An original version of this article was by published by Funds Europe, July 2014.
By Stuart Lawson, head of regulatory change and market development
at Northern Trust in Guernsey
Asset servicing is witnessing significant and sustained change. New European fund regulation with The Alternative Investment Fund Manager Directive (AIFMD) a key example, enhanced tax reporting triggered by the United States’ Foreign Account Tax Compliance Act (FATCA), and the ongoing drive to de-risk banks are all converging in 2014.
Individually, they present fund administrators and custodians with major technology and process changes. Combined they require an unprecedented development programme. How are offshore service providers responding?
Offer a choice
By definition, offshore centres are established outside mainstream financial centres such as London or Luxembourg and so present fund managers with different options. AIFMD is a good example. Fund managers may choose to remain outside Europe and establish in a third country such as the Channel Islands or the Cayman Islands with the aim to reduce or negate the requirement to comply with European regulation. Equally, there may be good reason to establish an Alternative Investment Fund (AIF) offshore but to base the manager onshore making much of the AIFMD applicable. Some may need an offshore depositary, others may require a robust and demonstrable risk management function in-situ, whilst others may choose to “opt out” altogether.
These are bespoke solutions tailored to the specific needs of individual managers and require careful planning and targeted investment underpinned by a flexible legal and regulatory framework. Guernsey is a good example of a centre which provides a dual regime with AIFMD equivalent regulations running alongside the jurisdiction’s existing rules – an “opt in” and “opt out” choice.
Adopt best practice
It is crucial that offshore centres adopt best practice that equals or exceeds their onshore counterparts. FATCA takes effect in 2014 imposing measures to prevent the non-payment of US tax.
The United Kingdom has followed suit with similar provisions being introduced with its dependant territories, and the Organisation for Economic Co-operation and Development (OECD) will shortly impose a broad ranging common reporting standard. In response, many offshore jurisdictions are enacting their own legislation and entering into information sharing arrangements with other countries to support these initiatives.
In practice, offshore service providers will be required to revise their record keeping to include investor tax status and due diligence and provide the requisite reporting or withholding arrangements. This is not a small undertaking and will require investment in both technology and local expertise.
Adapt or decline
Arguably the offshore centres have a more complex programme of change if they are to offer managers and investors the enhanced choices afforded by their unique status and maintain the highest standards of transparency. Strategic responses include:
Invest – service providers must enhance technology and, importantly provide their employees with relevant training and experience.
Re-think – operating models may require a radical rework to embrace the new challenges and remain competitive.
Collaborate – dialogue between industry, regulators and tax authorities and within broader international groups to agree responses and workable solutions should be supported.
Many offshore centres and service providers have invested significant time and effort in responding to the unprecedented change agenda which has for many resulted in a swelling pipeline of new business, particularly in the alternative fund sector. Looking forward, the pace of change will continue to be challenging. For those agile financial centres able to adapt quickly and decisively the outlook remains positive.