The funds industry remains a cornerstone of the Guernsey economy, however, it’s an industry that has undergone wide ranging transformation that’s set to continue in 2019. Justin Hallett, an executive director at BDO and head of the funds team considers what’s in store ten years after the collapse of Lehman.
Socially responsible investing is a trend that will only climb with the millennial generation entering the investing arena. In Guernsey the establishment of the Green Fund Rules has the objective of seeking a return for investors whilst mitigating environmental damage and investing into green initiatives has already seen success. On a similar theme, The International Stock Exchange has recently launched a green segment, TISE GREEN, which is open to all types of green investments and aims to enhance the visibility of those investments which make a positive impact on the environment. Indeed, many investment houses have a required percentage that must be invested in such funds. While their performance is currently unclear, their growing popularity is.
What does this mean for funds that are not so called Green Funds? Such funds will continue to attract investment, however, there may be more investor expectation for funds to disclose more information in relation to sustainability performance and environmental impact so that investors can fully understand the fund’s economic, environmental and social impact based on its underlying investments.
Some say that the creation of blockchain was in part motivated by the 2008 financial crisis so it’s not a surprise that in the same year as the collapse of Lehman the Bitcoin White Paper was released. The paper proposed the data structure for the Bitcoin blockchain and laid out the decentralised consensus mechanism. 10 years on and the blockchain revolution is starting to gain traction within the fund industry especially because of the decentralised ledger system and the ability to overlay smart contracts to create a frictionless, more automated, interaction between various parties with only one version of truth. As more people become familiar and comfortable with the blockchain concept together with its use cases, the deployment of the concept within the fund space and the wider financial services sector will continue to grow and at a much faster pace.
Regulation, regulation, regulation
An onslaught of regulation followed 2008 with UCITS (1 to VI), Dodd Frank, EMIR, AIFMD, MIFID (I and II), CRS, BEPS, FATCA, PRIIPS, MAR as well as increasing anti money laundering regulations. This has required a pragmatic regulator who establishes regulation that meets these external regulations but also to provide flexibility where they are not applicable or not required for a certain investor base. In addition to specific fund regulations, there is more focus around data protection GDPR and of course cyber security as we enter a new digitalisation era.
Compliance is an established profession
The increase in regulation in a time of financial crisis generally created a situation where the cost of delivery increased whilst expectations and demands were for no increases. As such, ways of working smarter and more efficiently were needed which has seen the rise in outsourcing and more digitalisation and automation.
Prior to 2008 we were in the part of the cycle that saw a rise in start-ups fund administrators, however we are now seeing a consolidation to obtain economies of scale and reduce the overall cost of compliance but also those successful starts-ups of years ago who are now looking for a realisation exit point. Looking forward I would expect to see the cycle continue and enter the start-ups phase again as people within larger organisations see the opportunities of breaking out themselves and providing a bespoke service offering.
Threats or Opportunities?
Over the period there has been a rise of other fund jurisdictions who have increased their focus on the fund market. Such competition will continue and, depending on Brexit, may evolve to include the United Kingdom.
Brexit will have no direct impact on the Guernsey fund industry as Guernsey does not benefit from UK’s membership of the European Union. Guernsey is treated as a third country and this will remain unchanged following Brexit. This creates opportunities as Guernsey is an established fund industry player with a stable legal, political and regulatory platform on which to establish funds.
As well as competition there are also the more politically motivated threats such as challenging offshore funds in general, the UK open register and continuing challenges on the tax transparency front. All of this arises due to Guernsey’s success in the funds space and can be expected to continue given Guernsey’s strengths and the threat that we present to other jurisdictions. Guernsey will need to continue an open, transparent dialogue and to reiterate its strong regulatory and clean regime.
Whilst much of the competition is focussed on European investors Guernsey has significant opportunity from both US and Chinese investors and being outside the European Union gives Guernsey a significant advantage. This is an area which will continue to grow over the coming years.
Guernsey is also the place for London listed entities and this is continuing to be demonstrated through new listings.
Guernsey will continue to respond to challenges from other offshore jurisdictions and political targeting as it has done historically but we’re well positioned to continue to thrive in the fund industry with Guernsey housing high quality fund service providers and a pragmatic and flexible regulator willing to innovate and respond to investor needs. Guernsey is keen to interact and be transparent with worldwide tax authorities and its third country provisions within Europe shouldn’t make us complacent but should inspire confidence in Guernsey’s offering and capabilities as a specialist finance centre.