2016 & beyond – The Evolution of Guernsey Fund Structures
As I write this the Investment Supervision & Policy Division (ISPD) of the Guernsey Financial Services Commission (GFSC) have just announced their strategy in respect of the Fund Sector for 2017. More about that later…
During 2017 we saw two new pieces of regulation come out of the ISPD, which is significant compared to previous years. What is interesting to note is that in both cases an innovative product can be launched without the need to change any of the primary legislation of the island (which would have resulted in significant delays), and shows the benefits of Guernsey’s regulatory regime. These new products give us interesting tools in Guernsey’s fund structure offering.
Manager-Led Product (MLP)
In the first half of the year work was going on behind the scenes with representatives with members of the ISPD team to discuss a new product. On 11th May 2016 the Manager-Led Product was announced on the GFSC’s website.
In a nutshell, the MLP allows a licensee under the Protection of Investors Law (a POI licensee) to notify the GFSC of a new subsidiary licensee and associated collective investment scheme (CIS) one business day prior to that subsidiary licensee and CIS being licensed/registered. The catch is that the POI licensee must opt-in to the AIFMD Rules, however derogation from specific rules will be possible.
How does this work? Like the Alternative Investment Fund Managers Directive (AIFMD) itself the regime operates by putting the regulation onto the AIFM (in this case the POI licensee who has opted into the AIFMD rules) who has all the responsibility for operating the subsidiary licensee and CIS. Essentially this is moving to prudential regulation and away from the historical route of fund-specific regulation.
This innovative product works along the same lines as the Luxembourg RAIF (Reserved Alternative Investment Fund) and Maltese NAIF (Notified Alternative Investment Fund), however the MLP takes this further. The MLP, unlike the RAIF and the NAIF, does not cover just a simple notification of the fund, but is extended to the subsidiary licensee (e.g. a general partner) as well. A good case of Guernsey being ahead of the curve.
Whether use of the MLP concept can be developed beyond just fund-related investment licensees remains to be seen, however we often hear of people keen to see further use of the regulation.
As for the future, the aforementioned fund sector strategy released by the ISPD starts by announcing the consultation to extend the MLP to worldwide marketing – although given that the current prudential regulation being adopted us the EU-generated AIFMD maybe a new set of prudential rules should be developed.
Private Investment Fund (PIF)
The second piece of innovative regulation came more recently with the release on 16th November 2016 of the Private Investment Fund Rules 2016.
In common with the MLP, the PIF requires a simple one business day notification period to the GFSC on a basic 2-page form. The main differences are:
- There are no rules applied against the Guernsey-based licensee, the rules in this case are at the PIF product level
- The PIF rules focus on strong corporate governance with managing of conflicts of interest
- The Guernsey-based licensee must make warranties in respect of the PIF and must perform tests to ascertain the number of ultimate beneficial owners both in total and those subscribing on a rolling annual basis
The main requirements are designed to ensure that the fund really is “private”:
- No more than 50 ultimate beneficial owners (UBOs) in total
- Following the first 12 months a test to ensure that on a rolling annual basis there are no more than 30 new UBOs
- There is no limit on the number of persons marketed to, what matters is the number actually invested
Whilst this seems low, consider each of the following which would in each case count as a single UBO:
- An investment manager acting on behalf of a family office with various investment structures representing different family members
- An investment manager investing on behalf of a pension scheme with over a thousand pension scheme members
- An investment manager acting on behalf of a collective investment scheme with 200 investors
In each of these cases the single investment decision would be counted as the “UBO” with the various underlying UBOs not being counted.
This is a very practical piece of regulation, which can either work given Guernsey’s ability to launch funds fully outside of AIFMD, or alternatively acting under NPPR selling into Europe applying the relevant AIFMD Marketing Rules over the licensee (or non-Guernsey investment manager if appropriate). Similarly once the third country AIFMD passport is activated the full AIFMD rules could be applied as an overlay.
2017 & beyond
I have already covered the MLP to be marketed worldwide, so what else is in the ISPD fund sector strategy?
Quarter 2 is going to be a clarification on investment products that are not funds (aka “when is a fund not a fund”!). Guidance can be expected for non-fund investment products, which themselves fall outside of fund regulation.
Quarter 3 is going to be a consultation on Client Asset and Client Money Rules. Whilst I would agree that Chapter 9 of the Conduct of Business Rules is only six pages and may be light, the existing rules should be adequate for most situations and can be easily adhered to. The only reason I can see for increasing the volume of rules would be to cover situations where a licensee does not have a compliance culture firmly embedded or purposely seeks to find “gaps” in the existing rules. We can only hope that the GFSC do not seek to replicate the entirety of the Financial Conduct Authority’s CASS Sourcebook!
To date we have seen how a flexible, pragmatic, approachable regulator can work well with both industry and government to innovate whilst maintaining a high regulatory standard. We hope that this continues well into the future. Kudos to the GFSC and, particularly, the ISPD!