KEITH JOHNSON, HEAD OF CUSTODY AT DEUTSCHE BANK INTERNATIONAL, EXPLAINS HOW INNOVATION AND HIGH STANDARDS ARE REINFORCING THE CHANNEL ISLANDS POSITION AS DOMICILES OF CHOICE FOR THE FUNDS INDUSTRY
The Channel Islands have worked hard to establish themselves as jurisdictions of choice for the provision of specialist funds work over the past decade. As a result, both Guernsey and Jersey are cementing their recognition as premier centres for the domiciliation, management, custody and administration of such funds.
Stemming from this success, the Channel Islands are also seeing significant growth in the demand for the custody services they offer and this is an area of business that both jurisdictions are looking to develop in the future.
The trend over recent years to identify new specialist fund vehicles, with more innovative solutions in addition to traditional fund structures, is becoming increasingly popular in both Guernsey and Jersey.
For example, both islands introduced protected and incorporated cell companies (PCCs and ICCs), which offer a range of benefits including asset segregation, cost efficiency and speed to market.
Legislation in both jurisdictions has continued to focus on enhancing flexibility and delivering a prompt approval process, in a pragmatic and risk controlled environment, geared towards the needs of sophisticated investors.
In Jersey, for example, a revolutionary new fund structure has recently been launched that could help further stimulate the market. Using ICC legislation, a template called the standard form expert fund (SFEF), allows individual investment funds to be established as separate incorporated cells. It is also possible to appoint standard legal, advisory, administrative, banking, auditing and custody functionaries for each cell – all provided by specialists, many of which are based in the Channel Islands. The SFEF is already attracting significant interest, owing to the ease and reduced costs involved in launching investment funds.
As a consequence of their respective enhancements, both jurisdictions have, in recent years, seen particular growth in the value of the alternative funds they administer.
The EU’s proposal for an Alternative Investment Fund Managers (AIFM) Directive has added to Guernsey and Jersey’s confidence in the long-term future of their funds industries too. By removing any initial uncertainty in the market created by the directive, this agreement is likely to attract new funds business to the islands this year.
At the same time, investment strategies are increasingly focusing on more diverse asset classes, such as renewable energies like carbon credits or wind farms, art and car collections and even fine wines. These often require specialist fund structures and service providers, which Guernsey and Jersey specialise in.
Managers and investors are also looking to the emerging markets for potential future growth. For example, Deutsche Bank in the Channel Islands, which has access to a global custody network of around 100 countries, is currently looking at opportunities to work with funds that will invest in South America, Eastern Europe, Africa, the Middle East and Asia.
Channel Islands fund practitioners realise that with greater innovation, flexibility and sophistication comes the responsibility of ensuring the need to focus on corporate governance that is fit for purpose and this is where Guernsey and Jersey have managed to gain a real advantage on competitor jurisdictions.
Key to this objective is the Channel Islands continued focus and support to position themselves as leading players among international fund centres, with the provision of dedicated and specialist support services, such as legal, advisory, administrative, banking, auditing and custody specialists all being resident in the Channel Islands.
In respect of custodial activity to meet the new demands of safekeeping non-traditional assets, the complexity of structures and the diversification of new “esoteric” funds makes the role of acting as a custodian much more varied, bringing its responsibilities into focus. Following the Bernard Madoff investment scandal, investors are quite rightly calling for enhanced, independent supervision to ensure that their assets are appropriately controlled and managed.
Against a backdrop of increasing global financial services regulation, particularly within the funds industry, Guernsey and Jersey have been quick to commit to implementing the highest standards of compliance and governance and ensure their regulatory frameworks are proven to be robust and fully internationally compliant.
Utilising a Channel Islands custodian, such as Deutsche Bank, can also bring a number of additional benefits. Its physical presence in both Guernsey and Jersey and expertise to recognise the subtle differences between both jurisdictions, can offer fund promoters and investors easy access to international markets, while the fast-track listing facility on the specialist Channel Islands Stock Exchange is often another real attraction.
Indeed, Deutsche Bank International was a founding member of the Channel Islands Stock Exchange (CISX) when it was first established in 1998 and its first bond listing in 1999 was a product issued by Deutsche Bank AG. Since then, the exchange has attracted more than 200 issuers, a total of more than 3,500 securities listings and has a market capitalisation of more than $50bn. More than half the listings are from outside the Channel Islands, including a significant proportion from the UK, Cayman and European finance centres, reflecting its international outlook.
What makes the CISX particularly attractive is the way in which it has developed a niche in a number of markets, particularly structured funds, which account for almost half of the listings, and property funds. Its full trading facility for closedended and open-ended investment companies has made the CISX an attractive option for funds professionals seeking listings facilities in a European time-zone, complementing the islands’ growing custody business.
The approach that Guernsey and Jersey have adopted towards developing their funds industries, with expert resident support services and infrastructure, within well regulated environments will ensure their continued affirmation as centres of excellence and domicile of choice for fund promoters