Jersey Finance, the Jersey Financial Services Commission together with the industry and Jersey Funds Association are continuing to explore changes and modifications to the hedge fund regime.

Jersey has come through the financial crisis in a stronger position. Despite the many hurdles facing the island state, most are optimistic about the future.

“The last 18 months have been very turbulent. But we’ve come through well. We’re not complacent, but we believe the wider view is that our reputation as an international financial centre is now stronger than pre-crisis,” declares Geoff Cook, chief executive of promotional body Jersey Finance.

The jurisdiction’s policy of paying close attention to international policy trends and trying to be ahead of the curve on regulatory initiatives has been shown to be a wise one. Cook proudly points to the fact that Jersey is top of the International Monetary Fund (IMF) list of countries compliant with its rating of current compliance with the financial action task force recommendations. Out of a possible 49, Jersey scored the highest with 44, followed by Singapore at 43 and the Cayman Islands in third place with 38.

The IMF review of Jersey in 2008 also showed the jurisdiction had taken on board all of the recommendations made during the previous review. The influential group found the state’s regulatory and super-visory regime to have improved on all of its past recommendations and in many cases to have surpassed expectations, particularly on -corporate governance.

Cook is proud of these facts as well as of Jersey topping the league table of offshore centres in the March 2010 Global Financial Centres Index (GFCI) report (GFCI 7).

Cook has also used the crisis as a way to explain exactly what Jersey does and why it is important to global economics and in particular the flow of capital in and out of Europe, mainly through London.

“A byproduct of the crisis has been the education about Jersey’s position as a top international financial centre. We have three number ones. This is recognition of our expertise, depth and governance. We are in a good shape to reap the commercial dividends and we are already seeing this. The first quarter 2010 figures showed the number of funds domiciled rose from 1,294 to 1,320, with 26 new funds in the first quarter alone – a significant rise on the last quarter of 2009,” he says.

“Things were not very good in 2008-09 but we started to see an increase in confidence in the last quarter of 2009 and now net asset valuation under administration is up by £14.4 billion to $180 billion in the first quarter of this year. That’s an 86% rise in one quarter,” notes Cook.

The continued success of Jersey is not just in the funds sector. Cook points to significant increases in bank deposits and company incorporations, stating these are the highest figures since mid-2008. “Am I tempting fate? Well the fourth quarter of 2009 was one of our best,” he notes, adding that there have been a significant rise in the number of new funds enquiries in the first quarter – more than in all of 2009.

This rosy picture, however, has one big dark cloud hanging over it: the European Union’s alternative investment fund managers (AIFM) directive. The uncertainty of just what will happen with this legislation and how it will impact third countries is, many believe, damaging to the development of the hedge funds industry in Europe. While Cook believes Jersey is well-placed to meet any equivalency standards the EU may throw out, there is no denying the lack of clarity around the potential rules regarding third countries is holding back some hedge fund launches and making many management companies consider more closely where to domicile any new funds.

Martin De Forest-Brown, director of international finance in the Chief Minister’s department, is under no illusion as to how seriously the AIFM directive should be taken. The fact that Jersey is considered well regulated and transparent as well as meeting any international criteria on such things as the exchange of tax information may not be enough for the EU. He and others worry the EU may not apply criteria objectively, although there are signs of a growing understanding in Brussels and the European parliament of the role Jersey plays in -international finance.

The AIFM directive will also be testing the state’s relationship with the UK. As a crown dependency, Jersey should enjoy the support of the UK. This failed to materialise under former prime minister Gordon Brown when the offshore centres were attacked as tax havens. Instead of defending the territories, Brown joined the US and others in castigating offshore centres such as Jersey. This lack of defence was one of the reasons Jersey and other crown dependencies such as Guernsey and Cayman began an effective programme of lobbying major groups such as the EU to ensure the facts and truth were made known.

Like many De Forest-Brown is concerned about how the EU may implement any third country criteria linked to the sale and distribution of hedge funds and other alterative products within the union. He is also worried about the impact on London. As the largest financial centre not only in Europe but globally, anything that harms London’s standing has a knock-on effect on Jersey.

“This is a much bigger issue for us. This [AIFM] will be the real acid test,” he says. If Jersey and the other offshore centres like Guernsey and the Isle of Man are blocked out of the EU, it could “kill our industry”. Despite these concerns, De Forest-Brown, like Cook, believes some progress has been made in getting the Brussels machinery to acknowledge the high standards imposed in Jersey.

“We have been working increasingly hand-in-hand with Guernsey. We have a clear mutual interest in working together. We’ve had similar meetings on AIFM with Brussels. We have explained we are both well regulated and transparent, following principles consistent with international criteria,” notes De Forest-Brown.

He is concerned any process of implementing the directive is objective. “It will be interesting to see how the EU implements the directive and any equivalency or other requirements for third countries. How it is done could cause unintended consequences,” he warns. The US and Asia could become the nexus of the hedge fund and alternatives industry with Europe more or less sidelined.

“We are keen to boost alternatives in general and the hedge funds industry,” he reports. “The nature of the beast is that hedge funds tend to prefer a community of hedge funds. They think in terms of big centres, like London or Switzerland,” he adds.

Richard Thomas, chairman of the Jersey Funds Association (JFA) as well as a partner at law firm Ogier, is keen to ensure Jersey is well-positioned to exploit any opportunities a changed environment could throw up post-AIFM. “We want to be able to offer funds to EU investors and facilities offerings from EU partners and investors within and outside the EU,” he says.

He expects no matter what criteria the EU imposes that it will to some extent be compliant with global requirements. While EU rules may be more complex and difficult for hedge funds and alternatives, he is confident Jersey will be able to meet any criteria. “Jersey,” he says, “provides services on a fiscally neutral basis. This is not damaging.”

He believes such services improve market access and thinks the lobbying effort by Jersey has actually helped politicians and civil servants in the EU to understand better the functions of international financial centres like Jersey.

David Banks, director of securities at the Jersey Financial Services Commission (JFSC) simply believes it is too early to try to second-guess Brussels. “Crucial aspects of the directive have not yet been decided. The debate needs to continue. We will continue to liaise with industry and Jersey Finance but we will wait to see what happens. We are confident we will be able to match any equivalency criteria set by the EU. If, however, the delay for third countries is two years or longer, that would be a concern. We can act only on certainty,” he comments, admitting the uncertainty is frustrating. “We are monitoring the situation carefully and will react in a proportionate way [once the legislation is passed],” he confirms.

He like others is confident about the existing rules and supervision of the funds sector. “We have our recognised fund regime rules that are approved by the UK Financial Services Authority to market into the UK and Commonwealth countries,” notes Bank. He says existing rules based on Ucits II will be upgraded to Ucits III this year.

In general any major changes to Jersey’s hedge fund rules are likely to be on hold for a little while. The annual ‘chief executive’s letter’ he sends to all persons registered to conduct fund services business in Jersey outlines most of the JFSC’s plans, he says.

The letter emphasises the “practical measures” needed by industry to demonstrate compliance with the fund services business codes of practice as well as identify areas where guidance or clarification might be needed.

For 2010 more on-site examinations are planned. Continued emphasis on the “importance of independent valuations of fund assets as well as the fair treatment of investors, no least in connection with fund suspensions” remains high on the list, according to Banks.

Three other issues were highlighted in 2009 and will continue to be on the JFSC’s agenda. The first relates to the collective investment funds (CIFs) rules relating to securitisation and repackaging special purpose vehicles that were considered outside the scope of the order. Another issue concerns the concession available regarding the codes of practice where a managed entity is an expert fund or “materially equivalent expert” fund.

Interestingly the third issue concerns the use of insurance ‘wrappers’ or similar products used by Jersey funds as -underlying investments.

For 2010 the major objectives concern the proposal by the International Organization of Securities Commissions (Iosco) to update its objectives and principles of securities regulation. This, wrote Banks, is a “cornerstone of international securities regulation and is generally regarded as the benchmark by which compliance with international standards is measured”. Iosco has amended its objectives and principles and has now included hedge funds as well as tightening key principles applied to funds in general.

Banks believes Jersey is ready to implement any changes as a result but is concerned that international rules do not conflict with expected rules from the EU. As a result the updating of the CIF rules has been delayed although Banks is confident work on this will continue.

While the funds codes has been finalised, he is delaying publication and implementation while Jersey awaits the outcome of the EU rules as well as the impact Iosco principles and objectives may have on the code.

On outsourcing Banks confirmed the JFSC has set up a working party to review policy and recommend changes. Changes are expected some time this year. Amendments to the anti-money laundering handbook, the draft fund services business client assets order and the non-domiciled fund guide are also expected this year as well as a guide to closed-ended CIFs to complement the existing open-ended CIF guide.

Finally, Banks wants to see more progress made on electronic reporting. He expects some reporting aspects to be fully online by the third quarter of this year. “This will assist our ability to provide Iosco with data,” confirms Banks. He also believes the development of final accounting as well as data retrieval and processing will make the collection and analysis of data faster and more relevant. He expects to review requirements to fit in with any data Iosco may be requesting.

Overall, Jersey is continuing to take its international responsibilities seriously as well as to increase and tighten its own supervision and oversight of both funds and service providers. Banks, together with others, believes this will continue to help Jersey be regarded by investors as well as fund managers as a jurisdiction that applies a proportionate and appropriate level of regulation to the -alternatives industry.

Jersey achieves good ratings review

Jersey increased its small lead over Guernsey in the March 2010 Global Financial Centres Index (GFCI) report, commissioned and published by the City of London from Z/Yen Group. It examines the major financial centres globally in terms of competitiveness, using a set of ratings and rankings.

The index measures competitiveness and takes into account a range of factors such as reputation and business climate, infrastructure, skills available and the tax regime.

The two centres were ranked just four places apart by the GFCI. Jersey is ahead of Guernsey in nine of the 10 sub-indices. Guernsey is rated just ahead of Jersey in the professional services sub-index.

There continues to be a strong correlation between GFCI ratings and the OECD status: the offshore centres which are on the OECD ‘white list’, such as the Channel Islands, have higher GFCI ratings, whereas centres on the OECD ‘grey list’ are well below the white--listed centres.

The International Monetary Fund (IMF) review in 2008 reaffirmed a number of features of Jersey’s regulatory and supervisory regime. It referred to Jersey as one of the pioneers of the tax information exchange agreements (TIEAs). It said financial institutions and trust company businesses in Jersey are well supervised to counter terrorist financing and money laundering and that the finance industry has continued to maintain open and co-operative relationships with regulatory authorities overseas. When compared with any other financial jurisdiction, Jersey’s finance industry standards rank at the highest level.

An independent review of the British offshore financial centres (known as the Foot report and conducted for the UK treasury) concluded that Jersey had performed well in managing the effects of the global downturn. It had implemented the latest international standards for regulation and -information exchange.

The review also highlighted Jersey’s financial contribution to the UK indicating that in the second quarter of 2009 alone through its deposit taking activity Jersey provided around $218.3 billion to UK banks.

Jersey is one of only seven jurisdictions complying with 15 of the 16 financial action taskforce (FATF) key recommendations. Jersey is also the only jurisdiction that has been assessed as compliant with 44 of the general FATF recommendations, closely followed by Singapore (43) and the US (43).

The OECD set up a body to assess how effectively the international standards of transparency and exchange of information for tax purposes are being implemented by individual jurisdictions. France is chairing the body and Jersey is a vice chair in the peer group review which evaluates policies and regulation. Other vice chairs include India, Japan and Singapore.

The peer review group of the global forum on transparency and exchange of information for tax purposes is undertaking a review of Jersey. The review is part of its analysis of how effectively the international standards of transparency and exchange of information for tax purposes are being implemented by individual jurisdictions.

The global forum brings together more than 90 countries and territories, including OECD and non-OECD countries. It has been the multilateral framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000.

The reviews on implementation of the standard will be carried out in two phases: assessment of the legislative and regulatory framework and assessment of the effective implementation in practice.

Jersey is in the first group of 20 jurisdictions to be reviewed. Within the first three years most jurisdictions being reviewed will be reviewed for phase one only. Jersey volunteered to be assessed for both phases.

An assessment team of officials from the global forum secretariat, Denmark and Bermuda, undertook an on-site visit at the beginning of June. The results of the review should be presented to the Peer Review Group in October 2010 and will be published on the global forum website.