The legal services community in Gibraltar is looking forward to opportunities offered by legislation coming out of the EU as well as what it believes will be a flight to quality European jurisdictions in 2010.

The latest hot topic doing the rounds in Gibraltar is Islamic finance. The territory’s legal community, together with tactical support from the Financial Services Commission (FSC), is exploring the possibilities. Leading the initiative is Joey Garcia, senior associate at Isolas.

According to Garcia the territory looked at introducing a framework for Shariah compliant financial services a few years ago, but the project was dropped. Garcia is keen to get it back on the agenda, having helped recently launch a Shariah compliant property fund using the experienced investor fund (EIF) vehicle. He and others believe there is a real possibility of making Gibraltar a jurisdiction of choice for Islamic alternative investment funds.

While within the hedge fund industry Shariah compliant funds have not had much success, Garcia believes Gibraltar may be able to introduce a mechanism that could act to reassure Islamic investors that a fund was truly compliant with Shariah law.

The idea is novel. Garcia is hoping the FSC will also find the idea workable. Working with Shariah scholars, he is looking at introducing a Shariah board as an overlay to the existing EIF legislation. The idea is for the FSC to refer any products that claimed to be Shariah compatible to the “outsourced” Shariah scholars to give its approval or not.

“This board would sign off on each Shariah product and add another layer of regulatory comfort,” says Garcia. The regulatory framework still needs to be drafted and the FSC has not yet said if it would be happy with this idea, but Garcia is hopeful that Gibraltar’s fund sector will soon be able to offer a workable and acceptable way to vet Shariah alternative investment funds.

Many in the jurisdiction believe if Gibraltar can find a workable framework, it will be able to attract hedge funds as well as others eager to tap into a new investor base in Europe. With significant Muslim populations in every EU member state, Garcia believes there is a market for such products. In addition, following the financial crisis, he thinks more traditional institutional investors may also welcome the more ethical investment approach a Shariah compliant product offers, not least because of the absence of leverage and a more conservative approach in general to investment.

It remains to be seen, however, if the hedge fund community will be able to break into a market that has until now been sceptical of the ability of what are seen as “risky” alternative investments to be truly Shariah compliant.

Garcia is confident there is little to change in existing legislation to accommodate Islamic finance and thinks the territory may also be able to leverage off London’s growing importance as an Islamic financial centre to attract funds to the state.

Whatever happens, Garcia is optimistic Gibraltar will continue to attract more hedge funds. Although he acknowledges there are many flaws and uncertainties still attached to the EU’s draft alternative investment fund managers (AIFM) directive, he see potential advantages for Gibraltar. Garcia has already given presentations to Swiss clients warning of some of the negative effects the directive could have on funds and fund management companies based outside the EU.

There are risks associated with the implementation of whatever directive eventually makes it onto the statute books, warns Garcia. He thinks companies and funds based outside the EU should be perparing for worst-case scenarios.

Mark Truman-Davies, business development manager at Triay & Triay, sees opportunities for the legal profession from the EU’s other main legislation affecting the hedge fund industry, Ucits III and IV. Although the law firm is relatively new to the hedge fund sector, it has in only a couple of years grown a solid practice around the area. He believes Ucits III and IV offer substantial opportunities for Gibraltar. He reveals that Triay & Triay has some Ucits III fund launches waiting in the wings for 2010 and is gearing up to ensure it has the expertise to exploit Ucits IV. Truman-Davies is convinced that once a few Ucits funds are launched in Gibraltar the “floodgates will open”.

The Gibraltar Funds and Investment Association (Gfia) is keen to go down the Ucits IV route, says Truman-Davies. He is on the marketing committee looking at ways to promote the jurisdiction’s expertise in this area. The other two Gfia committees on technical issues and education are also looking at Ucits IV. The trade association is keen to push for early implementation of Ucits IV to ensure Gibraltar has an early-mover advantage.

Overall, Truman-Davies is in an optimistic mood. “I think over the next one to two years and up to as much as five to 10 years from now there will be a massive increase in Gibraltar’s fund industry,” he says. “I think it comes down to what we are, where we are and what we do. It’s about costs, too,” he adds. He says the jurisdiction’s use of the English language and English law is a real plus point.

At Hassans, James Lasry, current chairman of Gfia and widely credited with leading the effort to promote Gibraltar as a hedge fund jurisdiction, is equally positive. He believes the work being done by Gfia will start paying off in 2010 and beyond as more people become aware of the services offered as well as some of the advantages of the EIF vehicle. Lasry, like many, believe the move to well-regulated jurisdictions will benefit Gibraltar.

At Hassans the fund team has increased to 12 and is expected to expand further. Like Garcia and Truman-Davies, Lasry sees opportunities in both the AIFM directive and the introduction of Ucits IV.

The use by hedge funds of Ucits III to put a wrapper around existing or new hedge funds to make them attractive to institutional investors is a trend he expects to continue. Through the Gfia technical committee, he expects work to centre on finding ways to exploit the AIFM directive when it becomes law as well as ensuring Ucits IV rules are in place early.

The Gfia is also looking at modifications to the existing EIF legislation to bring it up to date and reflect changes in the industry as well as to include a wider range of product options. He believes the jurisdiction will greatly benefit from the timely introduction of updated EIF rules as well as Ucits IV provisions.

Meanwhile, Lasry is keen to keep the pressure up on promoting the Gibraltar. The Gfia was present at a few major industry events in 2009 and plans to continue to market itself actively in 2010. He, like many others in legal services, believes the more people know about the options available in Gibraltar for hedge funds, the more actual business the territory will attract.