Christopher Anderson, Partner, Bedell Cristin,Guernsey
Christopher Anderson reports on how the shift of regulative responsibility, has moved from The Financial Services Commission to the fund administrators themselves.
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Spend any amount of time around compliance people and you will hear them talk about the importance of ‘embedding a culture of compliance’ into the business of an organisation. The idea is that effective compliance is not something you bolt on to the end of the business process. Rather, each step in the business process should be conducted in a compliant manner. In an organisation with a developed compliance function, the role of the compliance department is not to second-guess every business decision to check it is compliant. Rather, compliance becomes part of ‘the way we do things around here’, that is, the culture of the organisation.
Guernsey plc's own compliance department – the Guernsey Financial Services Commission – is adopting a similar approach in its approach to investment business regulation.
Until recently, one of the most time-consuming aspects of the job of the investment division of the Commission was to assess the fitness and propriety of new fund promoters who wished to establish a fund in Guernsey and to review and approve that fund's constitutive documents. The fact that the process could take four weeks or longer imposed a hard time constraint that Guernsey promoters had to build into their launch timetables and was a severe drag on the resources of the Commission.
The huge increase in funds business in Guernsey in the last five years or so has been well documented. That increase in volume of business coupled with the ever-increasing international obligations of financial regulators created more work than ever for the Commission's staff. Something had to give.
The first change was in 2005 which saw the introduction of the qualifying investor fund – a fast track fund approval process which promised regulatory approval for certain classes of fund in just three days.
That process was available to both open and closed-ended funds provided the fund was marketed only to professional, sophisticated or knowledgeable investors. Under this process, the responsibility for conducting due diligence on the promoter of the fund and for checking the constitutional documents is the job of the local administration company, not the Commission. Those administrators must conduct all the checks that the Commission would have done under the old process and then warrant to the Commission that they have done so. Where those checks are subsequently shown to be inadequate, the Commission will raise the matter with the licensed administrator. Although serious breaches can affect the licensing position of that particular administrator, they should not, in the ordinary course, have any affect on the approval granted to that fund.
In February 2007, the Commission introduced the registered fund approval process which also offers a three-day turnaround for fund approval. Unlike the qualifying investor fund, the registered fund process is not restricted to any particular class of investors. However, at present it is only available to closed-ended funds.
These changes were broadly welcomed in Guernsey and elsewhere. However, it was noted that the changes were not as helpful as they might be to certain key participants in Guernsey's fund industry and private equity funds.
A private equity fund is invariably established as a limited partnership. Under Guernsey regulation the general partner of a limited partnership that is a fund must obtain an investment business licence. Obtaining that licence can take up to four weeks for a new promoter which means that the fact that the regulatory approval for the fund can be obtained in three days does not in fact reduce the overall regulatory time frame for a new private equity fund.
With this particular issue in mind, in September 2008, the Commission introduced a fast track process for obtaining an investment business licence. Under the new process an application will be considered by the Commission and the licence granted in 10 working days. The process is only available to proposed licensees who wish to provide services to registered funds or qualifying investor funds. Again, the Commission relies on the local administrator to conduct the necessary checks and to warrant that it has done so.
Finally, the registered fund process (which is currently only available to closed-ended funds) will be extended to open-ended funds by the end of 2008.
Although promoters may still utilise the traditional fund approval process whereby information on the promoter and the fund's constitution are reviewed by the Commission's staff, the recent developments are clearly intended to encourage administrators to take on this responsibility themselves. The aim is to embed a culture of compliance into the fabric of Guernsey's fund administration business.
These fast track processes are, on paper, great news for investment managers. However, the three-day period only applies to the Commission approval process. Whether this will translate into a faster fund establishment process overall depends upon the efficiency of all of the parties responsible for creating the fund structures and, in particular, how quickly the administrator can conduct the necessary due diligence on the fund promoter.
Accordingly, the weight of regulatory responsibility now rests firmly on the shoulders of the fund administrator (and to a lesser extent the other advisors) and not on the Commission. Therefore the choice of fund administrator becomes crucial. How the fund administrators react to the opportunities and challenges this new responsibility presents will be important in determining Guernsey’s position as a global funds centre over the coming years.
About the Author
Christopher Anderson, Partner, Bedell Cristin,Guernsey