Bob Reynolds is consultant editor of Offshore Red.
There are all manner of financial instruments in full-service jurisdictions offering business families strategic avenues towards managing their wealth. So what makes Jersey so special? asks Bob Reynolds
The years since 2000 have been transitional for many of the leading offshore jurisdictions. The weight of international regulation and a fiercely competitive market has forced jurisdictions to be original and flexible in their thinking.
Many of the players in the offshore market which have chosen to compete as full service players have needed to invest heavily in people and technology resources. In the last 10 years, the 50 or so offshore centres have shrunk and only perhaps 10–15 are genuine top drawer players now. And some of those exist purely as niche players.
At the top of the pile are Jersey, Guernsey, the Isle of Man, Bermuda, Hong Kong, Singapore and Cayman. The Bahamas, the British Virgin Islands and Gibraltar are also distinctive contributors to the mix.
A familiar question of second tier centres when considering new product or regulation is: What is Jersey doing? Jersey enjoys the reputation as the leading jurisdiction in its field. Guernsey and the Isle of Man might both question this and rightly point to their specialisms. Guernsey is the top European insurance centre and was first in the field with its zero–ten corporate tax proposals.
But it has not been easy going for Jersey. Its relationship with the UK government has been exceptionally frosty at times especially over the recently delayed European savings tax directive. The island had robustly pointed out the inequity of the directive which forced island centres to compete at a disadvantage to Switzerland.
The States of Jersey recently passed its proposals for zero-rated corporate tax. This means that all companies – domestic and international – will pay 0% corporation tax. "This means that in effect it is business as usual for international clients operating exempt companies. But Jersey had to adopt the zero–ten proposal to remain competitive in world markets," says Beverley Le Cuirot, marketing and communications director of Jersey Finance.
Jersey will levy 10% corporation tax on finance companies, but it has also been obliged to increase other tax and explore a range of options including the possibility of a sales tax.
Jersey has been making a bid for the family office market. Family offices find the island attractive for a range of reasons. It has a highly developed private banking sector, a well-structured and recently expanded funds sector and significant numbers of top tier professional services advisers.
Traditional offshore company formation remains an important part of Jersey's business offered through firms in Jersey and the finance sector has aimed to make the jurisdiction more attractive to professionals seeking to establish such companies here.
Companies can be redomiciled both in and out of Jersey and par value, no par value and guarantee companies are all permitted under law amendments introduced in recent years, providing a number of innovative features for company owners and their advisers when planning their financial affairs.
For funds formed as companies, there have been three important amendments in the island's legal environment helping to make company vehicles for funds more attractive:
- Under company law amendments, provided an investor can satisfy the statutory solvency tests, they can avoid the maintenance of capital provisions if the company formed has no par value shares or alternatively if it is an expert or public fund. It is an important characteristic which provides for a much more flexible company vehicle.
- The introduction of statutory merger provisions has made it far easier to merge two fund companies together, and
- The introduction of statutory continuation provisions permits fund companies to transfer from a foreign jurisdiction to Jersey should there be legal, tax or regulatory advantages in doing so.
A key reason why family offices either locate in or do significant business with Jersey is the scope of the funds industry in the island. The funds sector is a sizeable part of Jersey's finance industry. It is valued at nearly US$175bn, an indication that this business has not grown overnight. In fact Jersey has been a prominent player in delivering fund services since the 1960s.
The banking and trust industries may have enjoyed a greater share of the limelight but the funds sector is, perhaps, the best kept secret of Jersey's finance industry.
The industry began its serious ascent in the mid-1960s when fund groups set up in Jersey when there were significant tax benefits. The first unit trust to invest in UK equities was the M and G Island Fund set up in 1965. Unit trusts from major UK groups including Hambros, Britannia and Save and Prosper were all established in the late 1960s and early 1970s and, by the boom period in the 1980s, groups such as Fidelity, Invesco and Gartmore also developed significant business in the island.
Wealth and innovation
Retail funds were particularly popular in the early days and were widely used by UK expatriates and other international investors. The centre became a test bed for innovative funds which were allowed to invest in a much wider range of assets than their onshore cousins – an advantage that continues to apply. Jersey was one of the first centres in Europe to establish the umbrella fund concept with the ability to switch easily between different classes or sub funds, for example.
The growth of retail funds eased as funds established under the UCITS directive flourished in EU financial centres. However, there are still retail funds based in Jersey and some of them have been approved on a fund by fund basis for sale in EU member countries as they meet stringent requirements laid down by UK regulators for sale there.
Alternative investments have become increasingly popular as a way of reducing the volatility in investment markets and Jersey has attracted a significant number of venture capital, private equity, mezzanine, real estate, hedge funds and even art collection funds.
The introduction of a streamlined regulatory regime for expert funds in 2004 has boosted the industry further, giving lawyers, accountants and specialist boutique administrators a regulatory environment in which they are far more likely to attract alternative investment strategy funds. The Expert Funds Guide, introduced by the regulator, the Jersey Financial Services Commission (JFSC) following extensive consultation with the industry, ensures the Island can compete more effectively for hedge fund, private equity and other specialist funds business alongside other comparable centres such as Cayman and Dublin.
The launch of expert funds allowed Jersey to compete at the highest level while at the same time broadening out its package of fund-based products.
Compliance with international regulation has been cleverly turned from a burden to a major commercial asset. "Compliance is of great importance for us as an international centre," says Colin Powell, chairman of the Jersey Financial Services Commission. "It means that the island is well-respected in the international community of regulators and law enforcement agencies. Increasingly, it is what financial institutions of stature are looking for when they choose a business location."
To boost the range of fund services available, the centre recently launched non-Jersey domiciled funds. This makes it possible for Jersey functionaries to act for non-Jersey funds, provided the fund is similar to a Jersey Expert Fund and recognised as UCITS equivalent funds. Fund promoters will have greater choice and can, if they wish, domicile their expert fund elsewhere but still take advantage of the administration or custody skills that are prevalent in Jersey.
Phil Austin, chief executive of Jersey Finance, says: "The Expert Funds regime ignores the number of investors involved, but rather concentrates on who those investors are. Although there is no change in the law, less stringent requirements and a fast-track approach can be taken for funds where it can be shown that investors can evaluate the risks involved in investing in the fund and can bear the economic consequences of losing the entire investment.
"There are a number of advantages that make the process of setting up a fund in the island less of an administrative burden and less costly. Organisations promoting expert funds will have to meet less stringent requirements than those promoting public funds, and only one functionary will be required in Jersey, such as a Jersey administrator or manager. There is also no need for a Jersey custodian for closed ended and hedge funds and there are no investment restrictions except on very highly geared funds.
"Another advantage is the auditing requirements. Under the new regime, the auditor does not have to be appointed in Jersey, provided the appointed professional meets the requirements of Jersey's company law. Since many financial institutions and international firms have preferred auditors that handle work on a Group wide global basis, this has a distinct advantage for the Island. There are some jurisdictions, for example, that have introduced offshore auditing requirements or offshore manager sign off on audited accounts which creates an additional burden on clients without adding further substantive protection for the funds," he says.
One of the great recent success stories for Jersey is the Channel Islands Stock Exchange. CISX was established in 1998. It is widely regarded as a successful innovation and has been seen as the template for similar ventures in offshore centres.
Apart from traditional equities and investment funds, more than 400 securities with a total market capitalisation of $17bn are listed on the exchange, including complex debt and securities instruments.
The listing rules were designed to be easily understood while meeting international standards. These are product specific chapters each setting out conditions for listing, the application process, document requirements and continuing obligations. The Market Authority is receptive to innovative product structures and CISX offers flexibility in a range of areas including choice of settlement and paying agents.
The CISX Market Authority meets daily to consider listing applications, a particular advantage for issuers working to tight deadlines. The Authority is responsive to client needs and in one recent example granted a listing to a Jersey law firm within 48 hours.
Securities listed involve every type of legal structure including limited partnerships, unit trusts and protected cell companies and a wide variety of investment vehicles including feeder funds, property funds and fund of funds.
Members who sponsor listing applications include banks, fund managers and administrators, trust companies and law and accountancy firms. The unique membership structure means it may prove cost effective to select a sponsor already providing other professional services to an issuer.