Offshore: Jersey - expert fund
13 June 2005
In February 2004, the expert fund regime was introduced in Jersey for the establishment of funds aimed at institutional and high-net-worth investors. The introduction of the expert funds regime signified a change in the regulatory environment in Jersey to accommodate the changing requirements of fund promoters and the fund industry in general.
For many years Jersey has been a premier domicile for the establishment of investment funds due to its beneficial tax regime and its strong reputation in regulatory matters. In recent years there has been a growth in popularity of alternative investments in private equity and property and a demand for hedge funds, due partly to the volatility in traditional investment markets and the stable, relatively low interest rates that currently prevail over the world's leading currencies. The introduction of this new category of fund has made Jersey a very attractive jurisdiction for the establishment of specialist-type funds such as private equity, property and hedge funds. The flexible approach of the new regime has enabled practitioners to offer innovative solutions to create investor-driven structures. The expert fund regime provides a 'light touch' of regulation while maintaining the high standards which have previously been associated with the finance industry in Jersey. In addition, there is a new streamlined authorisation process and such funds can be established in a matter of days and at a relatively low cost.
The regulator in Jersey, the Jersey Financial Services Commission (the commission), has produced a guide to the establishment of expert funds in Jersey, although as the name suggests it is only a guide and derogations can be sought from its requirements. The change in approach to regulation has meant that the commission will look at the regulatory control of the investment manager, which must be established in an Organisation for Economic Co-operation and Development (OECD) member state or associate member state (although derogations have been granted from this requirement) and regulated in that state or granted approval to act in relation to the expert fund by the commission (for example, if the investment manager is not regulated because the activity it proposes to undertake in relation to the expert fund is not a regulated activity in its home state). The investment manager must meet the guidelines set out in the guide and there is a degree of self-certification in respect of such requirements.
In addition, the expert fund must appoint an administrator, a manager or a trustee which has at least two Jersey resident directors with appropriate experience, together with staff and a physical presence on the island. The administrator, manager or trustee has responsibility for carrying out its own due diligence upon the investment manager and confirming that it has no reason to believe that the statements made by the investment manager are incorrect. In addition, the local administrator, manager or trustee has responsibility to take reasonable measures to satisfy itself that the investment manager does not breach any investment and borrowing restrictions applicable to the expert fund.
With regard to the custody arrangements for an expert fund, the guide requires that the expert fund shall have adequate arrangements for the safe custody of its property. If the expert fund is an open fund, custody arrangements must be sourced from a separate custodian/trustee with staff and a physical presence in Jersey. However, if the expert fund is a hedge fund, the guide provides that the requirement for a trustee or custodian will be waived, provided a prime broker that is part of a group with a minimum credit rating of A1/P1 is appointed. Thus the derogation from the requirement to have a local custodian/trustee is already given within the guide.
In conjunction with the relaxation of the regulatory approach taken by the commission, the expert fund is regarded as being flexible because it may take any form recognised under the law of Jersey. An expert fund may be an open or a closed fund. It may be established as a fund company in Jersey, as a limited partnership or as a unit trust. This flexibility allows the practitioners to create a structure which meets specifically the requirements of each fund promoter.
The statistics reported by the commission show that, to 31 December 2004, 36 expert funds had been approved. So far this year the commission has approved 40 expert funds and the indications are that this level of growth will continue.
Recent developments in immigration, business regulation and taxation policy in Jersey have enhanced substantially the attraction of Jersey as a location for the establishment of hedge fund managers and other hedge fund service providers.
Establishing a physical presence on the island requires the consent of various committees of the States of Jersey (Jersey's legislative and governing body). During 2004, these committees announced the creation of a coordinated and straightforward approach, whereby the various approvals required for establishing residence and new business in Jersey can be obtained far more readily in response to a desire to diversify the island's economy and encourage high-value business such as hedge fund management business. The States of Jersey has appointed an individual who is responsible for steering applications through the comptroller of income tax and the two committees of the States of Jersey in respect of housing and regulation of undertakings. It is anticipated that a final response will be given within 10 working days of receipt of the application.
For a hedge fund manager to be granted a permanent licence to reside in Jersey, the authorities will consider the individual's business and social background, the number of dependents and any other non-economic benefits that Jersey may obtain if residency is granted. An individual's likely tax contribution is a key factor to obtaining a licence to reside in Jersey. To meet the current requirements for residency, an individual would normally be expected to make an annual tax contribution of £100,000. This represents a reduction to previous requirements. In addition, a Jersey-resident hedge fund manager will generally need to obtain from the commission a permit under the Collective Investment Funds (Jersey) Law 1988 (the CIF Law). There are currently no formal requirements in relation to obtaining such a permit to provide services to an expert fund, although a hedge fund manager will need to satisfy the commission as to span of control issues and may be subject to annual inspections.
Jersey is clearly an attractive proposition as a jurisdiction in which to domicile investment funds. However, the changes which have been made to the manner in which a hedge fund manager can establish a business in Jersey are likely to encourage further growth of this industry sector on the island.
Expert in expert funds
There are a number of exciting developments in Jersey that will enhance further the attractiveness of the island as a domicile for investment funds.
Amendment 8 to the Companies (Jersey) Law 1991 is due to be debated by the States of Jersey in July 2005 and it is anticipated that it will become law by the end of 2005. This amendment will allow for the creation of protected cells in Jersey and it is expected to include a provision for cells to be incorporated separately. In addition, there is a proposal to amend the limited partnerships law to allow a limited partnership to have a separate legal identity, which could have certain tax advantages for a number of providers.
There is currently a proposal being considered by the commission to exempt certain functionaries that wish to act in relation to a non-Jersey-domiciled fund from the requirement to apply for a permit under the CIF Law, thus reducing the cost and administrative burden for Jersey-based functionaries wishing to act in relation to funds domiciled in other jurisdictions. The functionary must already have a permit for the same function for a similar fund and, as the commission will not regulate the non-Jersey-domiciled fund, it is proposed that the exemption will be possible in relation to funds from one of a number of jurisdictions.
The commission is also considering the introduction of codes of practice in relation to the CIF Law to ensure best practice in respect of functionaries in Jersey acting on behalf of collective investment funds.
The launch of the expert fund regime in Jersey has been successful in responding to the industry’s requirements for a more flexible regulatory approach and therefore responding to the needs of the global funds industry. The clear indication is that growth in these areas will continue as Jersey continues to develop new initiatives to meet the ever-changing needs of the finance industry while at the same time maintaining its high standards.
Richard Thomas is a partner at Ogier in Jersey