Jersey moves to reassure funds ahead of Brexit

Amid evidence that Luxembourg is taking more private fund business due to Brexit fears, the Jersey Fund Association says UK managers 'shouldn’t panic' when choosing a new domicile.

Jersey has moved to allay fears that funds based in the UK crown dependency wouldn’t be able to do business with the rest of Europe, following statements by UK government ministers that a no-deal Brexit is now the most likely outcome of separation talks with the EU. Recent data, in fact, points to alternative investments funds continuing to set up in the Channel Islands locale.

“We’re comfortable and confident because Jersey is not directly impacted [by Brexit],” said Mike Byrne, chairman of the Jersey Funds Association. “We have go-to market strategy and distribution routes in place under private placement. It’s not clear how a fund based in the UK would do those things after Brexit. But our position with funds here is that there is no imminent change – the restrictions under AIFMD [Alternative Investment Fund Managers Directive] apply to marketing, not operating a fund once they are up and running.”

Last month, the European Securities and Markets Authority said UK-based fund managers should prepare for the possibility of a no-deal Brexit that would leave them stranded outside of the EU with no way to market into the 27-country bloc. It said that it has seen “an increase in the number of authorization requests submitted to EU27 authorities,” validating recent data that seems to show an uptick in registrations in Luxembourg. In response, the JFA urged UK managers not to panic when considering a potential new fund domicile.

“The comment that managers shouldn’t panic was urging UK managers not to just automatically only consider EU options like Luxembourg without looking at other jurisdictions – such as Jersey – on their merits,” JFA had posted on its website. “With EU locations, you get certainty of distribution under the passport regime but it comes at cost from a regulatory point of view and depository costs. You also need to understand the capital structure there, the obligations around Sarl [limited liability company] holding requirements, common law versus civil law [and] issues around flexibility. There are a whole multitude of factors to consider.”

Under the AIFMD, European alternative fund managers can apply for a passport to distribute alternatives funds within the EU, where funds were previously sold on a private placement basis with different rules for different countries – the current arrangement in Jersey. Through the national private placement regime (NPPR), alternative investment fund managers can market their funds to Europe without going through a passport regime.

Byrne downplayed the importance of the passporting regime, saying it is not necessary for the majority of funds. “The EU’s own figures suggest that only 3 percent of EU funds market into more than three EU markets,” he said. “So the need for a passport is not a concern for the vast majority.”

He cited Japan-based Softbank as an example of a fund that decided on a Jersey domicile after the EU referendum, and points to figures that show an increasing number of registrations. “They set up here post the EU referendum, and for a $100bn fund for seven investors, they said Jersey is perfect. They perhaps said, ‘We don’t want or need the protection AIMFD offers.'”

Data from the Jersey Financial Services Commission shows that the number of Jersey-registered managers opting to market into EU member states through NPPRs under the AIFMD rose 8 percent between January and June this year and 23 percent year-on-year, while the total number of Jersey alternative investment funds being marketed into the EU through NPPR also increased to 306 – an 11 percent rise since June 2017.

But as a crown dependency with close administrative ties to the UK, the details of how a no-deal Brexit – or any formulation of Brexit – may impact Jersey are unknown. And Byrne, who is also a partner at accountancy firm PwC, admits that funds are beginning to react to the likely disruption.

“With my PwC hat on, Brexit uncertainty is proving a real headache for clients,” he said. “Some are looking at setting up new structures, duplicating structures or establishing offices in other locations.”

Last month, the Luxembourg Private Equity and Venture Capital Association said that based on its survey, the proportion of locally-established vehicles rose to 59 percent in 2018 – up from 37 percent in 2016. Funds registered in the UK and Channel Islands decreased from 33 percent to 24 percent over the same period.