A Bridge to Everywhere
A Keynote Interview with Ben Robins, Chair, Jersey Funds Association, first published in PFM Fund Domiciles Report, October 2015.
Jersey has not only made a full recovery from the financial crisis, it’s laid the groundwork for an all access path to EU investors. Jersey Funds Association chairman Ben Robins provides pfm the details.
In the summer of 2011, pfm packed its bags and headed to Jersey for an industry gathering. Upon arrival, our correspondent present was struck by the somber mood of the conference.
Remember at the time the funds industry was still wobbling after the 2009 credit collapse; meanwhile EU policymakers a few hundred miles northeast in Brussels were busy shaping the behemoth Alternative Investment Fund Managers Directive (AIFMD) in a way that could have barricaded Jersey managers from EU shores. Speakers at the forum discussing the future prospects of the small island state (population: 100,000) worried the directive would prompt individual EU states to tighten the screws on private placement regimes, which offshore Jersey managers walked to reach EU investors.
A few years on, and Jersey is thriving – something we picked up in the upbeat tone of Ben Robins, chairman of the Jersey Funds Association, who spoke with pfm about the island’s rebound and future growth strategy in a keynote interview.
It’s little wonder why. Jersey is one of three jurisdictions to receive blessing from Europe’s chief securities regulator, the European Securities and Markets Authority (ESMA), to offer local managers a pan-EU marketing passport into Europe. New fund vehicles have been interwoven into the island’s already comprehensive legal regime. And efforts by rich countries to crack down on tax evasion and profit shifting (the so-called BEPS Action plan) is unlikely to impact Jersey materially, which today has a transparent and easy to understand tax regime and a funds industry based on management substance, rather than mere domiciliation.
Proof in numbers
To begin to understand just what type of comeback Jersey has achieved in the last few years, it’s worth examining some of the raw fund data.
At the end of 2009, during the heyday of the financial crisis, Jersey had £167 billion of fund assets under administration, a massive 31 percent drop from the year prior. By the end of 2010, Jersey entered recovery mode, controlling then £185 billion of fund capital. From there, it would take eight straight quarters before Jersey busted past the sentimentally important £200 billion barrier. Jersey would dip below that figure once again as AIFMD rulemaking threw new doubt on the offshore island’s vitality, but throughout 2014 it became clear that Jersey had regained its lost ground.
In fact, at the end of 2014, Jersey claimed £229 billion of fund assets under its administration; “a figure not seen since the end of 2008 when the level of capital raised in the funds industry in a period of exuberance soared to unprecedented heights,” says Robins.
Much of the recovery could be attributed to alternatives, which accounted for 72 percent of the 2014 year-end totals, underscoring Jersey’s increasing appeal to the private funds community. Year-on-year, the real estate sector alone grew by 32 percent to its highest ever level, while private equity funds grew by a steady 5 percent in the same period.
The recovery, however, would not have been possible if the Island had not worked hard to ensure that new regulations have gone Jersey’s way.
Originally, the AIFMD was something to be feared. Today, Jersey sees it as an opportunity to entrench itself as one of very few domiciles to offer managers a full menu of vehicle and marketing options.
For starters, “a number of EU managers have relocated, or are expected to, relocate to Jersey in the coming months where their existing strategy and operations do not sit comfortably with full compliance with the AIFMD, but where they still want to retain access to EU investors via individual member states’ private placement regimes,” says Robins.
The second option, of course, where managers don't wish to market to European investors actively at all, is to relocate to Jersey and operate outside the AIFMD framework altogether, “which Jersey can easily facilitate,” Robins adds.
A third, more exclusive, option, however, is allowing Jersey managers to seamlessly market their funds across the whole of Europe by way of pan-EU marketing passport as a reward for choosing to meet the AIFMD’s full requirements. Jersey created a fund vehicle to do just that, but it was only this summer that ESMA recommended that a pan-EU marketing passport (as of now restricted to onshore EU managers) could be extended to Jersey managers choosing to use this structure. The ESMA recommendation is subject to the approval of the EU Commission, Parliament and Council. The three EU governing bodies are ultimately expected to approve the recommendation when sufficient numbers of other third countries have also been approved for pass-porting, in effect providing GPs wanting the passport “a tax-neutral platform offshore” in Jersey, Robins explains.
The other bit of regulation that is potentially concerning but seemingly non-life-threatening is the Base Erosion and Profit Shifting (BEPS) Action Plan. The OECD, a rich country club, has been developing the plan since July 2013 as part of a coordinated effort to crack down on tax avoidance. The plan’s principal target is large multinationals like Amazon and Google that shift profits across borders to escape tax, activities which are generally not hosted in tax neutral financial centres like Jersey, says Robins, “but its scope is broad enough to cause concern in the private funds industry.”
“The fear is that managers using Jersey as a legitimate tax-neutral base for investors – and not as some intermediary jurisdiction to escape onshore tax through exploitation of double tax treaty benefits – will be caught inadvertently by the proposal’s language,” he explains.
Thanks to industry lobbying efforts, the OECD has been made aware of the unintended consequences and it is hoped that it will sustain the important principle of (uncontroversial) tax neutrality for private equity vehicles during proposal rewrites. Robins believes the OECD initiative may even in fact benefit Jersey as the international community focusses on taxing economic activity where it actually takes place.
The concept of “substance”, such as personnel on the ground carrying out key investment functions, may be a key criterion the OECD uses to establish where fund managers are taxed in future. Unlike certain other offshore financial centres, Jersey has “in relative terms, a massive infrastructure of experienced fund service providers, including investment managers, administrators and board directors that private equity managers can utilize to demonstrate substance on the ground,” says Robins.
In fact, in Jersey “there already exist regulatory requirements that GPs must follow to demonstrate local management and control and avoid being designated a letterbox arrangement,” he adds.
Jersey’s future success will in part depend on efforts to reach new lands, says Robins when asked how Jersey will sustain its current momentum.
Over the last twenty years, Jersey's government and regulator have signed cooperation agreements with counterparts across Europe and the world at large to facilitate cross-border financial services and investment. This year alone, Jersey has signed such agreements with South Africa, Switzerland, Denmark, Rwanda and Korea.
Proactive campaigns are being launched in Asia as well. Late last year, representatives from Jersey hosted a range of breakfast and lunch events in Hong Kong, Kuala Lumpur, Singapore and the United Arab Emirates to over 500 stakeholders in key Asian markets as part of an inaugural Asia roadshow.
After developing a presence in Asia roughly six years ago, Jersey “is very well placed to capitalize on new opportunities like offshore renminbi structurings, dim sum bonds listings and Islamic finance,” says Robins.
Jersey’s goal will be going from a gateway into Europe into a gateway into the world. If the next seven years are anything like the last, they should make significant headway.