While Gibraltar has been particularly successful in attracting eGaming and insurance business, the funds industry has not grown at the same speed.
This is partly due to the constraints of having to comply with EU regulation, specifically the Alternative Investment Fund Managers Directive (AIFMD) introduced in 2013.
The AIFMD is a wide-ranging piece of regulation that applies to all funds in the EU. While some jurisdictions such as Luxembourg and Ireland have done well since its introduction, Gibraltar’s less mainstream funds industry has found it hard to compete and has seen a 31 per cent fall in EIFs over the past three years.
As a result Gibraltar has found itself with a funds sector that is made up principally of small, self-managed funds which are exempt from AIFMD regulation under de minimus rules.
While there is little risk to these funds leaving Gibraltar after an EU exit, as seems most likely, it is clearly a self-limiting market. So what opportunities exist post Brexit for Gibraltar to look at another model for its funds industry?
Bearing in mind the majority of investment business globally already takes place outside the EU, it would appear there is huge potential for Gibraltar to position itself as a jurisdiction of excellence in the international market once it is freed from automatic compliance to EU regulation and the demands of AIFMD.
Provided it could construct competitive products and harness its reputation for professional excellence in marketing those products, there is no reason why Gibraltar could not compete with top non-EU jurisdictions around the world such as Cayman Islands, British Virgin Islands and the Channel Islands. In fact Gibraltar boasts other characteristics such as a European time zone and strong relationship with London and the UK (the UK is currently Gibraltar’s biggest market and will, of course, also fall outside of the EU post-Brexit), that could put it in a stronger position than some other international finance centres.
Key to any such growth in non-EU business would be the need to attract more licensed fund managers rather than the smaller self-managed funds. This would require Gibraltar to review and improve its current offering to match or exceed those of other non-EU jurisdictions. Its present private funds and EIF products, could be updated to fit the requirements of non-EU markets and offer more scope to meet a wider range of investment needs.
Gibraltar’s responsive financial services regulator, supportive Government, and its ability to be nimble from a regulatory point of view are strengths in this regard – as is its location and lifestyle, which could be an attractive choice for fund managers who don't want to stray too far from European shores.
Of course Gibraltar need not turn its back entirely on the EU. At this point in negotiations, it is difficult to say, with any accuracy, exactly what relationship the UK and therefore Gibraltar, will have with the EU post-Brexit. But even if all trade ties are broken, the EU and its member states would still form an important market for the jurisdiction, which is inescapably part of the European continent.
By maintaining AIFMD-compliant products, in addition to a new regulatory framework, through the private placement regime, for operation outside of the constraint of EU law, Gibraltar would be able to keep its existing funds and give its providers access to individual EU member states that require EU-compliance products for their residents. In effect Gibraltar would have the chance – and the need - to introduce a dual-regime capable of servicing both EU and non-EU business after Brexit. The best of both worlds, one might say.
The difficulty for Gibraltar is in anticipating the final outcome of Brexit negotiations and the length of any transition time afterwards. While it remains a member of the EU, it must provide EU-compliant products but it needs to be ready to take advantage of any change to this as soon as possible.
With the earliest timetabled date of the UK and its territories leaving the EU set for March 2019, there is much for the funds industry and Government of Gibraltar to do to plan the opportunities ahead. There is also much to be gained if the jurisdiction can seize the potential from what looks like a game-changing opportunity.
Managing Director, Audit Partner
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