with staff, premises and a proven track record in the applicant’s category of business.
The FRG recommended a streamlined approach to licensing for fund managers and advisers that are part of a group which has members that are already licensed to provide the same services in the Isle of Man or elsewhere.
Any company licensed in this manner will only be able to provide services to funds in the new specialist fund category, or to equivalent funds in other jurisdictions. It will need to be managed and controlled in the island, but it will be sufficient for the company to be administered by a local fund administrator or fiduciary service provider, without the need for dedicated staff and premises in the island.
The focus for licensing is in these cases on the fitness and propriety of the licence applicant, criteria which are already applied by the Isle of Man Government Financial Supervision Commission (FSC) as part of its general licensing policy. A successful licence applicant is not obliged to meet any minimum capital or professional indemnity (PI) insurance thresholds, but is subject to an annual audit and a duty to make regulatory returns to the FSC.
Fund managers and advisers who only provide services to specialist funds but do not form part of a group which is licensed to undertake this business, are nonetheless capable of applying for a licence if they can demonstrate to the FSC that they are fit and proper and have the relevant experience. Successful applicants have to maintain staff and premises for their operations on the island, comply with minimum capital and PI insurance thresholds and meet the other criteria outlined above.
The specialist fund
The specialist fund was launched on 1 November 2007. The fund is aimed at institutional investors, affiliates of the fund’s promoters and managers and individuals with a net worth in excess of $1m (£490,000); it is not intended to be a vehicle for retail investment.
The specialist fund regulations give a clear definition of a ‘specialist investor’ and prospective investors are required to certify that they are sufficiently experienced to understand the risks associated with an investment in the fund in question and must each invest a minimum of $100,000 (£49,000). All material information about the fund must be set out in an offering document, and the documents constituting the fund must be subject to Isle of Man law.
A departure from current practice is the absence of any requirement for the fund to appoint a custodian, nor must the fund administrator be located in the island if it is authorised in another acceptable jurisdiction to provide its services to similar funds. This approach will allow promoters of offshore funds to use the flexible vehicles available in the Isle of Man and to source administration and custody services from those providers offering the best quality and value services, irrespective of the jurisdiction in which they operate.
Where there is no administrator in the island, a local agent must be appointed whose role is to ensure that certain administrative requirements are fulfilled. For added investor protection the accounts of specialist funds must be audited by an independent auditor holding PI insurance of at least £20m and distributed to investors no later than six months after the fund’s financial year-end.
The qualifying fund
The new qualifying fund also came into operation on 1 November 2007. The fund is aimed at institutional and sophisticated high net-worth investors and is not intended to be used for widespread retail investment. The regulations provide a clear definition of what constitutes a ‘qualified investor’ and prospective investors are required to certify that they are sufficiently experienced to understand the risks associated with an investment in the qualifying fund in question and must fall into one of the categories of permitted investor.
These cover institutional investors, affiliates of the fund’s promoters and managers and persons whose expertise, experience and knowledge to adequately appraise the merits of an investment in the fund is certified by a financial adviser who has been appointed and assessed by the fund’s promoter.
The Isle of Man offers a tax-neutral environment for fund operations. There are no capital taxes and the island has a zero rate of corporate income tax for most taxpayers. This means that a corporate fund vehicle benefits from a zero rate of income tax, as will any fund management or administration business based in the Isle of Man.
In addition, the fees levied by fund administrators and investment managers based on the island in respect of services to a specialist fund or qualifying fund are exempt from VAT in the Isle of Man.
It is believed that the island’s low tax status, proximity to London, competitive operating costs and high quality of life make it a compelling and cost-effective environment for basing hedge fund operations, and considerably increase the island’s appeal in the competitive offshore fund market as a jurisdiction in which to domicile specialist institutional funds.
Simon Harding is a partner and Paul Branford is a senior associate at Dickinson Cruickshank