Working with the AIFM Directive: Jersey focusing on stability and flexibility
By Nigel Strachan, Chairman, Jersey Funds Association
With the Alternative Investment Fund Managers Directive being formally adopted by EU Member States, alternative fund managers 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 long-term stability and flexibility to the international alternative funds industry.
Whilst the Directive is intended principally to regulate alternative fund managers, it will also impact service providers, including administrators and depositories, as well as the ongoing transparency, reporting and marketing of alternative investment funds themselves. There’s no doubt that its reach is broad and significant for private equity and real estate funds that are domiciled in Europe, have an EU manager, or are marketed in the EU.
As one of Europe’s leading centres for alternative funds business, Jersey has been quick to acknowledge this and is on the front foot in working with the Directive to ensure it is in a strong long-term position.
This is vital for Jersey, which has become the jurisdiction of choice for a significant number of private equity and real estate, as well as venture capital, mezzanine, debt and hedge funds - the current value of alternative funds administered in Jersey stands at 70% (£138.4bn) of the total (£196.2bn).
While Jersey is in legal terms a ‘third country’ for the purposes of the EU single market, in practice its finance industry has a long history of providing financial services in the EU market, most notably with London. To put things in context, it’s worth remembering too that Jersey is as much a third country as any other non-EU country, such as the USA.
Overall, Jersey’s strategy in relation to the Directive is to make it clear that it has the legal, tax and regulatory framework in place to facilitate the continued functioning of fund management and administration services on a ‘business as usual’ basis.
At the same time, Jersey is also pursuing opportunities to improve market access arising from the Directive so that not only can managers have confidence in it as a stable environment for ongoing alternative funds business, but also in targeting growth too.
Jersey’s funds industry, government and the regulator have been, and continue to be, intensively engaged on the Directive, and the overwhelming message is that Jersey is committed to maintaining a business as usual approach for funds business within the EU through the national private placement 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 continue to offer an element of flexibility by maintaining a completely separate regime that lies outside the scope of the Directive, for managers who don’t want to access EU capital or who don’t operate in the EU.
In this way, Jersey will be able to continue operating its existing, successful fund regime (designed to meet IOSCO standards) whilst at the same time offering an alternative regime that is fully compliant with the Directive, providing fund managers with the flexibility to market to investors both inside and outside the EU.
Private Placement and Passports
The timescales in relation to the next steps involved in the implementation of the Directive, particularly for third-countries such as Jersey, are complex.
EU-Member States will need to be fully compliant with the Directive as 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 in full.
The continuation of private placement regimes – the way that a number of Jersey funds are already actively marketed into the EU - will require, amongst other things, individual agreements between Jersey’s regulator and the regulator of each member state. ESMA are coordinating guidelines on these cooperation arrangements and Jersey has been heavily engaged in this process. Jersey’s regulator continues to engage with ESMA and member state regulators to ensure agreements can be in place in good time by July 2013.
Jersey currently has in place bilateral regulatory cooperation agreements with the majority of key EU Member States. The pre-existence of these agreements gives rise to a high level of confidence in Jersey's ability to sign the necessary co-operation agreements with the regulators of individual Member States.
Beyond private placement, Jersey is also well on track. Assuming the regulatory architecture necessary is created and approved by ESMA, EU-wide marketing passports, which will allow managers to market alternative funds to professional investors across the EU, will become available to non-EU managers from 2015, provided they satisfy specified criteria and are fully authorised under the directive.
So, whilst July 2013 is the date when EU managers and fund structures will require full compliance with all aspects of the Directive, Jersey, as a third country, won’t be able to - and won’t need to - obtain an EU-wide ‘passport’ before 2015.
It’s worth noting that even between 2015 and 2018, non-EU funds and fund managers will have the option to benefit either from an EU-wide passport or continue marketing through the national private placement regimes. ESMA are expected to provide guidance on whether or not to continue the national private placement route in 2018.
In terms of obtaining a passport, fully embracing the Directive and introducing a fully compliant AIFM Directive regime when it can in 2015, Jersey is also extremely well-placed. The AIFM Directive is about regulating and authorising alternative fund managers, and this is something that Jersey already does, in accordance with IOSCO standards.
Keen to fully embrace the Directive as soon as possible, Jersey intends to have a fully-compliant regime ready to go ahead of the 2015 date for non-EU countries, with the regulator and government ready to progress any additional agreements required by ESMA.
For instance, Jersey has agreements in place to exchange information on tax matters under the OECD Model Tax Convention with each Member State where alternative investment funds are to be marketed for passporting purposes from 2015. These include TIEAs or DTAs with 13 Member States, including the UK, France, Germany, Sweden, Norway, Finland, Denmark, The Netherlands and Ireland, whilst a number of other EU nations are expected to ratify TIEAs with Jersey in the coming months.
In addition, Jersey is able to comply with all required international reporting and transparency requirements, and leads the way in anti-money laundering, being more compliant with FATF recommendations than many larger onshore asset management jurisdictions.
With this substantial number of agreements in place and the excellent reports it has received on its regulation, oversight, corporate governance and stance regarding anti-money laundering, Jersey is confident that it will be able to satisfy the criteria needed to comply with the Directive ahead of the 2015 deadline.
Ahead of clear guidelines from ESMA, Jersey is preparing for every eventuality in terms of the agreements it will need to have in place or amendments it will need to make to existing regimes. In all cases, Jersey is confident it will be able to meet the requirements necessary.
For Jersey’s ongoing non-EU route, no changes are initially envisaged to Jersey’s existing fund products or structures.
For the EU AIFM Directive route, however, in order to satisfy the requirements of the Directive’s model for obtaining an EU-wide passport, some of Jersey’s licensing policies and codes of practice will be augmented in due course. Any changes to existing products are anticipated to be minimal and simple to implement.
Whilst there has been some speculation that the Directive may prompt a migration of private equity and real estate fund business away from offshore centres to onshore centres, which are deemed to offer a greater degree of certainty where the Directive is concerned, this is not Jersey’s experience to date or expectation at all.
Although a handful of managers have publicly expressed a desire to use onshore EU structures in future, the vast majority of alternative asset advisors (71%) confirmed in a survey conducted by Jersey Finance that they would not replace non-EU managers and non-EU funds with onshore solutions.
The route adopted by Jersey actually allows managers choice: of a route that is fully compliant with the Directive, and a route that remains outside of the EU completely, giving them more flexibility and certainty than onshore centres could. Some managers may well decide that they need an onshore option but it is anticipated that they will maintain a parallel offshore one too for non-European investors – it makes sense to do so.
Moreover, in the current climate, fund managers aren’t just focusing on Europe, they are thinking increasingly about adopting global marketing strategies to source capital. For sophisticated Asian and Middle Eastern investors in alternative investment funds, for instance, offshore solutions will remain attractive.
Far from being a burden for Jersey, the Directive could actually pose some opportunities. For example, whilst EU jurisdictions will have to deal rapidly with implementation of the AIFM Directive and indeed a raft of other EU financial services regulation, Jersey will be able to carry on business as usual until at least 2015 through national private placement regimes. Jersey can offer certainty, a safe environment and a ‘no-change’ solution, affording private equity and real estate fund managers the opportunity to focus their efforts on long-term growth.
Jersey recognises that certainty, stability and flexibility are key concerns across the alternative investment fund sector. In gearing up for the implementation of the AIFM Directive, Jersey has been sure to be able to offer all these things.
For those managers wishing to remain outside of the EU, the management and administration of Jersey funds will continue without change.
For those wishing to access European markets, the national private placement regimes will effectively mean business as usual for Jersey funds.
At the same time, the new AIFM Directive ‘brand’ is likely to have real appeal to some fund managers and their investors. In constructing the option of an AIFM Directive-compliant model, Jersey will also allow those managers who are seeking to operate within the Directive and who value the simple tax neutrality, sterling currency and excellent service standards offered by Jersey, the means to combine those features.
This article was first published in the Private Equity Real Estate Fund Administration and Technology Guide 2012.