Worldwide: Channel Islands Funds Quarterly Update: Q1 2019

1 Developments in the Channel Islands

1.1 Channel Islands removed from Annex II – the so called "grey list"

On 12 March 2019, EU Finance Ministers (ECOFIN) formally confirmed that Guernsey and Jersey have been removed from Annex II - the so called "grey list" - and judged to be cooperative tax jurisdictions.

Jersey's Minister for External Relations, Senator Ian Gorst, commented on the ECOFIN announcement: "Jersey has consistently maintained that we are a jurisdiction of substance, and we have worked quickly and effectively to introduce economic substance legislation, meeting a commitment made to the Code Group in November 2017. I welcome the decision today by ECOFIN to remove Jersey from Annex II, reaffirming our reputation as a cooperative and well-regulated jurisdiction that is committed to the development of new international standards in fair taxation."

Deputy Gavin St Pier, Guernsey's Chief Minister said: "I welcome this decision. I was confident that any objective process would produce this outcome.  We have consistently maintained as a matter of fact, that we are a jurisdiction of substance."

We have monitored developments relating to the new substance law very carefully. Our briefings on the topic can be accessed here for Jersey and here for Guernsey.

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1.2 New European Investment Fund Policy

The European Investment Bank (EIB) Group published its updated policy on 25 March 2019, replacing an interim approach that was in place whilst the EU Code of Conduct Group on Business Taxation undertook a comprehensive screening process to assess non-cooperative tax jurisdictions. The new policy provides some welcome clarity around Jersey's ability to continue to support the objectives of the European Investment Fund (EIF).

With ECOFIN having formally confirmed Guernsey's and Jersey's positions as cooperative jurisdictions, the new EIB policy confirms that there should be no impediment to private equity firms in Guernsey or Jersey continuing carrying out 'business as usual' with the EIF.

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1.3 Brexit and the Channel Islands

On 11 March 2019, the JFSC signed a Memorandum of Understanding (MoU) with the Financial Conduct Authority (FCA) to allow funds domiciled in Jersey to continue to market to UK investors through private placement if EU law ceases to apply (in the UK in the event of a 'no deal' Brexit or at the end of any transitional period.) The MoU gives fund managers added certainty around accessing UK investor capital through Jersey in the lead up to Brexit and post Brexit. 

The European Union (Amendment – Withdrawal Agreement) (Jersey) Regulations 2019 came into force on 13 March 2019 which makes it clear in Jersey law that if a Withdrawal Agreement is concluded between the UK and the EU, the arrangements will apply to Jersey during any transition period only in so far as they apply now (via Protocol 3 of the UK's accession treaty).

The Guernsey Financial Services Commission (the GFSC) signed a similar MoU with the FCA on 12 March 2019.

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1.4 Global Financial Innovation Network expands

The Global Financial Innovation Network (GFIN) was established last year between the GFSC and eleven other financial regulators and related organisations.  GFIN has since grown to an international group of 29 organisations, with the JFSC announcing that it had joined GFIN in 31 Janauary 2019.

GFIN offers businesses a new and practical way to work with financial regulators to scale new products, services and business models. It provides these companies with the ability to test different innovations simultaneously in multiple countries, which will give real-time insight into how a product or service might work in a particular market.

The GFSC continues to be involved in the network's leadership by sitting on the GFIN's coordination group and is one of the GFIN members participating in cross-border trials. The JFSC's membership consolidates the Channel Islands' leadership in responding to rapid technological developments with an agile and collaborative approach to regulation.

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2 Global developments impacting Channel Islands vehicles

2.1 AIC Code

The Association of Investment Companies (AIC) has published a draft revised AIC Code, which applies to accounting periods beginning on or after 1 January 2019 and is intended to enable boards to satisfy any requirements they may have in relation to the 2018 UK Corporate Governance Code. The AIC Code has been endorsed by the Financial Reporting Council and the GFSC and is supported by the JFSC.

You can read our Q&A on the new AIC Code and implications for London Stock Exchange-listed offshore companies here.

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3 Jersey Developments

3.1 Feedback on consultation on changes to Codes of Practice

On 22 March 2019, the JFSC published a feedback paper relating to its consultation on proposed amendments to the Codes of Practice (including those applicable to funds and service providers) to address regulatory concerns and to ensure compliance with international regulatory standards.

The feedback paper published by the JFSC outlines that there is appetite to commence the alignment of the Codes of Practice process and this will therefore form a separate feedback paper which will be published shortly.

Amended Codes of Practice (in the form consulted on, save for the changes described in the feedback paper) will be issued shortly and come into force on 1 June 2019. The principal changes that fund managers will need be aware of include:

  • a registered person will no longer permitted to indemnify any other person (including a principal person such as a director) from a financial penalty imposed by the JFSC under its civil penalties regime; and
  • the JFSC will generally expect to see "run off" PII cover covering a period of not less than three years where a fund service business is being wound up.

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3.2 Consultation on civil financial penalties

On 21 January 2019, the JFSC published a consultation on Civil Financial Penalties: Revised Statement of Principles and Processes. The consultation relates to proposals to revise the JFSC's Statement of Principles and Processes for civil financial penalties. The closing date for responses is 12 April 2019.

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4 Guernsey Developments

4.1 Guernsey features in new United Nations green and sustainable finance report

Guernsey is part of an international movement towards a low-carbon economic model, highlighted at a high-level conference on sustainable finance which took place in Brussels on 21 March 2019.

The conference has seen the publication of a report, Shifting Gears, by the United Nations' Financial Centres for Sustainability (FC4S) network, which seeks to stimulate action among financial centres in the development of green and sustainable finance.

Guernsey is one of 22 financial centre members of FC4S and the report highlights the process all are making.

FC4S now wants to pursue strategic action from member centres, mobilise their skill to channel capital flows to areas of greatest need, and provide a connection between decentralised action from financial centres and key international policy initiatives.

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4.2 Handbook on Countering Financial Crime and Terrorist Financing

The GFSC issued the revised Handbook on Countering Financial Crime and Terrorist Financing (the Handbook), in final form on 12 March 2019.

Publication of the Handbook follows the approval of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Amendment) Ordinance, 2018 by the State of Guernsey during December 2018.  The revisions to the rules and guidance in the Handbook, together with the revised legislation, bring the Bailiwick of Guernsey's framework for combatting money laundering and terrorist financing into line with international standards issued in 2012 by the Financial Action Task force, as well as addressing recommendations made by MONEYVAL following its mutual evaluation of Guernsey.

The rules and guidance in the Handbook were formally made by the GFSC on 1 March 2019 and will came into effect on 31 March 2019.

GFSC on 1 March 2019 and will came into effect on 31 March 2019.

Read our briefing on the handbook here.

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4.3 Discussion Paper on proposal to create a single Fiduciary Handbook and revise Pension Rules

The GFSC has recently issued a discussion paper seeking feedback on potential enhancements to the regulatory framework under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (as amended) (the Fiduciaries Law) with the objective of ensuring that the regime continues to comply with international standards, while remaining appropriate for the Guernsey market.

The discussion paper makes proposals for the revision and consolidation of elements of policy framework underlying the Fiduciaries Law, specifically:

  • the strengthening and reframing of codes of practice as a single fiduciary rulebook, in line with the Group of International Financial Centre Supervisors Standard on the Regulation of Trust and Corporate Service Providers; and
  • revision of The Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No.2) 2017 (the Pension Rules) to reflect industry feedback and consolidation of the conduct of business elements of the existing Pension Rules within the new single fiduciary rulebook, eliminating elements of duplication.

The deadline for responses to the discussion paper is 30 April 2019 and responses will be considered by the GFSC with a view to consulting on the detailed policy proposals in due course.

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4.4 Nominated Officer

The GFSC has ceased to require notice of any change to a firm's Nominated Officers from 28 February 2019.

Any person who has taken up a Nominated Officer appointment or ceased to hold such a position from 28 February 2019 is no longer required to complete an Online PQ or Online Appointment.  However, firms are reminded that they must continue to inform the Financial Intelligence Service within 14 days of any change of Nominated Officer.

This change was made in preparation for the effective date of the revisions to the Bailiwick of Guernsey's Anti-Money Laundering and Countering the Financing of Terrorism regime (see 4.2 above) and which does not require notice of such appointments to the GFSC.

All existing and active Nominated Officer appointments recorded on the GFSC's PQ Portal will be deactivated.

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4.5 Fourth quarter investment statistics 2018

The net asset value of total funds increased by £1.7 billion to £281.7 billion with the net asset value of private equity funds in the island passing £120 billion for the first time in the third quarter of 2018.

Guernsey-domiciled closed-ended funds experienced a quarterly increase of £4.2 billion, which represents an increase of £9.9 billion over the year since 31 December 2017, evidence of Guernsey's ability to continue to offer a good-value, high-quality and pragmatic service in an era when general partners are being increasingly asked to cover a greater share of launch costs.

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