Wendy Benjamin observes record growth within the funds sector and provides a legislative update across the jurisdiction’s other financial sectors.
The finance industry in Jersey in Jersey is continuing to enjoy sustained growth year on year. Statistics collated by the Jersey Financial Services Commission (JFSC) show that for the quarterly period ending 30 June, 2007:
The statistics are all the more impressive given the excellent performance of the Jersey economy over the past few years. The States of Jersey Statistics Unit annual report, Jersey in Figures 2006 , shows that the island produced an annual gross national income (GNI ) of £3.2 billion, and a GNI per capita of £36,000 in 2005, representing one of the world's highest. The indications for the year to date suggest further improvements are likely, whilst inflation remains within government targets. The Jersey Retail Price Index for the 12 months prior to September 2007 stood at 3.9 per cent.
The island's performance in recent years has been boosted by a series of regulatory and legislative measures aimed at enhancing its international reputation and competitiveness. Arguably, those measures have been most successful in the funds sector.
The remarkably successful Jersey expert funds regime was introduced over three years ago by a deft change of policy by the JFSC. The expert fund category is targeted at institutional, professional, and sophisticated investors. Investors in expert funds must fall within the definition of expert investor, which includes professional investors or any investor investing over US$100,000. Funds falling within this category benefit from a fast-track approval process and light regulatory touch from the JFSC. The success of the expert fund is reflected in its growth rates. During the 12 months prior to June 2007, the number of expert funds grew by 105 to 319, and their net asset value increased by 76.6 per cent to £38.3 billion. A related policy initiative introduced by the JFSC also facilitates fast-track regulatory approvals for Jersey fund service providers wishing to take up appointments in connection with foreign funds which are not managed out of Jersey.
Traded closed-ended funds
The presence of an Alternative Investment Market application previously meant that fast-track approvals for expert funds have not been available in Jersey due to the way previous regulatory policy operated. However, that changed in January 2007 with the introduction of a listed fund category (which recognises listings on AI M, Euronext, the London Stock Exchange, and other recognised exchanges). The flexible and fast-track approval process which has been achieved for Jersey expert funds has been adapted for listed funds.
Also, with effect from January 2007, the Authority for the Financial Markets (AFM) in The Netherlands has added Jersey to the short list of jurisdictions whose regulation is considered sufficient to allow a light regulatory touch by the Dutch regulator. As a result, Jersey domicile investment funds do not need a licence in The Netherlands to obtain a listing on Euronext.
Further fund regulation developments
The latest round of fund consultations is leading to further refinement and reform of the regulatory regime for investment funds in Jersey. The general intention is to extend the licensing regime under the financial services legislation and related codes of practice which already encompass investment business, trust company business, and insurance mediation to include a new class of fund services business. This will include investment management, investment advisory, fund administration, custody, depository, and registrar functions. Therefore, fund functionaries will cease to be regulated under the Collective Investment Funds (Jersey) Law, 1988 and will now be regulated under the Financial Services (Jersey) Law, 1998.
The collective investment funds law will remain in place as the principal source of regulation for the fund vehicles themselves. However, it is intended that the regulatory emphasis will fall upon the functionaries in Jersey, who will enjoy greater flexibility under the principle-based approach of the financial services law and related codes of practice.
New unregulated funds
A new category of unregulated funds aimed at institutional and other eligible investors investing more than an initial US$1 million will be introduced early in 2008. Provided the fund can ensure compliance with this requirement, the regulatory obligations placed upon it in Jersey should be minimal. In particular, the fund will not be required to appoint any Jersey-based service providers. When the unregulated fund category is introduced next year, Jersey will provide a European alternative to the Cayman Islands, which should be particularly attractive for hedge funds.
Channel Islands Stock Exchange (CISX)
The CISX continues to grow rapidly, with the number of listed securities growing from 982 to 1,489 in 2006. A further 400 securities have been listed in the first half of 2007 alone. According to the CISX, notable areas of growth include property funds, structured funds, and the listing of private equity debt, primarily acquisition vehicles.
Also, in the private equity context, the listing of ‘Payment In Kind’ notes remains popular as a way of mitigating withholding tax on payment of interest on shareholder debt by relying on the quoted Eurobond exemption.
Jersey’s trust law recently strengthened the protection given to Jersey trusts against attack by persons in other jurisdictions which do not recognise trusts or which have ‘forced heirship’ rules. Any questions concerning the validity, interpretation, administration, and exercise of powers of a trust, or the capacity of a settlor must be determined in accordance with Jersey law, not foreign law. Nevertheless, as a flexible alternative to trusts, Jersey foundations are expected to be introduced in 2008.
Trust law amendments
Company law changes
The Companies (Jersey) Law, 1991 had a major overhaul in 2002. The changes increased the variety of corporate vehicles available, including no-par value companies (with no set nominal value per share). They offer greater flexibility for the contribution and extraction of capital by investors. Perhaps of lesser importance was the introduction of unlimited and guarantee companies. However, a new incorporated limited partnership is also due to be introduced in 2008.
More recent company law reforms in February 2006 introduced protected cell companies (PCC) and incorporated cell companies (ICC). The Jersey PCC enhances the ring-fencing of assets and liabilities found in other jurisdictions. The ICC concept reflects the best aspects of PCCs, but is designed to overcome difficulties in jurisdictions unfamiliar with the cell company concept. Both PCCs and ICCs have proved to be popular vehicles, particularly for investments funds and other areas where the legal segregation of assets is an attractive feature.
These recent changes have contributed to a record number of live Jersey companies, now standing at over 33,500.
A package of further enhancements to Jersey’s company law expected in 2007 has been delayed slightly. These include abolishing the general prohibition on financial assistance for the acquisition of companies’ own shares, and permitting the appointment of corporate directors, provided that they are regulated under the island’s financial services law. Also, as part of the delayed package, companies will be allowed to hold treasury shares following redemptions or repurchases of their own shares. Treasury shares should prove very popular with Jersey investment funds, employee share schemes, and employee benefit trusts.
International Monetary Fund (IMF) visit
At the time of writing it is anticipated that these corporate changes will come into force in 2007 or early 2008. The short delay has arisen as the States of Jersey and the JFSC have shifted their focus to the International Monetary Fund’s visit to the island due in the second half of 2008 as part of its Offshore Financial Centre Assessment Programme. The IMF will assess the island’s regulatory framework (along with Guernsey and the Isle of Man). Preparations are well in hand for the assessment, with adjustments to primary and secondary legislation, codes of practice, and regulatory policies, including:
These regulatory changes should not adversely affect the finance industry in Jersey. A good assessment by the IMF will indeed enhance Jersey’s international standing.
In conclusion, Jersey law and regulation continues to develop rapidly to support the island’s premier position in international finance. Despite the shift in focus to preparations for the IMF visit, the island authorities remain confident for the future of the finance industry and the Jersey economy as a whole.
Wendy Benjamin, Appleby Hunter Bailhache, Jersey