Since the global financial crisis there has been a plethora
of new regulation and legislation coming down the
pipeline which, to a greater or lesser degree, is impacting
international asset management.
This includes the U.S. Foreign Account Tax Compliance
Act (FATCA), measures from Organisation of Economic
Cooperation and Development (OECD), such as the Common
Reporting Standard (CRS) and the Base Erosion and Profit
Shifting (BEPS) project, and the European Union’s Markets
in Financial Instruments Directive (MiFID) and Alternative
Investment Fund Managers Directive (AIFMD).
It was this combined amount of new regulation and
legislation which prompted Guernsey Finance to host a
technical masterclass in London this January to showcase how
Guernsey is responding positively to these developments to
ensure that it will continue to prosper as a fund domicile and
service centre in the future.
Of the new regulation and legislation, it is AIFMD which at the
moment is most directly impacting fund distribution. AIFMD
seeks to regulate EU-based Alternative Investment Fund
Managers (AIFMs), managers of EU established Alternative
Investment Funds (AIFs) and managers that market AIFs into
the EU. So, in essence, if either the manager or the fund has
a relationship with the EU then the Directive comes into play.
The initial ‘deadline’ for full legislative transposition of
AIFMD was 22 July 2013. However a report by the Alternative
Investment Management Association (AIMA), together with
EY, showed that by that date only 12 out of 31 EU and European
Economic Area (EEA) Member States had done so.1 In October
of that year, AIMA and EY published the results of a further
survey which showed the inconsistency in approach from EU
and EEA national regulators in how they were implementing
The transitional year ended on 22 July 2014 and a report from
KPMG showed that at that time only 23 of the 31 EU and EEA
Member States had implemented full legislative transposition
of AIFMD.3 Spain is one such jurisdiction which has since
transposed AIFMD into national law however others have still
not done so.
As such, even European fund managers cannot distribute funds
into some EU/EEA Member States and we have also heard that
the inconsistency of approach between national regulators
is making life difficult for those using the passport. In this
climate, it is no wonder that non-EU fund managers believe
that not only has AIFMD imposed extra cost on distributing
funds into Europe but that the inconsistency of approach
between national regulators is confusing and bureaucratic.
Feedback from an event we attended in the U.S. last year was
that AIFMD is too burdensome, with some citing it as creating
‘fortress Europe’ and therefore, they would not be distributing
funds into the EU.
The Guernsey solution
Guernsey is not in the EU (although it is in the European time
zone) and therefore, is not required to implement AIFMD.
However, with Europe still one of our biggest markets, a large
proportion of business relates to the EU in some form. Yet
we also have a substantial amount of funds business which
originates outside of Europe and does not touch the EU at all.
As such, the Island has introduced a dual regulatory regime so
that it is possible to continue to distribute Guernsey funds into
both EU and non-EU countries: the existing regime remains for
those investors and managers not requiring an AIFMD fund,
including those using EU National Private Placement (NPP)
regimes and those marketing to non-EU investors; and there is
an opt-in regime which is fully AIFMD compliant.
Guernsey’s opt-in equivalent regime which has been in place
since January 2014 is appropriate for funds requiring full
However, Guernsey’s position as a third country means our
managers and funds who want to access Europe continue
to be able to use NPP regimes. The Guernsey Financial
Services Commission (GFSC) has signed bilateral cooperation
agreements with 27 securities regulators from the EU and the
EEA, including the UK, Germany and France. These agreements
mean that Guernsey funds continue to be able to market to
How is more regulation impacting fund distribution?
1. Alternative Investment Management Association (AIMA) / EY, AIFMD – The road to implementation, 24 July 2013.
2. Alternative Investment Management Association (AIMA) / EY, AIFMD – The road to implementation, 11 October 2013.
3. KPMG, AIFMD Transposition across EU Member States, 22 July 2014.
How is more regulation impacting fund distribution?
appropriately qualified investors in these European countries
through their NPP regimes.
Many have continued to use NPP regimes due to the reduced
burden in comparison with AIFMD and they are working well.
Figures from the GFSC show that 34 Guernsey managers
promoted funds into 15 EU countries using their NPP regimes
during the transitional year for the implementation of AIFMD.
Indeed, it is understood that several Cayman Islands domiciled
funds are being migrated to Guernsey to take advantage of
the effectiveness of our route for distribution into EU countries
using NPP regimes.
NPP regimes are expected to remain until at least 2018,
while full passporting for non-EU managers is expected
from July 2015. Guernsey has been liaising extensively with
the European Securities and Markets Authority (ESMA) and
is doing its utmost to ensure that the Island is part of the
first wave of approved jurisdictions when the third country
passport comes into effect.
Feeder and parallel funds
The attraction of Guernsey for fund managers wishing to
market into Europe is that it can provide a European platform
but one which is not actually in the EU and therefore can offer
a variety of options.
For those marketing into Europe, the NPP route will likely
be favoured by many due to the depth and breadth of
requirements that fund managers will have to satisfy
under AIFMD. Indeed, it is expected that full-blown AIFMD
compliance will only be sought if there are particular reasons
to do so.
For example, it makes commercial sense for a fund manager
marketing almost exclusively to Europe to have a fully AIFMD
compliant platform. However, this does not have to be based
in a mainland European domicile and, indeed, it could be a
Guernsey platform because the Island has also introduced a
fully equivalent, opt-in AIFMD route to market.
However, managers should look carefully at whether the pan-
European passport offered is relevant to their investor base.
Many managers have increasingly geographically diverse
investors and therefore it is essential to have a platform
which suits all. European Directives – such as AIFMD but also
the Undertakings for Collective Investment in Transferable
Securities (UCITS) Directive – cater for European investors; as
such, if you do not need UCITS/AIFMD or only need limited
access to them for certain investors, then it is advisable
(and possible) to structure in a way that will greatly reduce
the compliance obligations and costs that come with those
For those managers with elements of EU and non-EU business,
the potentially onerous administration burden and costly
compliance with AIFMD will mean that parallel structures
are likely to be given serious consideration. It will be possible
to break the non-EU business away into a parallel or feeder
structure for which AIFMD compliance would neither be
required nor necessary.
Conversely, if a manager has a platform in a mainland European
domicile then it will have to comply fully with AIFMD even if
there were a large proportion of non-EU investors. European
mainland platforms do not offer the ability to separate the
reporting obligations away from non-EU investors, as with a
In addition, managers and funds with no connection to the
EU continue to be able to use Guernsey’s regulatory regime
which is completely free from the requirements associated
with AIFMD and as such, it will have significant operational
and cost benefits. For example, Investec Asset Management
recently re-domiciled a U.S.$1.2 billion fund focused solely on
non-EU investors from Ireland to Guernsey to take advantage
of our dual regime response to AIFMD.
A June 2013 survey of European asset managers by
fund software provider Multifonds showed that 77% of
respondents were considering establishing AIFs for non-EU
investors ‘offshore’ as a way to put them outside the scope of
the Directive.4 One option might be for a non-EU AIF to opt to
be self-managed and therefore a non-EU AIFM but this will be
subject to proving sufficient substance to the arrangements.
Guernsey has a huge advantage as a fund domicile in the
existing standards we already employ regarding oversight
and due to the substance which is already present in existing
Guernsey domiciled structures. There are more than 50 fund
1 October 2012 -
31 September 2013
1 October 2013 -
31 September 2014
The total number of fund approvals in
Guernsey has increased 33% during the last
4. Multifonds, The impact of AIFMD and convergence survey, 230 June 2013
How is more regulation impacting fund distribution?
managers, administrators and custodians servicing assets
valued at nearly half a trillion U.S. Dollars.
Guernsey already plays host to a number of major asset
managers, such as Apax, BC Partners, Investec, Man Group,
Mid Europa, Permira and Terra Firma which all have offices
and staff on the Island. The Island also offers a range of fund
administrators, from major international names such as Citco,
Northern Trust and State Street to boutique, independent
operations, coupled with a significant pool of qualified
Non-Executive Directors who are experienced in providing
Quality of service is evidenced by the fact that Guernsey
providers now not only administer or manage assets of
Guernsey open and closed ended funds but also U.S.$130
billion worth of assets from open-ended funds which are
domiciled in other jurisdictions, typically the Cayman Islands,
where there may be local substance challenges.5
Unlike many competitor jurisdictions, Guernsey also already
has well-established custody businesses. They are increasingly
being complemented by administrators who are setting up
depositary functions to service private equity and real estate
clients new to the requirement for a depositary under AIFMD.
However, it should be noted that those taking advantage of
NPP regimes are able to access a lighter touch regime for nonfinancial
assets compared to that which would be required
under full blown AIFMD.
AIFMD is just one piece of regulation which has come down the
pipeline and there are plenty more on their way. However, it is
extremely important for the international asset management
community and is having an impact on fund distribution.
Guernsey’s position as a third country, the Island’s dual
regulatory regime and our experience and expertise is proving
an attractive option for global fund managers. With new fund
approvals up by a third in the year to the end of September
2014 compared to the previous 12 month period (see chart), it
is clear that there is a continuing confidence in Guernsey as an
international funds centre of the future.
Dominic Wheatley is Chief Executive of Guernsey Finance,
the promotional agency for the Island’s finance industry.
Address: PO Box 655, North Plantation, St Peter Port,
Guernsey, GY1 3PN
Phone: +44 (0) 1481 720071
5. Figures from the Guernsey Financial Services Commission (GFSC) www.gfsc.gg