Guernsey's funds industry review
22 December 2016
Members of BDO Guernsey's funds and asset management team discuss their views of industry performance in 2016 and look ahead to the key items on the business agenda for 2017.
How would you describe activity in Guernsey’s funds industry over 2016?
"Brexit and the US Presidential elections were unexpected events which somewhat steadied activity however a distinct appetite for funds has remained,"said Justin Hallett, a Director of BDO in Guernsey.
"Back in January, the lurking EU referendum saw investors and fund managers applying caution and potentially holding off on new launches. Following the vote, we saw an increase in new funds and new fund managers choosing to move to Guernsey. Overall it’s still a cautious environment but funds remain in demand as cash returns are low to nil."
Audit Director Simon Hodgson emphasised the continuing need for funds to provide an alternative to cash: "Due to low interest rates in the UK the demand for alternative funds generating attractive risk adjusted returns continues to be strong," he said.
Mirela Epure, Assistant Manager in the team, pointed to the flexibility offered by the Guernsey Financial Services Commission (GFSC), the industry regulator, as one of the growth stimulators in 2016: "Amid the uncertainty the regulatory regime showed flexibility and innovation through the launch of Guernsey’s Private Investment Fund (PIF) and Manager Led Product (MLP) which showed the industry moving forwards and evolving to provide efficient structures to the market."
What key events have stood out for you as being particularly good for Guernsey?
According to Justin, despite the global uncertainty, several events have taken place that add to Guernsey’s appeal as a leading funds jurisdiction in 2017.
"The year began with MoneyVal reporting positively on measures Guernsey has taken to combat money laundering and the financing of terrorism in the legislative, financial regulatory, law enforcement and judicial sectors. This has further encouraged awareness of Guernsey’s operating standards in Europe.
"In June, the Brexit vote returned the potential of strong opportunities for Guernsey given the island’s established third country relationship with Europe and being able to demonstrate equivalence with many EU standards and we need to wait and see how this unfolds in 2017.
"Moving into July we saw ESMA recommending Guernsey for a ‘third country passport’ which was excellent news for the Guernsey funds industry and reinforces Guernsey’s position as a jurisdiction which meets the highest international standards.
"Then, more recently, in September we saw the Channel Islands Securities Exchange (CISE) widen its reach to cover all forms of investment vehicles in its updates to Chapter 7. Open and closed ended funds, real estate investment trusts (REITs) and unregulated investment companies, along with the associated legal entities are included in the vehicles now able to list on the exchange," Justin concluded.
"Along with these developments, the launch of the new PIF regime and Manager Led Product also came into play which Mirela has raised," Trevlyn Kelly, Assistant Manager, added.
"These developments combine to further enhance Guernsey’s global appeal as a very attractive place to do business," she said.
When it comes to fund accounting, what developments do you expect to come to the fore in 2017?
"Guernsey based investment funds need to pay attention to new standards appearing in relation to IFRS.
"The implementation of FRS 102 was a key point of focus in 2016. In 2017 there will be a degree of refinement in this area as best practice continues to be identified as the new standard beds down.
"The new IFRS standards, which will apply from 1 January 2018, place a major focus on disclosures and particularly on risk assessments and market impacts," explained Managing Director, Richard Searle.
"That’s true," agreed Jocelyn Craven-Wilkinson, Senior Manager. "Guernsey funds need to consider the new IFRS standards which contain some fairly complex requirements. IFRS 9, IFRS 15 and IFRS 16 will apply from 1 January 2018 but regulators will be expecting to see commentary in the 2016 financial statements that explains their impact on the reporting entity on implementation."
"The standards include several transition options and funds are going to need to determine which is most appropriate in advance of the application date," she added.
Will we see funds grow during 2017?
Justin commented: "Guernsey’s established third country relationship with the EU and ability to demonstrate equivalence to EU standards, demonstrates Guernsey’s stability in a wider climate of uncertainty for the UK which will bode well for Guernsey’s fund growth.
"However, in any time of uncertainty caution is important and hence new fund launches may be slower than normal. Guernsey has a great regulatory environment and can demonstrate the highest standards so it will be interesting to see how 2017 pans out."
Simon reiterated: "The demand for alternative funds generating attractive risk adjusted returns due to the low interest rates and hence the demand for further high quality funds to be made available."
How will property funds fair?
Jocelyn, also a property fund specialist, said: "Due to the underlying concentrated and often singular tenant strength in the commercial property sector, the pressure on commercial property valuations, following Brexit issues is likely to continue. There is potentially less impact on residential property given the tendency for wider exposure to tenants.
Justin agreed, noting: "Property funds may be in demand following interest from international investors with the currency rate devaluation meaning property is looking more attractive.
Tax Director, Mark Savage added: "Changes to development profits – with non-resident companies now paying profits on UK developments will add more pressure on the property fund market."
And private equity funds?
Simon noted: "Whilst uncertainty still exists around when the UK leaves the EU there is hope this will result in some relief from AIFMD regulation and this should make the process of raising funds more straightforward.
"Looking forward the question of location for GPs and PE funds is going to be driven by how much the GPs want to be exposed to AIFMD. Those raising most of their funds from Asia and North America rather than the EU are likely to look at the UK & Channel Islands.
"Given the greater certainty over current and future legislation I envisage that Guernsey will be well placed going forward," he said
How will regulation continue to shape the industry in 2017?
"Guernsey has a well-respected regulatory regime which will need to continue to develop and adopt best practice," said Jocelyn.
"New regulation in terms of Solvency II in respect of insurance and IORP in respect of pensions are likely to have a significant impact on the funds industry as both sectors are major investors in investment funds. The FRC has just announced a review of UK open ended funds which may result in increased regulation."
"I am interested to see what the GFSC will introduce this year following the launch of the MLP and PIF regime and to understand whether regulation around virtual currencies will be introduced in 2017," said Simon. He continued: "The first ever listing for a global bitcoin fund on the CISE this December was a fantastic development and certainly begs a question about the direction of regulation Guernsey might take.
Ronan Morrison, Manager added: "Regulation can only help Guernsey to remain competitive against European countries and our jurisdictional competitors, Dublin and Luxembourg. The GFSC has played an active role as Guernsey’s regulator in 2016 proving that regulation and accountability are living and breathing."
Richard added: "The GFSC has noted that under the PRISM risk based approach there will be more of a focus on governance and boards demonstrating robust challenge and adherence to ethical standards. As the expectations on boards continue to grow, focus on oversight, time to undertake duties, conflicts and sufficient documentation will increase."
What progress can be expected around AIFMD and Guernsey’s Third-Country Passport Status?
For Jocelyn, being granted a third country passport would place Guernsey’s funds industry into growth: "A survey conducted by the GFSC projects a 12% annual increase in the number of Guernsey fund launches along with a 21% increase in the scale of capital raised, were Guernsey to be granted a third country passport," she explained.
Mark believes that the remit to progress AIFMD passporting for Guernsey has moved away from the UK since the Brexit vote. "Guernsey is on track to progress this and the responsibility is firmly in the hands of the Channel Islands’ Brussels office. As soon as AIFMD passporting comes into place there will be an immediate advantage to Guernsey funds which will widen their access to European markets."
"The EU is going to be anxious not to set a precedent and to consider the issue of passporting holistically and across a number of jurisdictions that wish to apply," Richard added.
What changes in global, UK and Guernsey taxation should fund managers have on their radar for 2017?
"Base Erosion and Profit Shifting (BEPS) is an area for all fund managers to tune into in 2017," said Mark.
"More specifically limitations on tax advantages arising from gearing (in the UK and generally), and changes to UK property taxation which may be generally disadvantageous to international developers and investors while offering carve outs for widely held non-development funds," he added.
"BEPS and in fact AIFMD, all emphasise substance so can only benefit Guernsey’s funds industry and Guernsey is well positioned to meet the requirements with the fund structures available," said Justin.
From a risk management perspective, what areas should fund managers focus on in 2017?
Looking to 2017, Trevlyn said: "The preference for less liquid assets such as hedge funds will increase, given the higher return these offer which will be more challenging from a risk management perspective and especially from a liquidity point of view."
Ronan concluded: "The key will be to demonstrate corporate governance, management and control. For Funds, there will also be an increasing expectation around shareholder interaction and communication. Additionally cyber security should be on every board’s agenda as an area of risk management to focus on."
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