Jersey is on track in tackling the need to enhance its regulatory framework to help encourage further growth in the funds sector, particularly as it has moved away from retail towards the institutional end of the market
Jersey has been home to a funds industry for more than 30 years and by the end of December 2002, the sector was valued at £105bn. Jersey has built its success on its infrastructure, containing a highly-skilled network of bankers, accountants, lawyers and administrators. They have many years' experience and the specialist skills necessary to create the innovative structures that appeal to City of London-based financial institutions and their advisers.
Jersey's financial services industry is concentrated in a small area and the inter-relationship between the administrators, accountants and bankers has been an important feature in the long-term success of the island. Jersey enjoys political and economic stability, a flexible legislative environment and offers an attractive tax treatment when applied to various investment structures.
keeping the pace
However, the competitive nature of the global offshore industry ensures there is no opportunity to rest on past successes in this sector and the island must remain innovative and responsive to clients' changing needs. Some parts of its regulatory regime, which were formulated more than 20 years ago, need updating to reflect current market conditions, particularly as Jersey's funds business has moved away from the retail sector towards the institutional end of the market.
Close consultation has taken place between representatives from the fund management industry and the island's regulator, the Jersey Financial Services Commission, with a view to introducing a series of new fund classifications. These new categories will help streamline the approval process for certain fund classifications, thus widening the appeal of the jurisdiction to more professionals.
Without sacrificing the quality of its regulatory regime, Jersey will look to provide a flexible framework in which to provide special purpose fund entities that suit particular investment objectives. It is the belief of the industry in Jersey at the moment that some professionals with international business to place are looking elsewhere when choosing a jurisdiction for funds vehicles. One objective of the new regulations will be to make Jersey a more appealing destination for that type of quality, sophisticated funds business.
Changes may be made this summer to the policies which govern the authorisation of business and regulation of functionaries. Initial enhancements will focus on expert and institutional fund business, including hedge funds. In addition, the Collective Investment Funds (Jersey) Law 1988 will be incorporated into the Financial Services (Jersey) Law 1998 in 2004.
Policy changes should see a shift in emphasis away from a concentration on promoters of expert funds, to ensuring better regulation of functionaries. The rules governing promoters will be changed to provide clear and pragmatic criteria for those seeking to conduct business in the island. A definition of an expert investor will be agreed, which is likely to require a certain level of wealth or a certain level of expertise. A further key change will be from prescriptive investment criteria to accepting full disclosure of risk.
Jersey will have four fund classifications:
• A1 ' Recognised Retail Funds.
• A2 ' Unclassified Retail Funds.
• B ' Unclassified Expert Funds.
• C ' Control of Borrowing Order Funds.
The new classifications will make the process clearer for the promoters and the time taken to process applications should, in most cases, be reduced to a few days. This will be facilitated by a newly-proposed functionary/lawyer certification process. Jersey has the skill base to substantially expand both the capacity and number of administrators as business levels increase. The proposed changes will further assist institutions looking to create offshore domiciled hedge funds and private equity funds.
Similar developments have taken place in the legislative field to encourage new business to the island. Traditional company formation has always been an important service provided through professionals in the island, but with the introduction of a series of law amendments in 2002, the type and scope of companies that can be established in Jersey has been extended. It is also possible to re-domicile companies from other jurisdictions into Jersey, subject to the usual regulatory approvals.
These innovative new features provide company owners and their advisers with greater diversity when planning their financial affairs. One feature of the finance industry, which is reflected in the funds sector itself, is the remarkable breadth and depth to the services available to corporate clients. The island continues to cater for the whole spectrum of funds business, from the retail market to complex fund structures for institutional clients as part of a thriving and diverse fund administration sector.
The island has enjoyed spectacular growth in some of the corporate sectors of the financial services industry, taking advantage of the popular trust structure, a vehicle that supports a range of investment objectives. It has been used, for example, to create employee share ownership plans and there are several law firms and trust companies in the island administering global employee benefit schemes for major international companies. It is estimated Jersey administers the employee share schemes for about 75% of companies in the FTSE 100.
The island has become one of the major centres in Western Europe for the establishment and administration of asset backed securitisation schemes. Many high-profile securitisation schemes have been established in Jersey, supported by excellent legal, accounting, and administration services. The first schemes were established 10 years ago and today there are more than 200 securitisations based in Jersey, established by major institutions for wide ranging investment purposes.
There is often speculation in the media on the future direction of offshore business and frequently a commentator will imply that funds business will be badly affected by this or that measure announced by the authorities in the UK or in Europe.
For example, when a new policy measure is introduced by the Inland Revenue which impacts the offshore funds industry, there is a tendency to assume such measures will have far-reaching implications on offshore jurisdictions.
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