Guernsey
14 April 2021
The evolution of the Guernsey funds industry in recent years shows encouraging trends of innovation and adaptability, which will stand the jurisdiction in good stead
Image: chris2766/adobe.stock.com
Known for its beach resorts like Cobo Bay and the scenery of its picturesque coastal cliffs, Guernsey is one of the Channel Islands in the English Channel near the French coast, and is a self-governing British Crown dependency. In its financial services sector, Guernsey funds continue to grow. The evolution of the Guernsey funds industry in recent years shows encouraging trends of innovation and adaptability, which will stand the jurisdiction in good stead.
The nature of fundraising and capital deployment has changed considerably, and experts are seeing fund managers raising concurrent funds rather than raising and investing one fund before repeating the process again.
Guernsey continues to be an attractive place for private equity fundraising, with the ongoing confidence of megacaps ensuring aggregate billion-dollar commitments, according to EY’s extended assurance director Mark Le Page.
“The confidence has spread to the Guernsey open-ended sector, which has witnessed a resurgence in assets under management and administration,” says Le Page.
Additionally, fiduciaries are hearing from their family office clients that the private investment fund (PIF) structure is a persuasive solution to complex wealth management challenges. Therefore, industry participants are seeing the overlap of the Guernsey fund services and fiduciary services sectors to provide a coherent wealth management offering.
Non-executive director of PPHE Hotel Group Stephanie Coxon adds: “In line with the strong global demand, Guernsey has seen increased enquiries from managers around environmental, social and governance (ESG) and impact investing.”
With increasing numbers of Guernsey Green Funds being registered, Guernsey as a jurisdiction is well placed to service these funds as the momentum builds and demand from investors develops.
It is also worth highlighting that Guernsey’s fund industry has demonstrated remarkable resilience over the past year. Far from the negative trend that some were predicting 12 months ago at the start of the pandemic, the industry has continued to demonstrate stable growth and there is no evidence that this will not continue.
The popular PIF
The PIF has been a popular addition to the Guernsey funds regime since it was introduced in November 2016. PIF is used by new and existing fund promoters who have been able to quickly launch a simple and flexible product to private investors. It has proven to be particularly popular with those establishing their first fund.
“This is a differentiator from some other jurisdictions where similar funds rely on licensee exemptions. It has also attracted a lot of interest from those moving to Guernsey from another jurisdiction and looking to get up and running in a quick, cost-effective fashion,” says Collas Crill partner Wayne Atkinson.
It hasn’t just benefited start-up funds, according to Patrick Cummins, managing director, Apex Fund and corporate services (Guernsey), established GPs have also availed of the PIF as an effective structure enabling them to bring product to market — a PIF can be registered and licensed within a day.
In December 2020, it was revealed that Guernsey is set to revise the rules of its PIF, expanding the fund regime with two supplemental models which remove the requirement for manager involvement. The revisions are intended to create the most comprehensive and flexible suite of options of any private fund regime.
Cummins says it’s important to note that the proposed changes will not discard or change the current approach to registering a PIF, so the good work and solid foundations in place will not be unsettled, rather they will be complemented by these additive changes.
There is a proposal to allow a PIF to be created without the requirement for a Protection of Investors Law (PoI) licensed manager. Certain conditions relating to investor criteria would have to be met along with supporting confirmations from a licensed fund administrator.
Another option is the use of a PIF as a bespoke private wealth structure, with capital coming only from an investor base who share a family relationship.
Cummins explains there would be no requirement for a PoI licensed fund manager and a reliance on the PoI licensed fund administrator to confirm that the PIF has been restricted to eligible family members.
A spokesperson for the Guernsey Financial Services Commission (GFSC), says they have been greatly encouraged by the responses received to that paper and expect to provide an update in April.
The consultation paper proposes retaining the current successful PIF regime unchanged while at the same time introducing two additional, alternative qualification routes for a PIF.
These two new routes will not require the formation of a related licensed investment manager but will instead be based around investment by defined qualifying private investors or family investors.
According to the GFSC, this proposed revision to the PIF Rules recognises the needs of the fund industry and its clients by introducing a greater degree of flexibility while continuing to ensure that appropriate levels of investor protection are observed.
Listening to the market
Recent changes in the jurisdiction, such as the revision to the PIF Rules, show that regulators are responding and showing a willingness to listen to the market.
Atkinson suggests one of the benefits of Guernsey’s scale is its ability to be manoeuvrable and responsive in developing legislation and regulation.Additionally, as part of the same PIF Review, the commission also considered options around the exemption of general partners marking yet another response to industry demand.
“While global trends push ever increasing regulatory burden on managers and licensees, one of Guernsey’s hallmarks has been applying a suitable standard in a minimally disruptive way. This is obviously a fine balance so engagement with industry is essential to its workability,” says Atkinson.
Other industry participants suggest that regulators are also taking a ‘no-nonsense approach’. GFSC issued 11 fines for anti-money laundering (AML) compliance breaches in 2020 at a total of £379,000. The regulator also made recent changes to the Handbook on Countering Financial Crime and Terrorist Financing (CFT).
One such example is amendments to rules and guidance regarding understanding the ownership and control structure of an entity during the onboarding phase.
Kevin O’Neill, head of asset management and asset servicing, Fenergo, explains: “The aim is to make it easier to identify and verify the identity of beneficial owners when undertaking customer due diligence on a customer which is a trust.”
He continues: “This combined with the recent increase in enforcement actions demonstrates how the regulator is tightening controls so that financial institutions and prescribed businesses can better detect and prevent financial crime.”
Amendments were also made to the handbook to reflect a new mechanism for the implementation of UN and UK sanctions in Guernsey following Brexit, which proves how Guernsey is continuing to align with international standards when it comes to AML and CFT despite Brexit.
The GFSC also fined nine employees of two firms a total of £202,000 for AML-related compliance violations in 2020.
According to O’Neill, there has been a very clear shift globally when it comes to holding employees accountable for compliance failures.
“Many regulators around the world have introduced personal accountability regimes, aimed at holding individuals accountable for their role in compliance failures and regulatory breaches. Our analysis of global enforcement actions in 2020 shows that Guernsey issued the third-highest number of fines to people after China and the US,” he comments.
Firms have an obligation to replace manual processes with technology that automates AML/know-your-customer (KYC) compliance processes while establishing robust risk assessment processes and appropriate risk management measures.
However, the funds industry is notoriously manual by nature. O’Neill highlights that customer due diligence for AML and KYC compliance is cumbersome and paper based, making it harder for firms to understand corporate control structures, identify beneficial owners and the associated risks when onboarding individuals, corporates, Special Purpose Entities (SPVs), trusts, etc.
“Criminals looking to wash illicit proceeds thrive on this complexity and the GFSC is clearly keen to address this with the recent amendments to the Handbook and enforcement actions imposed at firms and their employees,” O’Neill outlines.
Until firms replace these manual processes with innovative technology, O’Neill suggests the repercussions could continue to be costly.
A bright future
With the regulators listening to the market as well as the movement towards traditional and established fund managers, Guernsey is ready to continue to drive growth in the funds space.
The EU Sustainable Finance Disclosure Requirement (SDFR) came into effect in March and is expected to be a topic that continues to attract focus for the island’s funds industry.”
SFDR establishes transparency requirements for financial market participants on the integration of sustainability risks and consideration of adverse sustainability impacts in their processes, and the disclosure of sustainability features of financial products.
Meanwhile, Apex’s Cummins also notices that crypto-currency is making an awful lot of noise in Guernsey at the moment. Apex has seen a number of prospective funds based around crypto-currencies.
“There will no doubt be a number of different products brought to the mainstream market this year that seek to harness some of the yields that are being seen in this space,” comments Cummins.
As well as the impacts of Brexit, SFDR and crypto, Sanne’s director Katy Hodgetts stresses it is key to note across these talking points is the continued stability of Guernsey as a jurisdiction, and the ability to continue to do business across the whole financial services sector.
Hodgetts explains: “There has been no change in the relationship between Guernsey and the UK and EU, and the National Private Placement Regime continues to allow Guernsey to market worldwide, so what will be most interesting to watch are the opportunities that will arise.”
The nature of fundraising and capital deployment has changed considerably, and experts are seeing fund managers raising concurrent funds rather than raising and investing one fund before repeating the process again.
Guernsey continues to be an attractive place for private equity fundraising, with the ongoing confidence of megacaps ensuring aggregate billion-dollar commitments, according to EY’s extended assurance director Mark Le Page.
“The confidence has spread to the Guernsey open-ended sector, which has witnessed a resurgence in assets under management and administration,” says Le Page.
Additionally, fiduciaries are hearing from their family office clients that the private investment fund (PIF) structure is a persuasive solution to complex wealth management challenges. Therefore, industry participants are seeing the overlap of the Guernsey fund services and fiduciary services sectors to provide a coherent wealth management offering.
Non-executive director of PPHE Hotel Group Stephanie Coxon adds: “In line with the strong global demand, Guernsey has seen increased enquiries from managers around environmental, social and governance (ESG) and impact investing.”
With increasing numbers of Guernsey Green Funds being registered, Guernsey as a jurisdiction is well placed to service these funds as the momentum builds and demand from investors develops.
It is also worth highlighting that Guernsey’s fund industry has demonstrated remarkable resilience over the past year. Far from the negative trend that some were predicting 12 months ago at the start of the pandemic, the industry has continued to demonstrate stable growth and there is no evidence that this will not continue.
The popular PIF
The PIF has been a popular addition to the Guernsey funds regime since it was introduced in November 2016. PIF is used by new and existing fund promoters who have been able to quickly launch a simple and flexible product to private investors. It has proven to be particularly popular with those establishing their first fund.
“This is a differentiator from some other jurisdictions where similar funds rely on licensee exemptions. It has also attracted a lot of interest from those moving to Guernsey from another jurisdiction and looking to get up and running in a quick, cost-effective fashion,” says Collas Crill partner Wayne Atkinson.
It hasn’t just benefited start-up funds, according to Patrick Cummins, managing director, Apex Fund and corporate services (Guernsey), established GPs have also availed of the PIF as an effective structure enabling them to bring product to market — a PIF can be registered and licensed within a day.
In December 2020, it was revealed that Guernsey is set to revise the rules of its PIF, expanding the fund regime with two supplemental models which remove the requirement for manager involvement. The revisions are intended to create the most comprehensive and flexible suite of options of any private fund regime.
Cummins says it’s important to note that the proposed changes will not discard or change the current approach to registering a PIF, so the good work and solid foundations in place will not be unsettled, rather they will be complemented by these additive changes.
There is a proposal to allow a PIF to be created without the requirement for a Protection of Investors Law (PoI) licensed manager. Certain conditions relating to investor criteria would have to be met along with supporting confirmations from a licensed fund administrator.
Another option is the use of a PIF as a bespoke private wealth structure, with capital coming only from an investor base who share a family relationship.
Cummins explains there would be no requirement for a PoI licensed fund manager and a reliance on the PoI licensed fund administrator to confirm that the PIF has been restricted to eligible family members.
A spokesperson for the Guernsey Financial Services Commission (GFSC), says they have been greatly encouraged by the responses received to that paper and expect to provide an update in April.
The consultation paper proposes retaining the current successful PIF regime unchanged while at the same time introducing two additional, alternative qualification routes for a PIF.
These two new routes will not require the formation of a related licensed investment manager but will instead be based around investment by defined qualifying private investors or family investors.
According to the GFSC, this proposed revision to the PIF Rules recognises the needs of the fund industry and its clients by introducing a greater degree of flexibility while continuing to ensure that appropriate levels of investor protection are observed.
Listening to the market
Recent changes in the jurisdiction, such as the revision to the PIF Rules, show that regulators are responding and showing a willingness to listen to the market.
Atkinson suggests one of the benefits of Guernsey’s scale is its ability to be manoeuvrable and responsive in developing legislation and regulation.Additionally, as part of the same PIF Review, the commission also considered options around the exemption of general partners marking yet another response to industry demand.
“While global trends push ever increasing regulatory burden on managers and licensees, one of Guernsey’s hallmarks has been applying a suitable standard in a minimally disruptive way. This is obviously a fine balance so engagement with industry is essential to its workability,” says Atkinson.
Other industry participants suggest that regulators are also taking a ‘no-nonsense approach’. GFSC issued 11 fines for anti-money laundering (AML) compliance breaches in 2020 at a total of £379,000. The regulator also made recent changes to the Handbook on Countering Financial Crime and Terrorist Financing (CFT).
One such example is amendments to rules and guidance regarding understanding the ownership and control structure of an entity during the onboarding phase.
Kevin O’Neill, head of asset management and asset servicing, Fenergo, explains: “The aim is to make it easier to identify and verify the identity of beneficial owners when undertaking customer due diligence on a customer which is a trust.”
He continues: “This combined with the recent increase in enforcement actions demonstrates how the regulator is tightening controls so that financial institutions and prescribed businesses can better detect and prevent financial crime.”
Amendments were also made to the handbook to reflect a new mechanism for the implementation of UN and UK sanctions in Guernsey following Brexit, which proves how Guernsey is continuing to align with international standards when it comes to AML and CFT despite Brexit.
The GFSC also fined nine employees of two firms a total of £202,000 for AML-related compliance violations in 2020.
According to O’Neill, there has been a very clear shift globally when it comes to holding employees accountable for compliance failures.
“Many regulators around the world have introduced personal accountability regimes, aimed at holding individuals accountable for their role in compliance failures and regulatory breaches. Our analysis of global enforcement actions in 2020 shows that Guernsey issued the third-highest number of fines to people after China and the US,” he comments.
Firms have an obligation to replace manual processes with technology that automates AML/know-your-customer (KYC) compliance processes while establishing robust risk assessment processes and appropriate risk management measures.
However, the funds industry is notoriously manual by nature. O’Neill highlights that customer due diligence for AML and KYC compliance is cumbersome and paper based, making it harder for firms to understand corporate control structures, identify beneficial owners and the associated risks when onboarding individuals, corporates, Special Purpose Entities (SPVs), trusts, etc.
“Criminals looking to wash illicit proceeds thrive on this complexity and the GFSC is clearly keen to address this with the recent amendments to the Handbook and enforcement actions imposed at firms and their employees,” O’Neill outlines.
Until firms replace these manual processes with innovative technology, O’Neill suggests the repercussions could continue to be costly.
A bright future
With the regulators listening to the market as well as the movement towards traditional and established fund managers, Guernsey is ready to continue to drive growth in the funds space.
The EU Sustainable Finance Disclosure Requirement (SDFR) came into effect in March and is expected to be a topic that continues to attract focus for the island’s funds industry.”
SFDR establishes transparency requirements for financial market participants on the integration of sustainability risks and consideration of adverse sustainability impacts in their processes, and the disclosure of sustainability features of financial products.
Meanwhile, Apex’s Cummins also notices that crypto-currency is making an awful lot of noise in Guernsey at the moment. Apex has seen a number of prospective funds based around crypto-currencies.
“There will no doubt be a number of different products brought to the mainstream market this year that seek to harness some of the yields that are being seen in this space,” comments Cummins.
As well as the impacts of Brexit, SFDR and crypto, Sanne’s director Katy Hodgetts stresses it is key to note across these talking points is the continued stability of Guernsey as a jurisdiction, and the ability to continue to do business across the whole financial services sector.
Hodgetts explains: “There has been no change in the relationship between Guernsey and the UK and EU, and the National Private Placement Regime continues to allow Guernsey to market worldwide, so what will be most interesting to watch are the opportunities that will arise.”
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