Published in Managing Partner - July 2007

Guernsey’s fund business is booming. Statistics released by the Guernsey Financial Services Commission (the “Commission”) last month show that:

• Funds under management and administration grew by £10.2 billion (7.8%) over the quarter ended 31 March 2007 to reach a total of £140.4 billion. For the year since 31 March 2006, values increased by £29 billion, an increase of 26%.
• There were a record number of closed-ended funds established in Guernsey in 2006 and the value of Guernsey managed and administered closed-end funds increased by £7.9 billion (16.3%) over the quarter and £22.6 billion (66.9%) over the year since 31 March 2006, to reach £56.4 billion.
• Guernsey domiciled open-ended funds grew by £2.1 billion (3.7%) over the quarter and by £5.2 billion (9.7%) over the year since 31 March 2006 to reach a new record total of £58.7 billion.

Considering that 2006 was one of Guernsey busiest ever years for new fund formations, the 2007 figures so far reinforce just how much fund business is now being conducted in the island.

Although growth on this scale is very good news for Guernsey as a whole, it also means heavy workloads for those responsible for approving new schemes - the Commission. In the past, those increased workloads had, on occasion, led to longer turnaround times, particularly for funds being promoted by persons doing business in Guernsey for the first time. The traditional fund approval process required the Commission to conduct extensive background checks on those "new promoters".

This burden had been partially relieved by the introduction of the qualifying investor fund ("QIF") approval process in February 2005. Under that process, the Commission promised a three day turnaround for fund approvals for both closed and open ended funds. The process relied on self certification by the administrator of the fund as to compliance with the relevant criteria. However, the QIF approval process was only available to funds being offered to "qualifying investors" - i.e. professional, experienced or knowledgeable investors.

Registered Funds

In February 2007 a new three day approval process was introduced specifically for closed ended funds; the registered fund.

As with a QIF, under the registered fund process, approval for a closed ended fund is guaranteed in three working days and relies upon self certification. Responsibility for conducting due diligence on the promoter of the fund as well as verifying that the fund’s constitutive documents meet Guernsey’s regulatory requirements is delegated to local administration companies who must conduct all the usual checks and then certify to the Commission that they have done so. Where those checks subsequently prove to be inadequate, the Commission will pursue the matter with the administrator. This should not, in the ordinary course, affect the approval granted to that fund.

Notably, the new registered fund route is open to all types of closed ended funds - not just funds aimed at "qualifying" (professional, experienced or knowledgeable) investors. Registered funds may not be promoted directly to the public in Guernsey - although shares may be marketed to the public in Guernsey through a licensed intermediary and Guernsey resident directors may invest in the fund.

Although the process is currently only available to closed ended funds, the Commission has indicated that the registered fund approval process will be extended to include open ended funds later this year.

Principal Managers

The other change to Guernsey fund regulation relates only to open ended funds. Historically, the Commission has insisted, as a matter of policy, that all open ended Guernsey funds must appoint a principal manager which is a Guernsey registered company licensed under the Protection of Investors Law.

The principal manager, as the name suggests is responsible for the management of the fund generally (the board of Guernsey funds being, invariably, entirely non-executive). However, in practice many of the principal manager’s function were delegated to other appointees - such as administration companies and investment advisors.

From 1 February 2007 it is no longer necessary for an open ended fund to appoint a Guernsey based principal manager. Whether an open ended fund appoints a principal manager in Guernsey will be solely a commercial issue for the promoters of the relevant scheme.

Effect of the Changes

Both changes are clearly aimed to enable funds to be established in Guernsey as efficiently as possible but without detrimentally affecting Guernsey’s high regulatory standards.

The registered fund process shifts the burden of compliance onto those responsible for Guernsey's fund business - the fund administrators - leaving the Commission with more time to audit the activities of those administrators. This can be seen as a natural evolutionary step in the compliance process of a sophisticated finance centre.

The three day turnaround for obtaining Commission approval is a great "headline" for Guernsey. However, the three day period only applies to the Commission approval process. Whether this will translate into a faster fund establishment process overall will really depend upon the efficiency of those responsible for creating the fund structures and drafting the necessary documentation. For promoters who have already set up a fund in Guernsey, the three day turnaround should mean exceptionally fast overall turnaround times are now possible – particularly if they are largely replicating an existing structure.

However further economic growth in Guernsey depends upon attracting new entrants to Guernsey and it is in respect of those new promoters that the most significant delays have occurred in the past, particularly promoters from the emerging economies of eastern Europe and the middle east. Whether the new registered fund approval process will enable new promoters to establish themselves on the island more quickly will now depend on how quickly the fund administrator can obtain the necessary due diligence on that promoter.

Accordingly, the weight of regulatory responsibility now rests firmly on the shoulders of the fund administrator (and to a lesser extent the other advisors) and not on the Commission. Therefore the choice of fund administrator becomes crucial. How the fund administrators react to the opportunities and challenges this new responsibility presents will be important in determining Guernsey’s position as a global funds centre over the coming years.