Letter from Jersey: funds prepare to claim passport to EU expansion

By Richard Urban, jersey-based independent non-executive director

Richard Urban 2015More than a decade before Les Miserables was published, French novelist Victor Hugo fled political instability in his homeland to take sanctuary in Jersey. He described the island as “Pieces of France fallen into the sea and picked up by England”, an accurate summary of Jersey’s unique geography and cultural heritage.

As a Crown Dependency, Jersey is loyal to the English monarch but not part of the UK. It is independently administered, with its own government, tax and legal systems.

But Jersey shares its language, currency and time zone with the UK. Over the past half century, Jersey’s proximity to the UK and mainland Europe, its economic and political stability, tax neutrality and robust legal and regulatory frameworks have led it to become a leading international financial centre (IFC).

As an IFC, Jersey has an enviable array of fund managers creating and administering funds spanning a wide range of asset classes, including real estate debt. With a large slice of Jersey’s economy dependent on the fund management industry, many Jersey-based professionals have been monitoring the development and implementation of the Alternative Investment Fund Managers Directive (AIFMD) with keen interest.

AIFMD was designed to regulate alternative investment fund managers managing and marketing alternative investment funds (AIFs) in the European Union.

Since AIFMD’s implementation phase ended in July 2014, alternative fund managers that fall under the regulation (some are exempt) must meet required standards across a number of areas, including risk management, valuation and managing conflicts of interest.

A crucial aspect of the AIFMD is that it provides compliant AIFMs with a ‘passport’ allowing them to market funds to professional investors throughout the EU. Since Jersey is not in the EU, Jersey-based AIFMs (and EU-based AIFMs with Jersey AIFs) have previously been unable to obtain such a passport.

However, they have been allowed  to follow a less elegant parallel route to marketing in the EU. This involves using EU member states’ multiple national private placement regimes, and adhering to a reduced set of AIFMD requirements. This means applications must be made in each country the AIFM plans to market in. The parallel route will remain in place until at least 2018, after which it is likely to be phased out.

In readiness for this, the European Securities and Markets Authority (ESMA) plans to allow the extension of marketing passports to non-EU countries. Having evaluated six non-EU jurisdictions interested in gaining the passport extension, the ESMA saw no obstacle to extending an EU  marketing passport to the island.

This is a major endorsement for Jersey as a fund industry hub, especially since ESMA has yet to decide on the far larger jurisdictions evaluated (such as the US, Singapore and Hong Kong), citing concerns about information availability and regulatory hurdles to integration.

ESMA has relayed its findings to the European Parliament, Council and Commission. The Commission is required to adopt a delegated Act within three months of receiving the information, specifying when passport extensions will become available. But the three institutions may opt to wait until positive advice on additional non-EU countries is received before adopting the act.

The ESMA’s conclusion puts Jersey in a strong position to be among the first non-EU jurisdictions to receive a marketing passport. The strengthening of Jersey’s status in the AIFMD landscape, plus its pedigree as a world-class financial centre, create compelling reasons for AIFMs to choose Jersey as a location for funds.

A number of high-profile property debt funds are located in Jersey. As those funds’ managers seek to raise additional capital and emerging managers to launch real estate debt vehicles, the Jersey option is high among their considerations. Those with experience of conducting fund business in Jersey can vouch that they are anything but Les Miserables.