Mercator Fund Services
Mercator Fund Services’ MD speaks to AST about how the island has developed during the downturn and the changing role administrators are playing
SLT: How has your local market reacted to the financial crisis over the past couple of years?
Douglas: Guernsey’s financial services sector, and in particular its funds industry, has held up remarkably well during the financial crisis as evidenced by the latest official statistics, which show an eighth consecutive quarter of growth and a record high for investment funds under management or administration.
Guernsey has earned an excellent reputation as a fund jurisdiction thanks in part to the high standard of its regulation and its service providers. At the same time, the legislative and regulatory regime has evolved to meet the changing nature of the fund industry and Guernsey has been at the forefront in terms of developing new products. As a result, Guernsey has stolen a march on many of its competitors in respect of certain types of funds, most notably private equity, property and funds of funds, and as such the financial crisis has not necessitated any great regulatory changes. That is not to say that anyone is resting on their laurels.
SLT: Where is the business coming from? Is this changing?
Douglas: Guernsey has long been integrated into the City of London and service providers maintain close contact with the major London law firms and tax advisers, while the island is the most popular domicile for investment companies listed on the London Stock Exchange (both main market and AIM). While the UK and Europe remain important sources of business for Guernsey, there is a recognition that the world is changing and there has been a significant amount of promotional activity over the past couple of years as Guernsey looks to develop new markets for its fund products. Promotional trips to China, India, Russia and the Middle East have been organised by Guernsey Finance, the promotional agency for the island’s finance industry, accompanied by industry practitioners and in some cases government ministers.
The tax efficiency and attractive regulatory framework of Guernsey funds are already being recognised by promoters from other parts of the world. For example, Guernsey has recently become the jurisdiction of choice for incorporating Indian entities listing on AIM. Middle Eastern promoters have also found that Guernsey’s regulatory regime has the advantage of being able to support Shariah-compliant funds.
Significant business flows are expected from the Far East over the next few years. Guernsey Finance has a representative office in Shanghai and some Guernsey law firms and administrators have already looked to establish a physical presence in the region. Earlier this year, Guernsey was approved as an acceptable overseas jurisdiction by the Hong Kong Stock Exchange for the purpose of companies incorporated in the island seeking to list on the Exchange.
SLT: Is the role you play changing? Are clients now asking more of you?
Douglas: Over the past two decades, as Guernsey’s fund industry has experienced a gradual shift from high-volume retail funds to institutional niche funds, the role of the administrator has changed. Clients are looking for a more tailored and personal service. They require an administrator who can deal with funds that are ‘out of the ordinary’ and who is proactive in developing solutions to problems; they are looking for added value.
More recently, there has been a greater focus by many investors on robust regulation and sound corporate governance. Promoters are therefore looking for a competent company secretary with experience in complying with the listing rules of various stock exchanges and the requirements of applicable codes of corporate governance. Investors also require greater transparency than ever before, and administrators need to be able to cope with the greater volume and frequency of investor reporting.
SLT: How much competition is there between you and other European domiciles - Gibraltar, Luxembourg, Malta, Dublin etc?
Douglas: Competition between different jurisdictions has inevitably increased given the reduction seen in new fund launches since the start of the financial crisis, although the competition has tended to be keenest against other offshore jurisdictions rather than our European neighbours. Guernsey has carved out a niche for alternative investment funds, whereas onshore European centres have tended to remain more focused on UCITS equivalent products.
Guernsey has also been proactive in looking at opportunities to cooperate with other fund jurisdictions for mutual benefit. For example, it is recognised that there are fund structures that can benefit from having both onshore and offshore elements. Guernsey Finance recently hosted a debate in Luxembourg to discuss ways in which service providers from the two jurisdictions could work together in such circumstances.
Another example of such cooperation was the way Guernsey and Jersey worked together to make joint representation on the proposed Alternative Investment Fund Managers Directive (AIFMD) to key individuals in Brussels in order to achieve the best possible outcome for the two islands.
SLT: Do the new FATCA rules have any effect on your business? Are there potential opportunities here?
Douglas: Guernsey investment funds will have to comply with the FATCA requirements when they come into effect on 1 July 2013 (although it is possible that this date may be pushed back further). While we wait for the next draft of the regulations to come out early next year, we are discussing the possible impact with our funds’ tax advisers and considering any gap analysis required. It has been suggested that some administrators may decide that they want nothing to do with FATCA and so will be prepared to drop any clients with US source income or US investors, which in turn will provide opportunities for others who are prepared to embrace the challenge.
There are also potential opportunities arising for Guernsey from the AIFMD, which was initially seen as a threat to the Island. It should be possible for EU investors to subscribe to Guernsey funds, which are not subject to the provisions of the AIFMD, on the basis of reverse solicitation, passive marketing or, in due course, ‘passporting’ of Guernsey funds into the EU. Furthermore, some EU-based fund managers may choose to relocate to Guernsey should they find the AIFMD provisions too restrictive.
SLT: How much is the changing regulatory environment affecting your business? Is there now a requirement for firms to have certain scale if they are to cope with the new landscape?
Douglas: Guernsey has a reputation as a well regulated jurisdiction so local administrators are already subject to a high level of regulation and have perhaps not been as affected as administrators in other jurisdictions who are now playing catch up. The main impact will be felt from legislative changes in the EU and US, such as AIFMD and FATCA. In these circumstances, it may be acceptable to pass some of the costs on to the client, but administrators also need to review their procedures and seek to be more efficient.
There has already been some consolidation among fund administrators as evidenced by a number of recent mergers and acquisitions. Some of the smaller independent administrators, who perhaps entered the industry just before the financial crisis took hold, will no doubt be feeling the pressure. However, there is still very much a role for the larger independents who are ideally suited to providing the bespoke service that many alternative funds require.
SLT: How important is technology now within your business? Is this changing?
Douglas: Technology obviously has an important role to play and we are constantly reviewing our systems to ensure that they deliver what our clients want in the most efficient way. High volume transactional business such as transfer agency work, which is often outsourced and works on very narrow margins, will have different technological requirements compared to fund administrators who provide more bespoke services. In the latter case, the requirements are often driven by investor reporting requirements. While technology remains important, we must not lose sight of the fact that we are a people business and that the quality of our staff will have a greater impact on the value that we are able to add for clients.
SLT: What are the key issues you are focusing on for the future?
Douglas: At Mercator, we are committed to delivering a first class client service in an efficient and expert way, focused at all times on being responsive and innovative and maintaining a close personal relationship with all our clients. While, like many administrators, we are focused on developing new markets, we must not lose sight of the importance of client service and recognise that existing clients and intermediaries remain the best source of new business.
