Funds: Adapting to Ever Changing Market Conditions

Guernsey’s successful fund industry has grown substantially over the last three decades. This has enabled Guernsey to establish a sophisticated infrastructure to promote the establishment of investment funds, ensuring Guernsey remains at the forefront of offshore fund centres. 

The growth of the investment funds industry in Guernsey is attributable in part to the policies of the Guernsey authorities and the diversity and flexibility of the regulatory and legal system. Growth is also attributable to the high-quality services available in Guernsey in relation to fund management, administration and custody.  The Protection of Investors (Bailiwick of Guernsey) Law, 1987 set up a modern statutory structure for the regulation and administration of collective investment schemes in Guernsey and provides a framework for investor protection whilst retaining flexibility to adapt quickly to changing market conditions.

The GFSC quarterly statistical review to 31 December 2012 reveals that the net asset values of funds under management and administration in Guernsey totals £276.8 billion, representing an annual increase of 5.8 per cent.  Within these totals there were 222 open-ended investment funds authorised in Guernsey with a value of £50.3 billion and 618 closed-ended investment funds with a value of £131 billion.  There were 274 non-Guernsey schemes, for which some aspect of management, administration or custody is carried out in Guernsey, with a value of £95.5 billion.

It is also possible to list Guernsey funds on most exchanges, including the Channel Island Stock Exchange and indeed the London Stock Exchange (LSE) markets.  A report published by Guernsey Finance as of 31 December 2012 states that Guernsey is the leading jurisdiction for company listings on the LSE and that there are considerably more Guernsey companies listed on the LSE markets than any of its close competitors.  There are a total of 122 Guernsey entities listed on the LSE markets in comparison with Jersey where there are only 86 entities, Isle of Man where there are 52 entities and the Cayman Islands where there are only 46 entities listed.

The continued success of Guernsey's fund industry relies on its ability to accommodate the demands of industry participants and also react to external factors with the aim of creating a stable and advantageous legislative and regulatory environment.  To that end, Guernsey will be making changes to and updating its legislation and what follows is a discussion of some of those developments.

Companies Law

After a period of extensive consultation, the Companies (Guernsey) Law, 2008 (the Law) is to be amended to remove problems that have arisen in practice, simplify certain procedures and provide clarity so as to maintain Guernsey's overall competitiveness. 

One proposed change welcomed by those who offer fund incubator platforms based on cells of protected cell companies (PCC) is the extension of the conversion provisions of the Law to allow conversion of a cell of a PCC into a stand-alone company. This will allow continuity for cells which reach a critical mass of investment and then spin off as a limited company.

Further, in relation to PCCs, it is proposed that the Law be amended to allow the directors of a PCC to prepare individual accounts for cells instead of consolidated accounts as currently.

Currently, all companies with a share capital are required as part of their annual validation to provide detailed information regarding the company’s shares as of 31 December of the previous year. Given that such data is not required for any States of Guernsey purpose and is only accurate for the 31 December preceding the annual validation, this requirement is being repealed, relieving funds of a costly administrative burden.

The prescriptive provisions of the Law relating to the issue of shares and the five-year authority therefore will be repealed.  Directors will have a general power to issue shares to the extent permitted by the company's Articles or by ordinary resolution.

At present there is no time limit on the recovery from members of distributions made at a time when immediately after the distribution the company did not satisfy the solvency test or made without compliance with the procedure set down by the Law.  It is proposed that a time limit of two years is introduced to provide some certainty.  It is also proposed that a ‘whitewash’ provision be introduced in respect of directors’ personal liability under this section.  This is expected to provide that no recovery from a director can be made where the company would have passed the solvency test at the time the distribution was made and would pass it at the time recovery is contemplated.  This change increases certainty for directors and shareholders whilst providing appropriate protection to creditors.

A new category of ‘small company’ is to be introduced with legislation to relax certain requirements of the Law in relation to such companies, such as the requirements relating to the content of notices of member resolutions. Small companies will be defined by reference to the number of members, so the relaxation of certain administrative procedures will be of particular relevance to funds utilising single-member special purpose vehicles to hold investments.

The draft amendments to the Law are expected towards the end of this year.  The amendments will make the Law more user friendly, maintaining Guernsey's competitive advantage in the funds sector.

Limited Liability Partnerships

For those wishing to establish a physical presence to conduct business in Guernsey, for reasons of AIFMD or otherwise, the four main structures that are currently available are: a company; a conventional partnership; a limited partnership; or a sole trader.  Guernsey is intending to introduce legislation to enable the formation of a new structure to the jurisdiction, the limited liability partnership (LLP).  The Guernsey LLP will offer the flexibility of a partnership with the advantages of some limited liability for members.  The proposed legislation has taken a while to come to fruition, first being formally proposed in March 2009 but, after industry wide consultation, the drafting is now at a stage where we can be fairly confident about the substance of the final legislation.

The key features of the proposed Guernsey LLP legislation are as follows:

1.   Members will not be liable for the negligent acts of other members unless they were party to or privy to them but will remain liable for their own negligence.

2.   An LLP can limit its liability and the liability of its members, employees and agents where it is reasonable to do so (ie, in respect of clients who are acting for purposes relating to their trade, business or profession) or fair to so (ie, in respect of clients who are acting for purposes outside their trade, business or profession).

3.   LLPs will have a separate legal personality.

4.   Unless the members elect to for an LLP to have a limited life, an LLP will exist in perpetuity with changes to its members not affecting its legal existence.

5.   Formation will be straightforward, being carried out through the Company Registry.

6.   No minimum capital contribution requirements.

7.   An LLP will need to have its registered office in Guernsey, where it must keep its constituting documents, annual validations, accounting and financial records etc.

8.   The Partnership agreement of an LLP does not need to be filed with the Companies Registry although it must be kept at the registered office and be available to the relevant authorities via the registered agent of the LLP.

9.   An LLP will have internal flexibility with the members being free to agree on how the LLP is to be managed.

10.   An LLP will have relatively low ongoing reporting requirements.  There will be no obligation to produce audited accounts, although members can choose to have them audited.  An LLP will be required to keep proper accounts that comply with generally accepted accounting standards.  An LLP will have a legal duty to keep the assets of the LLP separate from the assets of its members.

11.   An LLP will be required to file an annual validation and notify the Registrar of changes to its membership.

12.   An LLP can have an unlimited number of members who can be natural persons or other bodies corporate.

13.   All members of an LLP will be agents of the LLP and capable of binding the LLP.

14.   LLPs can be migrated to and from Guernsey.

15.   LLPs will be permitted to contract out of unfair prejudice and statutory derivative claims.

16.   The law will contain enabling powers to permit further innovations in the future.

The above features have evolved as a result of Guernsey considering LLPs in different jurisdictions so allowing the creation of an internationally competitive structure.  Those who provide professional services to investment funds now have an increased choice as to how they wish to structure their business in Guernsey.