By Andrew Whittaker, Managing Director at Ipes Guernsey
The funds industries in Guernsey and Jersey are arguably in the midst of one of their most significant periods of change. A couple of recent notable external developments have had a major impact on those industries – the erroneous ‘blacklisting’ of Guernsey (and its subsequent correction); and advice from the European Securities and Markets Authority (ESMA) that the islands be recommended for third-country passports for non-EU jurisdictions under the Alternative Investment Fund Managers Directive (AIFMD).
It’s these two issues that I would like to address in this briefing.
Incorrect ‘blacklisting’ and support for Guernsey
In June, Guernsey found itself on a list of the jurisdictions that EU States most often found to be non-cooperative – something seen by many commentators as a ‘blacklist’. The reality was that Guernsey had been erroneously placed on the list – its creators had lumped Guernsey in with neighbouring Sark, and this had a negative impact on Guernsey’s status.
The listing, which came out of the blue, naturally created a great deal of concern in the island, with the States of Guernsey registering its ‘astonishment’ at the island’s inclusion. This is understandable – Guernsey risked exclusion from markets, as well as reputational damage, if the listing had held.
An association with blacklists is both very disconcerting to investors, and incredibly difficult to distance yourself from. Luckily the States had its backers when it challenged the listing. The UK government took an aggressive stance with the EU in pointing out it was wrong. The OECD also weighed in, confirming that the situation had nothing to do with Guernsey, crucially adding that the jurisdiction meets every one of its own stringent criteria on tax transparency.
The list in question still exists, but the EU has been forced to point out that it does not comprise an official sanctions list.
Still it was a high-profile story for a while, and negative press can be damaging until it is forgotten. Guernsey, however, has come out of the situation in very good shape – the net result, with both the UK government and the OECD backing the island, being that Guernsey’s cast-iron reputation has been brought even more to the fore.
In a time when adherence to the highest regulatory standards is vital for jurisdictions such as the Channel Islands, it’s worth making a further note on the importance of the support received by the OECD, and why it matters to the islands.
Guernsey and Jersey are considered tax transparent by the OECD because of their relationship with the UK, which is also a member. It’s an important status, as it distinguishes the islands from other jurisdictions.
If the UK is onshore, and jurisdictions such as the Cayman Islands and British Virgin Islands are offshore, the Channel Islands sit somewhere in the middle, as they are recognised as tax transparent by the OECD, yet still offer the financial advantages that come with offshore status. As such they could be considered ‘midshore’. This status enables funds to go via the Channel Islands to market in EU jurisdictions such as Germany, for example.
In the second key development in recent months, on 30 July the European Securities and Markets Authority (ESMA) published advice on changes to the passport regime under the AIFMD, looking at whether the passport should be extended to non-EU entities – many of whom are currently able to market funds to Europe via national private placement regimes (NPPRs).
Significantly, Jersey and Guernsey were named as the only two jurisdictions (from six that were scrutinised) to which ESMA felt it could extend the passport given how they already operate. Switzerland could become the third once it has enacted legislation that will remove any obstacles that still exist.
When ESMA introduced the passporting model in 2014, it agreed to look at what third-party jurisdictions could come into the passport in the future. It is still tidying up how different states are applying the Directive, and so for now the NPPR still exists, with fund managers still marketing that way from the Channel Islands.
But while other jurisdictions are still being reviewed, ESMA’s announcement shows that Jersey and Guernsey now offer the most likely option for a non-EU AIFMD solution that could bring with it a passport for Alternative Investment Funds (AIFs).
This is significant as it provides comfort to the marketplace that if there is a change to legislation – with private placement changing to passporting in future – they can be safe in the knowledge that the Channel Islands will be included. So, anyone who currently uses the Channel Islands to market to Europe will continue to be able to do so.
This provides certainty and a confidence that doesn’t yet extend to the likes of Switzerland, which currently carries the risk that managers won’t have permission to market their product in these markets. As for other jurisdictions, such as the Cayman Islands, for example, the rules clearly state that they don’t ‘pass muster’ to get the passport at all.
The Channel Islands have benefitted greatly from official recognition of their standards by two key authorities – ESMA’s provision for third-party passporting under the AIFMD, and the OECD backing of Guernsey’s tax transparency in the wake of its unjustified EU ‘blacklisting’ incident.
Such vindication only becomes more important as the world turns increasingly towards tax transparency and anti-money laundering measures. The Channel Islands’ reputation proves that fund managers can feel secure using them as a route to market to Europe far into the future.
Managing Director, Ipes Guernsey
T: +44 1481 735850
You can read the other articles from Ipes' Private Equity update (edition 18) at the following links: