We talk to ZEDRA for its insights into how the funds sectors of Guernsey and Jersey compete with European Union member state and major financial hub Luxembourg. Brexit, changing rules, and the pandemic have all had an impact.

As part of our series of articles about the Channel Islands, we talk to the head of funds for Guernsey at ZEDRA, Damien Fitzgerald. The corporate services, wealth and fund services group has been busy. In March, it bought BNP Paribas Jersey Trust Corporation. ZEDRA is one of the largest players in the space and operates in a number of jurisdictions. 

This business has a ring-side seat watching Jersey and Guernsey shape up in the competition for funds and related business with jurisdictions such as Luxembourg. Brexit continues to influence events, as has the pandemic and its impact on working life and travel. 

WealthBriefing kicked off its conversation by asking Fitzgerald where he thinks Jersey and Guernsey need to improve in order to rival Luxembourg's offering.

“We would highlight two areas: resourcing and transport links. As experienced across the globe, many jurisdictions are hampered with achieving growth plans, by finding suitable resource,” he said.

“Employees wishing to work closer to home – due to possible Covid concerns or not wishing to move to Guernsey – has decreased the workforce available to choose from. This is complicated further with housing licences and visas and has resulted in many Guernsey companies being unable to fill vacancies. Finally, many countries now support working from home, which was once a huge advantage to an island like Guernsey, in offering a better work/life balance with little time needed for commuting,” he said. 

Air routes are a problem, Fitzgerald continued. 

“Guernsey is heavily reliant on its main link to London Gatwick. But flexibility of location arrivals/destinations and flight options/timing, causes difficulties for fund managers wishing to visit the island – essential when commencing a fund and for economic substances throughout the life of the fund,” he said. 

Fitzgerald said that Jersey offers “a sound and efficient alternative” for managers who wish to access capital from professional investors within the European Union. 

“Trying to compete head-on with Luxembourg won’t pay any dividends; we think it’s best to try to operate in `blue water’ where the fit with clients works best,” he said.   

We asked Fitzgerald what sort of cost differences there are between Jersey, Guernsey and Luxembourg and what clients say about this.

“Guernsey funds are cheaper and faster to set up, compared to Luxembourg. An example would be the application fee for setting up a fund, roughly £3,500 to £4,000 ($4,630) for Guernsey and €15,000 ($15,063) for Luxembourg. In Jersey, a Jersey Private Fund “JPF” can be registered for a cost of £1,340 and registration is usually done in 48 hours at the JFSC (the regulator).  Jersey stacks up favourably in this respect,” he said.    

“For Luxembourg, the most popular fund structure is the SCSp (special limited partnership) and is similar to the equivalent partnerships in the UK and Channel Island jurisdictions,” he said. “The setup of the SCSp is fairly simple as it can be done via private deed and in many cases no regulatory approval is required (registration of the GP can be sufficient). Luxembourg is generally a more costly place to operate a fund due to AIFMD requirements.” (He referred to the Alternative Investment Fund Managers Directive that oversees the sale and management of entities such as hedge funds and private equity funds in the EU.)

There is more to the choice than simple costs. Fitzgerald pointed out that Luxembourg’s regime provides ease of marketing across the EU jurisdictions, some of which would otherwise be difficult to penetrate without the EU marketing passport – often a requirement for those investors who prefer an onshore jurisdiction regulated by the AIFMD.

“Ultimately, what is right for one fund may not be right for another depending on the fund sponsor’s specific objectives,” he said. 

Third countries 
Guernsey is not a member of the European Union and is regarded as a “third country” for the purposes of AIFMD.

Since 2013, when AIFMD came into force, Guernsey has operated a dual regulatory regime to enable the continued distribution of Guernsey-domiciled funds into both EU and non-EU countries.

Guernsey funds, and fund managers who are not distributing their funds into the EU, are outside the scope of AIFMD and are subject to Guernsey’s existing regulatory regime. Guernsey funds and fund managers who want to distribute their funds to professional investors in the UK and EU can use national private placement regimes (NPPR) to provide access to UK and European investors. 

In Jersey’s case, the picture is slightly different. The island has adopted an AIFM regime which mirrors both the AIFMD and the UK equivalent regulations. If AIFMs manage less than €500 million (closed-ended and unleveraged funds) then a streamlined approach requiring compliance only with certain aspects (notably Annual Report; Disclosures and Reporting Obligations) of AIFMD applies. 

For non-EU investors wanting to tap into the EU funds market, but who don't necessarily want to go via a UCITS funds structure, and prefer to target a small handful of markets, what sort of options do they have? 

Fitzgerald pointed out that NPPR allows non-EU alternative fund managers/non-EU alternative funds to continue to market in Europe without using the Alternative Investment Fund Manager Directive (AIFMD) passport. 

And he noted that the EU investment fund market is still predominantly a national market, which might surprise some observers. Only 3 per cent of EU AIFs are registered for sale in more than three member states, Fitzgerald said. 

“Alternatively, a non-EU alternative investment fund domiciled in Guernsey can use NPPR to distribute their funds across the UK and EU in a way which has been demonstrated to be quicker, less expensive and more flexible than the passport,” he said. 

Jersey is very similar to Guernsey in this regard, he added.

The national private placement rules of both islands are available provided that the qualifying thresholds (€500 million or €100 million, whichever is relevant) apply. Fitzgerald notes that this is subject to the usual registrations having been undertaken in the host jurisdictions and in Jersey as an AIF. 

“Once a scheme has raised capital, then it needs to only comply with the applicable elements of the local AIF codes and any periodic reporting obligations to the host countries,” he said. 

Brexit's impact
WealthBriefing asked him how Brexit has affected the islands' competitiveness compared with Luxembourg's services and what is ZEDRA's outlook on this?

“Brexit has further complicated the challenge of seeking resource into Guernsey. Equally, travel requirements with Guernsey being mainly accessed through the UK becomes an additional consideration. Further complexities arise when EU initiatives need additional consideration and costs in applying these in Guernsey (eg EU Russian sanctions, given that Guernsey is not part of the EU),” Fitzgerald replied.

“We don’t believe there has been any negative effect in the funds industry, albeit the counterfactual can never actually be known. Prior to Brexit, we were looking at a so called `passporting’ regime, but the NPPR regimes have proven to be extremely resilient and are widely used in the alternative funds market,” he said.  

“If, however, this question is with respect to the war for talent in a competitive industry in Jersey, then Brexit has had some negative impact but this also needs to be viewed alongside the impact from the pandemic and people choosing to leave the Island and return home or perhaps emigrate abroad for lifestyle reasons,” he added.