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Jersey benefits from reputation for regulation and tax probity

Jersey has been a significant fund services jurisdiction since the 1960s, but the ground is shifting now more than at any time over the intervening decades.

Not only is the global private equity industry a wounded beast in the aftermath of the financial crisis, but Jersey – already called upon to defend its reputation to an international audience time and again – has faced uncertainty about its future attractiveness to European managers and investors as European Union leaders and legislators  wrangle over the eventual form of the proposed Alternative Investment Fund Managers directive (see page 9).

Jersey is widely regarded as having made significant progress in upholding its good name. It is currently firmly on the Organization for Economic Co-operation and Developmentís so-called ‘white list’ of jurisdictions compliant with international standards of fiscal transparency and exchange of tax information and the island has also received significant endorsements from other international oversight efforts.

David Banks (pictured), director of securities at the industry regulator, the Jersey Financial Services Commission, says: "The IMF assessment [under its offshore financial centre programme] has had a greater impact. We are right at the top of the league, and that demonstrates the strength of our system."

Jersey was also placed in the highest category by the Financial Action Task Force for its efforts to counter money laundering and terrorist financing, meeting or exceeding 44 of its 49 requirements to achieve the best result attained by any jurisdiction. Geoff Cook, chief executive of promotional body Jersey Finance, says: "We want to be known as a brand with good governance, transparency and regulation. Big international brands seek us out for this."

The island appears to have been successful in managing reputational risk. "In late 2008 and early 2009, there was an attempt to link the financial crisis to so-called tax havens," Cook says. "One or two countries got a lot of stick, but we did not because we took the view decades ago that we wanted to manage only disclosed tax assets. We have the highest anti-money laundering standards in the world and tax evasion has been a crime here since 1999. In most parts of the world, it is not a crime even now, just a civil offence."

Jersey Finance has worked for the past two years with the media and think-tanks including the Adam Smith Institute, the Centre for the Study of Financial Innovation and the Fabian Society to help diffuse the messages about how international finance really works.

"The work reached its zenith with the G20 in 2009," says Cook, who was also present at this yearís Conservative Party conference. "If politicians have written critically we will write to them and challenge them politely."

Jersey Finance has held discussions with UK politicians including Lord Wallace and Mark Field, the Conservative MP for London and Westminster.

Ironically, Jersey continues to win business from promoters attracted to its unregulated fund regime, introduced in 2007, but Banks say that in the current environment there is greater readiness to embrace the islandís regulated options.

"Unregulated sounds attractive, but post-Madoff it is in many people’s interest to be regulated," he says. "Once they consider it, they realise it is more marketable and that the Expert Fund regime is not as difficult to navigate as they may have thought."

Jersey continues to introduce new measures to enhance its attractiveness to fund promoters. A limited partnership law due to come into force at the end of this year will create new kinds of partnership with separate legal personality distinct from that of its partners, unlike traditional limited partnerships.

"We may even grab some business from Scotland with this law," says Kate Anderson, a partner at law firm Voisin. "It allows the partnership to transact in its own name and also provides tax transparency."

The innovative nature of the new regime and its newly-created separate limited partnerships and incorporated limited partnerships makes it popular as a test-bed for new funds.

Justin Partington, group commercial director of specialist private equity administrator Ipes, says: "It might be a big real estate manager looking to do private equity for the first time or a large corporation – such as a professional services firm – looking to dip its toe into fund management."

Jersey is also starting to gain traction in its quest to attract investment professionals and their firms to move to the island, a longstanding but elusive ambition for international financial centres.

"We have been successful in attracting investment managers here," says Eve Kosofsky, a partner at law firm Carey Olsen. "They are often initially attracted by the tax differential but the final decision is usually about the quality of life."

In this area the island is competing with other European jurisdictions, not least its close neighbour Guernsey. There is a perception among some in the market that Guernsey has stolen a march on Jersey, at least in terms of its image within the industry.

But Jersey is carving out its own areas of dominance, according to Partington, whose firm also has offices in Guernsey, London and Luxembourg. "

Our pipeline suggests there is a distinct level of interest in Jersey AIM-listed structures as opposed to [those in] Guernsey and Luxembourg," he says. "The main reason for this is demand for listed funds, for which Jersey has built a reputation. A Jersey listed structure responds to investors needs for greater liquidity and reporting."

For all the inter-island competition for business, there is also a strong spirit of co-operation between the Channel Islands.

"We have a very good relationship with the Guernsey Financial Services Commission, and there is no rivalry between us at all," Banks says, arguing that competition at the regulatory level could be deleterious to both camps. "We donít want there to be any possibility of regulatory arbitrage. So we meet to discuss fund applications. A fund might say if we donít agree with them they will go to Guernsey instead. But we know that Guernsey hears the same thing from funds, so we talk between us to iron these things out."

Many firms have business operations spanning the two jurisdictions.

"We operate a successful pan-island business and make an effort to share information," says Lisa Le Gresley, a director at Kleinwort Benson in Jersey. "Law firms on both islands also conduct impact analyses which are hugely beneficial in terms of sharing briefing notes and data."

With similar regulatory regimes, product offerings and service provider infrastructure, the choice between the islands can often come down to personal preference.

Says Kosofsky: "It can be as simple as a fund manager going on holiday to one of the islands as a child and having a good memory of it."

A sound reason for the Channel Islands to collaborate is to present a united front as they seek to avoid being disadvantaged by the EU’s proposed AIFM Directive. At times the various drafts of the directive have included third-country provisions that could in theory bar the Channel Islands from European business, although this now appears less likely as EU member states grapple toward a compromise.

The two governments have emphasised to European governments that they are not loosely-regulated jurisdictions that would offer dubious fund managers a back door into the EU marketplace. Jersey has opened an office in Brussels and appointed representatives to hold regular meetings with EU officials and explain the island’s position. Jersey Finance is co-ordinating with the UK and European governments, investors and trade bodies such as the European Private Equity and Venture Capital Association, and has commissioned an impact study from PricewaterhouseCoopers.

"We are confident we can meet whatever tests are established," Banks said. "However, if an equivalent route to EU standards is to be brought in, we would side with the UKís Financial Services Authority and argue that the chosen standard should be Iosco’s. The difficulty would be if the EU decides to set up its own standards and that took two to three years. The biggest fear is prolonged uncertainty. At least if we know the good or bad news, we know where we stand."

There is some evidence that the uncertainty is already hurting Jersey’s fund sector.

"There have been a lot of inquiries from across the board asking what Jersey’s position is on the directive," Banks says. "I have been told by law firms that some businesses have not proceeded with Jersey and have gone to Luxembourg instead."

Adds Le Gresley: "A significant amount of business is currently on hold. Fund managers and investors are being cautious not only on types of structure, but also on the jurisdiction of that structure and are seeking more clarity."

But other industry members are more sanguine. "More than 90 per cent of London lawyers say there has been no impact and itís business as usual," Partington says. "They have deep relationships with the Jersey law firms and there are tried and tested structures here. To move business away from here would be hasty."

In fact, Jersey may even benefit from the impact of the directive in the longer term. "There does seem to be an opportunity for custodians to pick up more mandates," Kosofsky says. "Many of these are in Dublin, but it will be cumbersome under the new regime, so they could move elsewhere and Jersey would be a prime candidate. This would lead to more recognition for the island and more work for everyone."

Click here to download the Private Equity Wire – Jersey Private Equity Services 2010 Special Report

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