HFMWEEK S P E C I A L
R E P O R T
GIBRALTAR 2013-2014 REGULATION Becoming a frontrunner for the AIFMD
LOCATION The benefits of being an EU jurisdiction
TAXATION Gibraltar’s favourable business environment
FEATURING ADM Investor Services // Attias & Levy // Chesterton // Deloitte // Fiduciary Group // GFIA // Gibraltar Finance Centre // Grant Thornton // Hassans // KPMG // Nexus Fund Administration // PWC // Turicum Private Bank
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INTRODUCTION
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he selection of a fund domicile is an important decision for any fund manager and we have worked hard, and continue to do so, in developing our framework over the last few years to position ourselves as an alternative European fund domicile, with some success. There is, and has always been clear government support for Gibraltar’s financial services sector.
Albert Isola MP was elected to the Gibraltar Parliament on 4 July 2013. He is a barrister by profession and prior to his election a senior partner in a large Gibraltar law firm where he worked extensively in financial services and was heavily involved in promoting this sector internationally.
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Gibraltar’s position is quite unique. It represents an EU fund domicile, with a competitive tax system which has been approved by both the European Council of Economic and Finance Ministers of the 27 EU Member States (ECOFIN) and is compliant with the EU Code of Conduct for Business Taxation. For Alternative Investment Fund Managers, Gibraltar offers a realistic entry point to the EU market, and as a fund domicile, an EU alternative that provides the footprint required for distribution without the added complications that exist for nonEU territories. Our EU position in relation to the AIFMD is important as we are not one of the domiciles ‘looking in’ to the EU and attempting to gain access, but rather one of the
EU domiciles that have fully implemented the Directive, and able to offer AIFMD compliant solutions from within. We hope to replicate the success already achieved in other sectors of our financial services community and we will continue to react positively to the regulatory developments that impact managers globally, while continuing to support the local industry. Over the last 12 months, we have appointed three senior business development executives specialising in funds and asset management, insurance and private clients to work from the Finance Centre Department’s office in Gibraltar. A fourth senior executive has also been appointed and is working from Gibraltar House in London covering all sectors and assisting the industry in promoting our jurisdiction. Our objective remains to position Gibraltar as an alternative EU domicile for managers and funds, and I have no doubt that the contents of this report will expand and elaborate on the advantages that Gibraltar undoubtedly has to offer.
Hon. Albert Isola MP Minister for Financial Services and Gaming, HM Government of Gibraltar
REPORT EDITOR Alexis Burris T: +44 (0) 20 7832 6656 a.burris@pageantmedia.com REPORT WRITER Karolina Kaminska T: +44 (0) 20 7832 6654 k.kaminska@pageantmedia.com HFMWEEK HEAD OF CONTENT Tony Griffiths T: +44 (0) 20 7832 6622 t.griffiths@pageantmedia.com HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Rachel Kurzfield, Eleanor Stanley, Luke Tuchscherer CEO Charlie Kerr GROUP COMMERCIAL MANAGER Lucy Churchill T: +44 (0) 20 7832 6615 l.churchill@hfmweek.com SENIOR PUBLISHING ACCOUNT MANAGER Tara Nolan +44 (0) 20 7832 6612, t.nolan@ hfmweek.com PUBLISHING ACCOUNT MANAGERS Bryce Robson +44 (0) 20 7832 6616, bryce.robson@hfmweek. com, Rebecca Wheeler, +44(0) 20 7832 6613 r.wheeler@hfmweek.com CONTENT SALES Richard Freckleton T: +44 (0) 20 7832 6593 r.freckleton@hfmweek.com CIRCULATION MANAGER Fay Muddle T: +44 (0) 20 7832 6524 f.muddle@ pageantmedia.com HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group © 2013 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher
H F M W E E K . CO M 3
CONTENTS
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FINANCIAL SERVICES
SMALL BUT MIGHTY
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HFMWeek catches up with Philip Canessa of Gibraltar Finance Centre to talk about the jurisdiction’s EU status and favourable legal framework
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LEGAL
ENTERPRISING AIFMD/EU SOLUTIONS FOR THE FUNDS INDUSTRY
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THE KEY TO UNLOCKING EUROPE James Lasry, of Hassans International, tells HFMWeek why Gibraltar is one of the few jurisdictions to offer effective fund solutions since the implementation of the AIFMD
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REAL ESTATE
GIBRALTAR PROPERTY, TAX AND RELOCATION Mike Nicholls of Chesterton discusses some of the property, tax and relocation issues to consider prior to relocating to Gibraltar
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FUND ADMINISTRATION
A POWERFUL ALTERNATIVE IN EUROPE Moe Cohen, CEO of Nexus Fund Administration, explains how Gibraltar has become a leading fund domicile and what managers looking to set up there should expect
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CHALLENGES AND OPPORTUNITIES As the AIFMD finally arrives, Kristian Menez of PwC discusses the difficulties the Directive presents for managers as well as the benefits in becoming a frontrunner for implementation
GIBRALTAR – WELL-REGULATED, COST-EFFECTIVE AND WITHIN THE EU Jon Tricker of Deloitte speaks to HFMWeek on what makes the rock a leading fund jurisdiction
Now that the AIFMD has arrived, Abraham J Levy and Carol Haw of Attias & Levy discuss what Gibraltar has to offer by way of solutions for the funds industry FINANCIAL SERVICES
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FINANCIAL SERVICES
BANKING SAFELY IN A POST-CRISIS ERA Benjamin Moss, chief risk officer at Turicum Private Bank, discusses systematic risk in banking today
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FUND ADMINISTRATION
THE AIFMD IN GIBRALTAR Adrian Hogg of Grant Thornton Fund Administration speaks to HFMWeek about the strengths of Gibraltar as a fund domicile and how it can benefit from the implementation of the AIFMD
FINANCIAL SERVICES
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SMALL BUT MIGHTY HFMWEEK CATCHES UP WITH PHILIP CANESSA OF GIBRALTAR FINANCE CENTRE TO TALK ABOUT THE JURISDICTION’S EU STATUS AND FAVOURABLE LEGAL FRAMEWORK
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ecent regulations have made the benefits of domiciling in an EU jurisdiction clear, but with its small size and numerous regulatory advantages, Gibraltar has become a jurisdiction of quality over quantity. Philip Canessa of Gibraltar Finance Cen-
tre explains.
Philip Canessa joined Gibraltar Finance in September 2013 as senior Finance Centre executive – funds and asset management, focusing on the development of the funds and asset management sectors. He has more than 30 years’ experience in the financial services sector and was for 11 years managing director of an investment firm managing hedge fund portfolios. He also served as a board director of a number of funds in different jurisdictions.
HFMWeek (HFM): The legal framework in Gibraltar is based on common law. What does this mean for its funds industry and what benefits does this offer over other jurisdictions? Philip Canessa (PC): Gibraltar is the only common law jurisdiction in continental Europe and its courts, statutes and principles of equity are based on English law. This makes business transactions for legal professionals much easier as most international financial transactions are based on common law. Gibraltar, however, is a separate and distinct jurisdiction to the United Kingdom within the EU. The regulatory framework will also be familiar to professionals who are used to dealing with the regulator in the UK. HFM: In what ways are the tax laws in Gibraltar fundamental to the success of the jurisdiction?
PC: I think the main benefit is our size, which brings many advantages. We will look favourably at smaller funds wishing to set up in Gibraltar whereas larger jurisdictions may only want to look at funds with assets in excess of US$500m. Our Experienced Investor Fund (EIF) vehicle with its pre-launch approval regime, where an EIF can be launched in ten working days, makes it the fastest “time to market” fund vehicle in the EU. Our regulator, the Financial Services Commission, is very accessible and conducts a light but robust regulatory regime. Because of its geographical size, everything in Gibraltar is close by; we have 16 banks, 27 investment firms, the “big four” audit and accounting firms, international and UK qualified lawyers, 55 insurance companies and 68 company managers/professional trustees all in 2.5 square miles. With an average of 300 days of sunshine per year and 60 top class golf courses in the region very near to Gibraltar, the quality of life is very good.
THE TAX LAWS IN GIBRALTAR, THOUGH VERY FAVOURABLE TO FUNDS AND PROFESSIONALS, ARE NOT FUNDAMENTAL TO GIBRALTAR’S SUCCESS AS A JURISDICTION
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PC: The tax laws in Gibraltar, though very favourable to funds and professionals, are not fundamental to Gibraltar’s success as a jurisdiction but form part of the overall package of making Gibraltar attractive as a jurisdiction for funds and asset management. Of major importance to us in Gibraltar is regulation and reputation. Notwithstanding this, an attractive tax regime exists for funds as they roll up gross. In addition, an asset manager in Gibraltar would only be subject to 10% corporation tax. Employees of the asset manager who meet certain criteria can avail themselves of the High Executive Possessing Specialist Skills (HEPSS) status and will only be taxed on the first £120,000 of earned income, which at the current rate of income tax caps their tax at around £30,000. Gibraltar does not tax investment income, there is no capital gains tax, no wealth tax, no inheritance tax and is excluded from the requirement to levy VAT. 6 H F M W E E K . CO M
HFM: There are several benefits to Gibraltar being an EU jurisdiction, but what benefits does it offer compared to EU counterparts such as Luxembourg and Ireland?
HFM: What changes do you expect to see from Gibraltar’s fund industry in the next decade?
PC: It is difficult to plan for change over the next few years, let alone over the next decade. However, our government has invested in the appointment of four senior executives to develop the funds and asset management sector, the insurance sector and the private clients sector. Three of the senior executives are based in Gibraltar and the fourth is based at Gibraltar House in London. These additional resources will enable us to increase our presence at relevant events, seminars and go out and sell our story. By taking this approach we expect to see manageable, steady growth in the funds and asset management sector in Gibraltar with the objective of attracting quality not quantity. We expect to see an increase in the number of funds set up in Gibraltar, taking advantage of our jurisdiction in order to passport services into Europe. We are also confident that the efforts we are making, together with our close ties with Swiss asset managers, will also lead to more asset managers looking to set up in Gibraltar. Q
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ENTERPRISING AIFMD/EU SOLUTIONS FOR THE FUNDS INDUSTRY NOW THAT THE AIFMD HAS ARRIVED, ABRAHAM J LEVY AND CAROL HAW OF ATTIAS & LEVY DISCUSS WHAT GIBRALTAR HAS TO OFFER BY WAY OF SOLUTIONS FOR THE FUNDS INDUSTRY
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s a jurisdiction for hedge funds, Gibraltar has become more attractive to investors and asset managers due to its EU status, regulatory framework and high standards. In light of the AIFMD, Carol Haw and Abraham Levy of Attias & Levy speak to HFMWeek about the benefits of Gibraltar. HFMWeek (HFM): Can you outline recent legislative developments in Gibraltar concerning funds?
Abraham J Levy is a founder and the managing partner of law firm Attias & Levy. He has 30 years’ corporate/commercial law experience and spearheaded the creation of the firm’s funds department.
Carol Haw relocated to Gibraltar in 1985 from the UK and has a wealth of experience in specialist commercial fields. Carol is a legal assistant, an active member of the Gibraltar Funds and Investments Association and has successfully built up Attias & Levy’s funds department.
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Carol Haw (CH): Yes, the EU Alternative Investment Fund Managers Directive (AIFMD) was transposed into Gibraltar law on 11 July 2013 and now forms part of Gibraltar’s long-established legislative framework covering collective investment schemes. At the forefront of Gibraltar’s legislation covering alternative investment schemes are the regulations governing the popular Experienced Investor Funds (the EIF regime). The EIF regulations were amended in 2012 with AIFM in mind and, for the first time, non-Gibraltar fund administrators were permitted to be licensed to act as administrators of EIFs. This enables funds re-domiciling to Gibraltar to retain the services of their existing administrator. Gibraltar being “AIFMD ready” with the strength of the tried and tested EIF regime, combine to set Gibraltar on course for increased funds work. HFM: Why might funds or managers consider Gibraltar rather than the more traditional funds jurisdictions? Abraham J Levy (AJL): The obvious attraction for the funds industry, but also for other types of financial services business, is that Gibraltar is part of the EU. In the context of the AIFMD, the benefit of pan-European passporting is a massive attraction for bigger managers. For “boutique” managers looking to set up or re-domicile in an EU home who fall under the AIFMD’s de minimis exceptions for assets under management (AuM) (those below the threshold of €100m including leverage or €500m close-ended), Gibraltar offers a good choice for a base. Although the lighter touch AIFMD regulatory regime does not enable de minimis managers to passport throughout the EU as inscope AIFMD managers will be able to do and, adherence to national private placement regimes must be adhered to,
a manager establishing operations in Gibraltar by applying for authorisation as an investment manager under MiFID can keep an eye on the AIFMD developments from its Gibraltar/EU base and use AIFM’s opt-in provisions whenever it feels that the time is right or AuM increase. Gibraltar has an excellent regulatory regime, a sound infrastructure, quality funds professionals and costs are competitive. Now that the AIFMD has arrived, choices of specialist funds jurisdictions within the EU are really limited to Luxembourg, Ireland and Malta, so Gibraltar has shot up the list so to speak. Attias & Levy have seen markedly increased interest in Gibraltar recently. HFM: Abraham mentioned the quality of Gibraltar’s funds professionals. What more can you tell us about high standards to be found in Gibraltar? CH: Gibraltar’s transition into the leading EU finance centre it is today, evolved over a period of many years. The “offshore” or “brass-plate” mind-set has long gone. Gibraltar law is based on English law so, as you would expect, this has always demanded high professional standards. The Weavering case, which set out various principles applicable to the standards expected of fund directors, was welcomed here. The FSC has always had regard for high standards of corporate governance and in spring of this year, the Gibraltar Funds and Investments Association (GFIA) published its own Corporate Governance Code for Gibraltar Collective Investment Schemes which both the FSC and the Government of Gibraltar endorsed. Now that the AIFMD is here, the crux of what is really required is strong governance over policies, procedures and documentation. In Gibraltar we are well used to thinking from a regulatory perspective, so I believe that we are very well equipped as a jurisdiction to assist fund managers in ensuring that they can demonstrate compliance with the AIFMD by drafting documentation to a high standard and always remembering and checking that policies, procedures and documentation are completely in line with the investment objectives so as to continuously complete the circle. Many managers are currently considering a move from lightly regulated jurisdictions into the EU and the guidance of Gibraltar’s funds professionals can be invaluable in assisting with adapting to a highly regulated environment
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take. The FSC has published numerous information pages and application/registration information on its website for the purpose of providing detailed information on the AIFMD and Level 2 and to promote understanding on all the requirements, big and small, imposed on the investment industry by the AIFMD. HFM: As a key requirement, the AIFMD introduces obligations on depositories to provide extra oversight to funds and fixes them with liabilities to investors. So what is the position in Gibraltar in relation to depositories? CH: In terms of the liability to investors and oversight duties under the AIFMD, depositories may require that an administrator connected to it perform some of the administrative functions of the fund permitted under the AIFMD, but it is hoped that a natural comfort level will be found whereby depositories are happy with independent administrators performing at least some of the traditional administrative functions they are associated with. The AIFMD does not prescribe that only credit institutions can act as Depositaries; investment firms or institutions which would be eligible to be appointed as Depositories under Ucits may also act. In relation to close-ended funds, which have no redemption rights exercisable for five years and do not invest in assets that must be held in custody, AIFM includes a “depository light” mechanism that enables such funds to have as depositories entities which carry out depositary functions as part of their professional or business activities and are subject to mandatory professional registration. Very many existing Gibraltar EIF’s are close-ended and do not invest in assets requiring custodian services, and we therefore expect to see entities such as MiFID firms and others being appointed as depositories.
and adopting a regulatory mind-set. Gibraltar is very small; its funds professionals, mainly through the GFIA platform, liaise with each other frequently and actively promote training, learning and high standards generally. Managers will find that at a moment’s notice, we will arrange face-to-face meetings between service providers to iron out any issues or problems which may arise. HFM: What are the typical timescales like in Gibraltar for establishing funds and applications for AIFM authorisations?
NOW THAT THE AIFMD IS HERE, THE CRUX OF WHAT IS REALLY REQUIRED IS STRONG GOVERNANCE OVER POLICIES, PROCEDURES AND DOCUMENTATION. IN GIBRALTAR WE ARE WELL USED TO THINKING FROM A REGULATORY PERSPECTIVE
AJL: The EIF regime retains the “deemed authorisation” provisions and in theory therefore EIFs can be the quickest to launch of all fund vehicles. However, it is not always appropriate to rely on the deemed authorisation process but to actually meet with the FSC once the fund’s documentation is drafted and service providers identified to discuss any issues, particularly for more complex funds. In general, the usual timescale for setting up an EIF is approximately six weeks. For AIFM applications, which includes applications on behalf of self-managed AIFs, the FSC has three months to respond indicating whether or not granted, although that time may be extended for a further three months where the FSC considers it necessary due to any specific circumstances. A non-AIFMD application on behalf of a start-up de minimis investment manager for authorisation under MiFID likewise has the basic three month timeframe. As with all regulatory applications, the better prepared the application, including business plans and policy and procedure documentation, the less time it is likely to
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HFM: What can managers expect from Gibraltar in the near future?
AJL: I believe that Gibraltar’s fund industry is on the brink of rapid growth and that the dedication of the industry in preparing for the AIFMD will pay dividends. Above all, managers can expect to meet high quality service providers yet encounter a pleasant, relaxed jurisdiction in which to conduct business. Here at Attias & Levy, we are geared up to offer the full remit of legal services the funds industry will expect. Q H F M W E E K . CO M 9
Established EU Jurisdiction for a wide range of investment funds Fully AIFMD compliant, with passporting right across the EU Specialist European master feeder fund solutions Unique asset manager offering, combining quality of life with fiscal and legislative stability Professional and internationally recognized fund and investment expertise
GIBRALTAR: THE SPECIALIST FINANCIAL JURISDICTION OF CHOICE IN THE EU GFIA members include Funds, Fund Administrators, Stockbrokers, Investment Managers, Audit Firms, Law Firms,
For more information please contact GFIA Executive Coordinator by e-mail on
FINANCIAL SERVICES
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CHALLENGES AND OPPORTUNITIES AS THE AIFMD FINALLY ARRIVES, KRISTIAN MENEZ OF PWC DISCUSSES THE DIFFICULTIES THE DIRECTIVE PRESENTS FOR MANAGERS AS WELL AS THE BENEFITS IN BECOMING A FRONTRUNNER FOR IMPLEMENTATION
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Kristian Menez is a director in PwC Gibraltar and has worked in London and Gibraltar. Kristian provides audit and regulatory services to investment managers and funds and prides himself on being a trusted advisor to his clients.
he moment is finally upon us. Most conversations I have had with respect to funds over the last few years have been about how the AIFMD was set to revolutionise the mid-tier fund industry in Europe and how this would finally create passporting rights for funds registering under the AIFMD as well as the ability to attract investors from all over the EU under a unified framework. Now that the AIFMD is here, the conversation has turned to the challenges being faced in understanding and implementing the Directive as well as the costs associated with some of the requirements. However, these challenges also create opportunities. Those companies who get to grips with the requirements and find practical solutions, taking cost effective products and services to market, will be the frontrunners in growing this type of business and will have a huge competitive advantage over those seeking to enter the market at a later stage. Thoughts and efforts should therefore be directed to ensuring that those charged with product and service development work in tandem with compliance functions, industry associations and regulators to deliver ready-made solutions and services to investment managers and those looking to invest in Alternative Investment Funds. That is the approach being taken in Gibraltar and I am pleased to see how the relevant industry bodies such as the Gibraltar Funds and Investments Association and Gibraltar Banking Association have engaged with the Financial Services Commission and their members to set up working groups to focus on the more difficult aspects of the Directive to understand and implement. The areas of the Directive which have been identified as those requiring further analysis include remuneration, delegation and the interaction between the various counterparties involved in providing services to the AIF. There are still many questions to be answered on how much the AIFM can delegate to other parties and whether those requirements which apply to the AIFM can and must be imposed on the parties to whom activities are delegated. The AIFM must also be able to justify any delegated activities and have sufficient staff and resources to appropriately supervise those delegated functions. The Directive is clear in that delegation does not absolve the AIFM of the respon-
sibility and liability to the investors of the AIF and cannot be used to circumvent the requirements of the Directive. Depositaries also face significant challenges with the AIFMD placing a large burden squarely in their remit with clear liability consequences and ongoing cash flow monitoring and supervisory requirements. The decisions the depositaries face in the business environment will be significant with AIFs pressuring to use different brokers and bank accounts, yet with the liability for errors and losses attributing to the depositary. This may result in reduced options for funds but will definitely increase the protection available to investors. I am currently enjoying the challenges of working together with industry bodies on behalf of clients who are looking to submit applications for AIFM authorisation by providing our perspective on how to implement the requirements of the Directive in a way that is conducive to generating business and which presents a balanced approach to compliance. I hope to look back in the near future and see the AIFMD as the start of a brand new successful chapter in the Gibraltar funds industry. Q
THOSE COMPANIES WHO GET TO GRIPS WITH THE REQUIREMENTS AND FIND PRACTICAL SOLUTIONS... WILL HAVE A HUGE COMPETITIVE ADVANTAGE OVER THOSE SEEKING TO ENTER THE MARKET AT A LATER STAGE
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G I B R A LT A R
European financial services centre
International financial centre within the EU Direct access to EU single market in financial services Regulated to EU and UK standards Attractive fiscal environment High-quality infrastructure
design: s.perera
HM Government of Gibraltar Ministry of Financial Services Finance Centre Department Suite 761, Europort, Gibraltar Tel: (+350) 200 50011 Fax: (+350) 200 51818 info@financecentre.gov.gi www.gibraltar.gov.gi Twitter: @GibEUFinance LinkedIn: GibraltarEUFinance
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THE KEY TO UNLOCKING EUROPE JAMES LASRY, OF HASSANS INTERNATIONAL, TELLS HFMWEEK WHY GIBRALTAR IS ONE OF THE FEW JURISDICTIONS TO OFFER EFFECTIVE FUND SOLUTIONS SINCE THE IMPLEMENTATION OF THE AIFMD
James G Lasry is a partner and head of the funds team at Hassans International Law Firm in Gibraltar. He deals with funds and financial services law as well as tax. Lasry advised the Government of Gibraltar on its funds legislation and he was involved in the drafting of the Financial Services (Experienced Investor Funds) Regulations 2012. He is chairman of the Gibraltar Funds and Investments.
A NEW ERA FOR EUROPEAN FUNDS Gibraltar, as an onshore jurisdiction within the EU, has become one of only a handful of jurisdictions that can offer effective and efficient fund solutions to both fund managers that want guaranteed access to the EU market (as a full in-scope AIFM) and also to smaller fund managers (who fall within the exemptions under the AIFMD). Gibraltar is a well-regulated, tax efficient EU jurisdiction, with the ability to utilise the highly successful EIF regime and yet retain the ability to “opt-in” to the AIFMD as and when it best suits their needs. For many fund managers, Gibraltar could indeed be the key to unlocking Europe’s markets. THE AIFMD The AIFMD is causing sweeping changes throughout Europe’s fund sector to the way fund managers are regulated and how they distribute the funds they manage. The AIFMD will operate alongside and create a separate European regulatory regime from Ucits IV and MiFID. Effectively, all European funds will fall under either the
AIFMD or Ucits IV. All EU member states were supposed to implement the AIFMD into their national laws by 22 July 2013, but in fact only 13 jurisdictions did (including Gibraltar). Existing fund managers which fall within the scope of the AIFMD have until 22 July 2014 to bring their operations in-line with the Directive. Since 22 July 2013, European AIFMs managing EU AIFs, such as Gibraltar AIFs, have been able to obtain authorisation under the AIFMD and therefore benefit from the EU marketing passport provided for by the AIFMD. Such AIFMs will be able to market to professional investors (as defined in MiFID) freely within the EU. There is the possibility that managers from third jurisdictions such as those in the US, the Caribbean and the Channel Islands will be able to obtain authorisation and therefore access to the EU marketing passport under the AIFMD subject to certain conditions but only as from mid-2015 at the earliest. There is some doubt in the industry which I think is legitimate as to the true willingness of the somewhat politically motivated Esma to approve certain non-European jurisdictions, particularly some of those in the Caribbean H F M W E E K . C O M 13
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as authorised third jurisdictions under the Directive. At least one politician who was involved in the drafting of the Directive has expressed such doubts. The Directive has polarised funds and fund management jurisdictions into the European on the one hand and the non-European on the other. Offshore jurisdictions may feel particularly vulnerable in this process. Whereas they will continue to provide a service to certain categories of investor, the ongoing regulatory changes within the funds industry, combined with continuing economic uncertainty and investor desire for security, will only further the current general drift to more regulated onshore markets, such as those within the European Union. The issue for offshore jurisdictions is less related to any failings as to their means of undertaking business. There will no doubt remain a place for the better off-shore jurisdictions. The “if it ain’t broke, don’t fix it” adage is simply less relevant in an investment industry that has changed almost beyond recognition from that which existed just a few years ago.
isation launch process available to existing EIFs. In other EU jurisdictions, AIFMs wishing to establish in scope AIFs will have to undergo the process of authorising those AIFs (which can take anywhere between a few weeks and several months depending on the fund and the jurisdictions). The Gibraltar process for this however is simply to establish and commence trading the EIF on the basis of the pre-authorisation launch and concurrently with the submission of the EIF documentation to the FSC (either immediately or within ten business days of launch), submit the AIF documentation including the passporting notices to the FSC. The FSC will then have up to 20 business days to consider the documentation and to process the passporting notices. GFIA and the FSC have discussed a streamlined process for the preparation of passporting documentation. Gibraltar’s solution is a product of co-operation of the industry along with the FSC and government and is illustrative of the positive working relationship that these three elements enjoy. The FSC is in the process of completing its approach to many of the key issues that are raised by the Directive such as remuneration, delegation and depositaries. Although these are yet to be finalised, the approaches seem to be that Gibraltar will follow the UK approach of “materiality” in respect of remuneration. Furthermore, delegation will be permitted so long as overall supervision and responsibility remains within the jurisdiction. Depositary requirements are probably the hardest of the three issues with many operational questions remaining open among all of the European jurisdictions. Gibraltar, because of its size and the close working relationship of the parties involved, can offer solutions that provide flexibility without compromising the protection of investors. Gibraltar EIFs are probably the most user-friendly fund vehicles within the European Union. They certainly have the quickest time to market within the EU. The FSC on the other hand has a plethora of powers in order to regulate such funds and to protect the interests of the investors. This, along with the generally closely-knit investment community in Gibraltar allows for a quick, efficient and safe funds jurisdiction within the EU. Q
THE DIRECTIVE HAS POLARISED FUNDS AND FUND MANAGEMENT JURISDICTIONS INTO THE EUROPEAN ON THE ONE HAND AND THE NONEUROPEAN ON THE OTHER
PERMISSIBLE DISTINCTIONS – GIBRALTAR’S ADVANTAGE In their implementation of the Directive, member states were free to decide how they exercise the derogations provided for in the AIFMD. They also needed to decide whether they wished to “gold plate” the Directive by adding provisions to their national fund regimes that were not required by the Directive. Critical distinctions in implementation may exist in such topics as regulation of the national fund regimes for funds and managers that are below the de minimis thresholds of the Directive (i.e. €100m for open-ended funds and €500m for close-ended funds), including application of the depositary regime in the Directive to funds that are out of scope of the Directive and applicability of any private placement regimes. The Gibraltar approach to the above issues, following an in-depth consultation involving a collaboration of government, the FSC, and the Gibraltar Funds and Investments Association (GFIA), the representative body of Gibraltar’s funds and investment industries, retains as much flexibility as possible as is offered by the Directive. Accordingly Gibraltar has kept its EIF regime for those funds and managers that are out of scope of the Directive while allowing those that wish to, in order to avail themselves of the EU wide marketing passport, to opt-in to the AIFM regime even if they are below the de minimis thresholds. Obviously those that opt-in will have to abide by all the terms of the AIFM regime as if they had been “in scope”. EIFs will therefore form the basis for the regulatory regime to be used as the “in scope” AIF. As they have to comply with the terms of the Directive they will essentially be “Super EIFs”. This is very significant because, as mentioned below, this is likely to dramatically reduce the licensing time of “in scope” AIFs thus retaining Gibraltar’s place as the European jurisdiction with the quickest potential for time to market for new funds. AIFMs wishing to set up Gibraltar funds will be able to do so by establishing “Super EIFs” utilising the pre-author14 H F M W E E K . CO M
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R E A L E S TAT E
GIBRALTAR PROPERTY, TAX AND RELOCATION MIKE NICHOLLS OF CHESTERTON DISCUSSES SOME OF THE PROPERTY, TAX AND RELOCATION ISSUES TO CONSIDER PRIOR TO RELOCATING TO GIBRALTAR
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Mike Nicholls, managing director, is a fellow of the Institute of Chartered Accountants, a member of the Gibraltar Society of Accountants, a regulated funds director and a member of GFIA. Mike operates the Chesterton estate agency in Gibraltar and has his own real estate investment solutions consultancy.
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ibraltar has not only withstood the economic plight of the last few years, but has continued its economic growth unabated. The low tax base in a well-regulated EU jurisdiction ensures that Gibraltar is an attractive proposition at any time of an economic cycle. With corporation tax at 10%, income tax peaking at an effective rate of 25%, and no wealth, capital gains or inheritance tax, Gibraltar is appealing to both individuals and companies willing to relocate to save costs. Chesterton Gibraltar specialises in tax driven relocation services. It works with individuals and companies seeking to establish a Gibraltar footprint and provides a myriad of services within the property and taxation arena. Perhaps the greatest challenge currently facing new arrivals is to source the right property, be it residential or office space. Given the size of Gibraltar, just 2.5 square miles, and the continued demand for property, supply is probably at its lowest level for a number of years. RESIDENTIAL PROPERTY Earlier this year, Spain introduced stringent disclosure requirements on its tax residents relating to non-Spanish assets, the impact of which has been a migration of crossborder workers returning to or moving into Gibraltar for the first time. As a result, the supply of rental apartments has significantly reduced and any apartment below £2,000 pcm is now in short supply. This in turn has led to wouldbe tenants becoming property buyers, resulting in a significant tightening of the sales market with property prices in the £200,000-£500,000 price bracket rising. This is set to continue up the property value curve. The popular areas for incoming executives are the two marinas, Ocean Village and Queensway Quay, and the residential area around Europort. Ocean Village consists of some 480 apartments sharing 3,000 square metres of pools and gardens. The development includes restaurants, bars, the only casino in Gibraltar, a marina, and Chesterton. The location of Ocean Village is one of its main advantages, being walking distance from the border with Spain, the airport and the main shopping area. Prices start from £230,000 for a 50 square metre one-bedroom apartment, increasing to £1.8m for a fourbedroom penthouse with a private swimming pool. Queensway Quay is a more residential and less commercial marina than Ocean Village. It is deeper into Gibraltar while still being walking distance to Europort and the shopping centre. Prices are in line with Ocean Village.
In response to the increase in the number of high-networth individuals seeking to relocate to Gibraltar, two property developments aimed at the higher end buyer are currently under construction. Phase one of Buena Vista Mews is a collection of six villas and nine townhouses in the south district. Nearly sold out, the next phase is due to launch in January 2014. The true measure of Gibraltar’s increasing attraction to the higher net worth client is the recent launch of the Sanctuary: five huge and exquisitely designed exclusive villas adjacent to Gibraltar’s Nature Reserve affording panoramic views across the Strait of Gibraltar to Africa. Chesterton is sole agent. COMMERCIAL PROPERTY Office space is in short supply in Gibraltar. Expect to pay £300-£380 per square metre per annum rent in the more modern office developments. Lease terms vary, but expect a minimum three-year, a probable five-year and a desired ten-year term from the landlord. The relevant covenant strength of the tenant probably determines who holds the ace in the negotiations. Cheaper offices are available around the town centre in refurbished buildings, although floorplates tend to be smaller than the more modern stock. Chesterton is working with two developers currently, both of whom have consent to build purpose built and high end office blocks to satisfy the current demand levels. Contact us for further details for pre-let and pre-purchase opportunities. TAX To benefit from the attractive tax rates, the company or individual must be a Gibraltar resident, which at the minimum entails buying or renting a property. We work with a team of local and UK tax specialists who can advise on the relocation tax issues and opportunities to properly and legitimately reduce one’s tax exposure. LIFESTYLE Gibraltar is a small and friendly place. Lifestyle pursuits include sailing and golf in nearby Spain where there are many excellent golf courses within easy reach of the border. Schools are good, crime is low and the entrepreneurial opportunities are limitless. Three hundred days a year of sunshine is an enticement in itself. And all of this within a two and a half hour flight from London. Q
YOU DON’T HAVE TO LOOK TOO FAR TO FIND THE PERFECT TEAM . . . . . . www.attiaslevy.gi Gibraltar is a perfect EU jurisdiction for the full spectrum of financial services business, with a flourishing funds industry and meeting the highest regulatory standards.
attias & levy Barristers & Solicitors, Notary Public has an experienced team to advise and assist on all legal matters including: Funds, Corporate & Commercial, Financial Services, Private Client, Wealth Management, Taxation, Telecommunications and E-Commerce, Property, Shipping & Admiralty, Litigation and Personal Injury Our corporate arm is A & L Corporate Services Limited Registered in Gibraltar Incorporation no. 103779 and Licensed by the Gibraltar Financial Services Commission A & L Corporate Services Limited — Company Managers — Licence No FSC 1159B Attlev Trustees Company Limited — Professional Trustees — Licence No FSC 00440B
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Email: attlev@gibraltar.gi
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Gibraltar
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GIBRALTAR – WELL-REGULATED, COST-EFFECTIVE AND WITHIN THE EU JON TRICKER OF DELOITTE SPEAKS TO HFMWEEK ON WHAT MAKES THE ROCK A LEADING FUND JURISDICTION
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rofessional, timely and low-cost with an exceptional regulatory environment and unbeatable lifestyle benefits, it is no small wonder that Gibraltar continues to solidify itself as a top jurisdiction. Jon Tricker of Deloitte explains the benefits and opportunities the EU jurisdiction offers.
Jon Tricker, a Cambridge graduate, qualified as a chartered accountant with Deloitte UK. He joined Deloitte in Gibraltar in 2005 and has overseen the growth of the practice’s services to hedge funds and investment managers, supporting the industry through various roles, including as a member of the executive of GFIA.
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HFMWeek (HFM): Why should fund managers choose Gibraltar? What benefits does it offer over other jurisdictions? Jon Tricker (JT): Gibraltar is a fantastic base for investment managers, who come for several reasons, most notably Gibraltar’s status within the EU and the passporting advantages this brings, low costs, a familiar legal environment based on UK common law, a sensible and approachable regulator, exceptional client service from wellqualified and experienced local staff and, for those looking to relocate, a huge improvement in lifestyle. As a responsible EU jurisdiction, all EU directives are implemented in Gibraltar on a timely basis. Until recently investment managers would establish themselves using the MiFID licensing regime and, in addition, we are aware of several applications for AIFMD licences already in the pipeline. Without doubt, the biggest pull for investment managers to Gibraltar is the EU dimension that both regimes bring. Regulation is an important factor in choosing any jurisdiction and any regulator is faced with a difficult balancing act of enabling the business community to flourish while enforcing regulations strictly and sensibly. We believe the Gibraltar regulator, the Financial Services Commission, achieves this well. The regulator is frequently subjected to outside review, and these reviews consistently praise the high standards of regulation. In that context, the Commission is available and willing to meet potential licensees before applications are made – and applicants are thus able to get a clear view of where they stand before embarking on the licensing process. In addition, once licensed, the regulator is sensible and approachable, and has self-set service standards which it is very proud to maintain. In the case of Gibraltar, the regulator is without doubt a positive factor. Cost is one of the other main reasons for setting up a licensed investment manager in Gibraltar. The costs to
become licensed are reasonable, and the ongoing running costs very competitive. One of the big cost advantages for Gibraltar is in taxation – there is a flat 10% rate of corporation tax, no VAT, no withholding taxes and no capital gains tax as well as low personal rates of tax that ensure that no employee will pay in excess of 25% tax on their remuneration. In addition, investment managers who choose to relocate, as well as other executives possessing skills of particular interest to the jurisdiction, can apply to the Finance Centre in Gibraltar to obtain a taxation status which caps the tax on their employment income to around £30,000, which can be used to reduce substantially the net tax payable in percentage terms on management profits. The lifestyle Gibraltar offers is unique among the EU jurisdictions. Gibraltar is very safe and family friendly, with excellent schools. While Gibraltar professionals work very hard, the pace of life on the streets can be slower than elsewhere in Europe and that fact, coupled with the good weather (more than 300 days of sunshine per year), make for generally happier people. In addition, pretty much all leisure pursuits are well catered for, either in Gibraltar or over the border in Spain, which offers not only excellent restaurants and tapas bars but also numerous high quality golf courses, skiing facilities and beaches, all within a short drive. Transport links are also very good – there are several daily direct flights from Gibraltar’s airport to the London hubs and other UK destinations, and Malaga, Seville and Jerez airports are also within a relatively short drive. Gibraltar’s foundations in the investment management industry are already strong and its attractions very real. There can be no question that these foundations put Gibraltar in a strong position to attract new compliant businesses to the jurisdiction. HFM: What are some of the main opportunities for investment managers in Gibraltar? JT: Those wishing to relocate will find Gibraltar an extremely attractive proposition, as already mentioned. The main opportunity exploited by investment managers is the EU passport afforded by both the MiFID and AIFMD regimes. The AIFMD regime is new and the Directive has already been fully transposed into Gibraltar law, and those elements of the Directive that are subject to the judgement
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of the local regulator (for example in terms of regulation and delegation) are to be implemented in a sensible, business friendly way. In order to obtain a licence, either MiFID or AIFMD investment managers need to demonstrate that there is substance to their operations in Gibraltar, in particular in the form of appropriate qualified individuals running and overseeing operations. That said, it is still possible to obtain a licence in Gibraltar and for portfolio management, for example, to be delegated elsewhere. In addition to the natural links to the UK, there are strong links in Gibraltar to the Swiss investment management community, and there are local service providers able to support such managers to set up a licensed business in Gibraltar and “hit the ground running” – allowing certain business aspects to be delegated to another territory while ensuring all licensing requirements are met. The reality is though that the managers who do relocate soon settle in to the excellent lifestyle in Gibraltar and there is no simpler way to take full advantage of Gibraltar’s benefits than to move operations in their entirety to Gibraltar. HFM: Market participants have suggested the AIFMD will drive more funds onshore. Do you think Gibraltar will see that movement and why?
MANAGERS WHO DO RELOCATE SOON SETTLE IN TO THE EXCELLENT LIFESTYLE IN GIBRALTAR AND THERE IS NO SIMPLER WAY TO TAKE FULL ADVANTAGE OF GIBRALTAR’S BENEFITS THAN TO MOVE OPERATIONS IN THEIR ENTIRETY TO GIBRALTAR
JT: Without doubt, until 2015 at the least, the AIFMD puts EU AIFMD compliant funds at an advantage over non-EU funds, and Gibraltar as an EU jurisdiction is well placed to see further growth in its funds industry, which is already well established. One of Gibraltar’s unique advantages, particularly in terms of the hedge funds industry, in which Gibraltar’s key competitors (Dublin, Malta and Luxembourg) are all in the Eurozone, is the fact that Gibraltar’s home currency is the British Pound (and not the Euro) – especially given the many bailouts in the Eurozone and the risk of contagion. This, coupled with the fact that Gibraltar’s legal system is based on UK common law, with UK case law being equally applicable in Gibraltar (in uncertain times a familiar legal system can only be attractive to investors in hedge funds) makes Gibraltar a unique proposition within the EU. The service levels of Gibraltar professionals and firms are also very high so there are many reasons to believe Gibraltar will benefit from this change.
HFM: How does Gibraltar feel it has adapted to the global transparency push? JT: The reality is that there has been no need to adapt significantly. Gibraltar is a small jurisdiction which as a finance centre has always taken its reputation extremely seriously.
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By way of example, Gibraltar has signed a significant number of tax information exchange agreements, far more than is required by the OECD to ensure a white listing, and those agreements have been with significant jurisdictions including the US, the UK and the other large EU financial centres. The government of Gibraltar has stated its commitment to exchange of information and transparency in tax matters and will be taking part as one of the initial jurisdictions in many international initiatives. Gibraltar as a jurisdiction is only interested in open and transparent business. HFM: Finally, what are the main issues currently facing Gibraltar fund managers and what solutions does Deloitte offer its clients?
JT: We are the appointed auditor on a significant percentage of the jurisdiction’s investment funds and fund management companies. The importance of the audit of any investment company goes beyond the statutory annual audit requirement – all counterparties depend on a proactive, consistent and timely approach, and we work very hard to deliver on and exceed those expectations. In addition, in terms of investment managers, we regularly assist our clients in meeting the requirements of the Gibraltar regulator, offering expert guidance in navigating the application process – developing business plans, assessing business predictions in the context of regulatory returns and preparing ICAAPs. We can also provide support in the production of management accounts, as well as ensuring all ongoing regulatory filing requirements are fulfilled. We are always delighted to meet new business partners and would be very happy to give further insight into the jurisdiction either at our offices in Gibraltar or elsewhere. Q H F M W E E K . C O M 19
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F U N D A D M I N I S T R AT I O N
G I B R A LTA R 2 0 1 3 - 2 0 1 4
A POWERFUL ALTERNATIVE IN EUROPE
MOE COHEN, CEO OF NEXUS FUND ADMINISTRATION, EXPLAINS HOW GIBRALTAR HAS BECOME A LEADING FUND DOMICILE AND WHAT MANAGERS LOOKING TO SET UP THERE SHOULD EXPECT
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Moe Cohen FCA is a founder partner of Benady Cohen & Co, Chartered Accountants, as well as the CEO for Nexus Fund Administration. He is also a member of the executive board of GFIA and Finance Centre Council. Moe advised the Government on the initial establishment of regulated funds in Gibraltar in 2004/2005.
oe Cohen has been part of the Gibraltar fund industry since its inception in 2004/05 and has witnessed the immense growth of the jurisdiction during this time to become a leading alternative fund domicile. With the growth here set to continue and a number of regulations shaping the industry, Cohen takes a moment to speak with HFMWeek on the benefits of domiciling on the Rock and how and why managers set up funds there. HFMWeek (HFM): What factors have led to Gibraltar becoming a leading fund domicile? Moe Cohen (MC): Gibraltar is a professional jurisdiction which has been developing a significant amount of business in the financial services world. This began in banking, many years ago. As the industry continued to grow, it expanded into insurance where Gibraltar has developed a strong sector in both general insurance and captive companies. When we established the fund industry in 2004/2005, we cherry-picked from other jurisdictions what we felt was going to be the best product for Gibraltar. There has been an excellent growth pattern in the last few years and we now have just close to 100 Gibraltar funds. Within those funds, Gibraltar also has more than 200 or 250 cells or sub funds and approximately £3.5bn AUM. The fiscal environment in Gibraltar is also attractive for the fund managers themselves, as there is only a 10% corporation tax. Funds themselves are tax neutral. In addition, the regulatory environment in Gibraltar is extremely robust and the regulator is very accessible. International authorities like the IMF and the FSA have audited the jurisdictions and the results have been very positive calling Gibraltar “a model jurisdiction”. Gibraltar can and does offer a number of types of funds from Experienced Investors Funds (EIF), private funds to Ucits. The private funds are particularly important for smaller projects and can actually help a fund manager get a track record to be able to then convert it
into a regulated EIF fund later on. Gibraltar, therefore offers seed-level funds such as the private funds in order to be able to gather momentum and to scale up into an EIF or another fund accordingly. HFM: What should managers be considering in terms of redomiciliation to Gibraltar? MC: Managers looking to redomicile their business or their funds should first look closely at their fiscal considerations and the regulations in Gibraltar. As mentioned, the attractive tax environment coupled with the flexibility and accessibility of the regulator make it quite easy to move to Gibraltar. More importantly, as Gibraltar is located in the EU, it can passport services into the EU and benefit from all its regulatory advantages. Also, it is in a central location which is an important aspect in terms of timelines for international investors. HFM: Have recent regulations such as the AIFMD affected managers’ decisions to domicile in Gibraltar? MC: Gibraltar is relatively quite advanced with the rules and regulations of the AIFMD. As an EU jurisdiction, the industry has been accelerating over time in order to ensure that by the time the AIFMD becomes completely operational and applicable we will have the service providers fully equipped with all the requirements of AIFMs. Gibraltar enjoys EU status and has already enacted the AIFMD (and all other EU directives) which is an important consideration. As a result, Gibraltar and its regulator are assisting its service providers to be able to attract the funds and fund managers who need to satisfy AIFMD requirements.
WHEN WE ESTABLISHED THE FUND INDUSTRY, WE CHERRY-PICKED FROM OTHER JURISDICTIONS WHAT WE FELT WAS GOING TO BE THE BEST FOR GIBRALTAR. WE NOW HAVE JUST CLOSE TO 100 FUNDS.
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HFM: What time-frame can a manager expect when launching a fund in Gibraltar in terms of licensing and legal processes involved? MC: The time-frame depends on two aspects. If the fund is being redomiciled, then the time frame depends on where the fund exists at the moment and the complexities or otherwise of that jurisdiction to redomicile to Gibraltar. A fund from BVI or Cayman, H F M W E E K . C O M 21
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for example, has been seen to have a time frame of approximately two to six months. In terms of the Gibraltar licence, the licence will allow the fund to launch immediately subject to a 14 day notice period. From the fund side, this will depend on how long it takes to set up the prospectus. In cases of redomiciliation, it may simply need to be edited in terms of jurisdictional differences which can take up to a month for more complex funds or funds without a prospectus in place. Therefore, Gibraltar is extremely streamlined and efficient in terms of these processes. For a manager looking to obtain a licence, the time frame will obviously depend on the type of licence, whether it is an AIFM licence or another type, and can take up to six months depending on how much the manager has prepared in terms of the application form and business plan. HFM: In what ways does your firm assist managers with fund set-up? MC: We are part of Nexia International, an international network of independent accounting and consulting firms, and represented in over 100 countries; therefore we can advise the client on either side for redomiciliations as necessary in terms of fiscal and professional advice. If the client is a new start up, we can also help them with the set-up of their prospectus with technical assistance from the law firms with whom we work very closely with. Once the fund is set up we act fund administrators and provide a full set of fund administration services which include transfer agency services and where appropriate, directorships. As chartered accountants, we can also audit the funds which we do not administer. HFM: What types of fund structures have proved to be the most popular in Gibraltar? 22 H F M W E E K . CO M
F U N D A D M I N I S T R AT I O N
MC: There is a large variety of funds in Gibraltar. The main types of funds here are EIFs followed by private funds. The EIFs are regulated and can have more than 50 investors. There are a large number of securities and derivative based funds. A good proportion of the fund market is made up of private equity which presents a considerable amount of opportunity. It is quite a niche market where, because institutional finances are so difficult, we are seeing a number of private equity groups using Gibraltar funds as a means of alternative finance. HFM: What do you expect in terms of growth over the next 12 months? MC: Over the next year the jurisdiction will continue to adjust to the AIFMD requirements to make sure we are fully prepared for the influx of larger funds. We expect to see redomiciliations and the set-up of new structures as a result. In my opinion, the full introduction of the AIFMD will represent stage two of Gibraltar’s fund industry growth. Growth in private equity and securities EIF and private funds represented stage one, which will continue to grow in parallel. While I don’t see a huge growth in Ucits in the next year, I believe that once a few Ucits funds are established, it will present new opportunities and I think this will be stage three of our fund industry’s growth. I would also note there is a project for a Gibraltar stock exchange in the pipeline which will enhance and encourage Gibraltar’s fund industry as funds will be able to be listed locally. This additional facility will play an important role in further catapulting Gibraltar into a new stage of its growth. In a nutshell, Gibraltar, as a fund jurisdiction, is a growing and powerful alternative in Europe. Q
Investment Fund Services One step ahead. Gibraltars’ Funds Industry The investment fund industry today faces unprecedented challenges and opportunities. Yet every fund, regardless of its size or where it is in its life cycle, has different needs and different challenges. We offer extensive local experience coupled with global reach and bring a wide range of combined capabilities to bear on every engagement. As an appointed advisor on a significant proportion of funds domiciled in Gibraltar, Deloitte Gibraltar is the professional services firm of choice for investment funds in the jurisdiction.
For more information please contact Jon Tricker, Partner on: Tel: +350 200 41200, Fax: +350 200 41201, jtricker@deloitte.gi
www.deloitte.gi Merchant House, 22/24 John Mackintosh Square, P.O. Box 758, Gibraltar © 2013 Deloitte Limited. A member of Deloitte Touche Tohmatsu Limited
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FINANCIAL SERVICES
BANKING SAFELY IN A POST-CRISIS ERA
BENJAMIN MOSS, CHIEF RISK OFFICER AT TURICUM PRIVATE BANK, DISCUSSES SYSTEMATIC RISK IN BANKING TODAY
Benjamin Moss heads the legal, compliance and risk management department at Turicum Private Bank in his role as chief risk officer. He has a strong legal background with dual law degrees from the UK and France and a master’s degree in International Commercial Law. He is currently undertaking a fully sponsored research project on the regulation of systemic risk.
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ince the financial crisis of 2008, banking has received a considerable amount of negative attention. Moving forward, the importance of assessing risk in investment banking remains clear. Benjamin Moss of Turicum Private Bank explains how the crisis has altered perceptions of the banking industry. HFMWeek (HFM): What does banking safety mean today? Benjamin Moss (BM): Well, as always, it means different things for different people, who have different needs and different risk appetites. This is the most common argument in favour of segregating banking activities, by safeguarding retail clients against risky banking dealings. The common denominator, however, remains that any account holder does not want to experience a bank failure, but even more importantly they do not want to lose their assets. Having said this, even if assets are safe despite a bank’s health, by being segregated or guaranteed by a scheme, it remains that it will take time to recover the assets if the depository fails. Although progress has been made in this respect, we are still talking in years for recovery. For example, if we compare the amount of time it took to recover assets when Lehman Brothers (2008) failed against MF Global (2011), the former remains an ongoing process
whereas the latter has ‘already’ returned a large amount of client monies. With the introduction of improved processes to deal with failed or failing institutions, and the development of living wills for large financial institutions, we can foresee that recovery times will improve. HFM: What did the financial crisis change in the way banks are perceived? BM: It is no secret that banks and bankers received a considerable amount of bad press during the crisis, and in many circumstances rightfully so. This had the effect of setting the regulatory pendulum in full swing towards the implementation of a more strenuous regulatory regime for financial institutions. Although we have to commend the efforts of key legislators and regulatory authorities in their hard work to provide a safer framework in which to provide financial services, we need to be cautious of regulations set up in haste. Prior to the crisis we bemoaned the time it took to fully implement legislation, but this had the advantage of covering all the bases and enabled full consultation with industry. In my opinion, the principles of the AIFMD are valid, for example, in particular in relation to systemic risk and for larger funds. However, the repercussions for the smaller players in the industry could potentially be very expensive and the wider consequences remain uncertain, for example in terms of consumer protection schemes or professional insurance premiums. H F M W E E K . C O M 25
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will be at risk due to fractional reserves, but stocks, bonds or fund shares, for example, will be held separately from the bank’s assets. So another good question to ask is where and how are my assets held.
HFM: You mention systemic risk and the larger funds, so size still matters today? BM: It does matter, but not in the same way it used to and we now have confirmation that it is not restricted to banks. Prior to the failing of Lehman Brothers, ‘too big to fail’ rang true as the fear of unquantifiable consequences was overwhelming for governments. Allowing Lehman to fail brought home the idea that no matter the potential implications, financial institutions could fail. Moreover, with regulatory efforts to avoid systemic fall outs, and the introduction of living wills for financial institutions of a consequent size, government intervention is less likely in the future. HFM: What does this mean for consumers in practice?
HFM: Would you say that regulatory efforts have been sufficient to legitimately restore confidence in banks?
ANYONE WANTING TO OPEN AN ACCOUNT WHO HAS SAFETY IN MIND NEEDS TO RETHINK WHAT SAFE BANKING ACTUALLY MEANS; EVEN MORE SO IF SIZE IS NO LONGER A GAUGE OF SAFETY
BM: It means that anyone wanting to open an account who has safety in mind needs to rethink what safe banking actually means; even more so if size is no longer a gauge of safety. Consumers need to start looking at banks’ and financial institutions’ balance sheets a bit more carefully in order to fully understand the liabilities a particular institution is exposed to. Understanding the nature and the risk appetite of a financial institution is crucial, retail clients need to rely on the regulators, but professional clients and counterparties who have the tools available need to be able to justify their choice of custodian or depository to their respective clients. HFM: How can a consumer, whether retail or professional, such as a fund, assess the safety of a bank? BM: Capital adequacy is probably a good starting point. I think it is also perfectly acceptable now to ask your banker to explain the bank’s balance sheet and highlight which are the biggest risks it is exposed to. Analyse your custodian as if it was a long-term investment and make sure the bank’s risk appetite is congruent with your objectives – the due diligence process needs to be a two way exercise. We train our front line staff to have a good understanding of our financials and risk map so that we can ensure the clients understand our limited risk appetite in terms of balance sheet exposure, which ultimately translates into institutional safety. Also, it is important to note that assets that are deposited with a bank are not necessarily at risk if the bank is in difficulty. In a well diversified portfolio, the cash element 26 H F M W E E K . CO M
BM: The myriad of financial reform efforts have chiefly targeted moral hazard and systemic risk in order to protect jurisdictional stability via the avoidance of failing banks, but is this sufficient? At a jurisdictional level it is certainly a leap forward as, prior to the crisis, discussions regarding the regulation of systemic risk were mainly academic. However, the fact that a failing institution will not affect the rest of the economy does not really help the affected account holder. I also think individuals now working in the finance industry understand much better what their responsibilities are, and are much more aware of the repercussions their acts can have. Prior to the crisis, banks were entrusted with the role of gatekeepers of money flows and financial transactions. Maybe this was too much to ask from private institutions as they ended up acting as Trojan horses instead. By diminishing the scope for systemic risk to occur will certainly lessen to a certain extent the importance of banks in the economy; however, consumers need to start feeling that banks are in the business of keeping their assets safe rather than seen as gamblers. This change will take some time, but with requirements of improved education for bankers, improved corporate governance measures and pay packages which have a long-term interest, confidence in banks is already making a U-turn.
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HFM: What is your outlook on the finance industry in terms of safety and stability? BM: I think the next five to ten years will be decisive in determining the role banks play in economies at a jurisdictional level. Let’s not forget that banks carry out a semi-public role, where their presence is necessary for an economy to function, but they need to be able to position themselves competently at several levels and return to becoming anchors rather than risks. It is clear that those institutions that fail to adapt to the new regulatory environment by realigning their business models will have great operational difficulties in the future. Q
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TH E NE W H E DG E F UND RE G ULATORY AND COMPLI ANCE ONLI NE RE SOURCE
About HFMCompliance HFMCompliance is a new online data resource providing access to key reporting, marketing information and updates from a host of international legal advisors. The service, which is due to launch at the end of 2013, will provide COOs, legal and compliance professionals at hedge funds with a comprehensive breakdown of key rules and regulatory considerations on a jurisdictional basis. This free to access service – exclusively for HFMWeek subscribers - is designed as a first port of call for management firms seeking guidance on global trading rules, short selling reporting, domiciliation and marketing conditions in 50 of the most requested jurisdictions (as suggested by managers themselves). HFMCompliance is produced by the publishers of HFMWeek, the leading supplier of news and business intelligence to the global hedge fund sector. The facility benefits from HFM’s background of extensive industry knowledge and contacts to ensure that the information delivered is
relevant, informative and essential for a hedge fund user.
How to access HFMCompliance HFMCompliance is available exclusively to HFMWeek subscribers. To find out more HFMCompliance and how to become a subscriber, contact the HFMWeek team on: +44 (0) 20 7832 6511
How does HFMCompliance work? HFMCompliance provides a comprehensive guide to the specific trading and marketing regulations within each country from the top 50 most requested global hedge fund trading and marketing venues. Users can search for specific regulations for each country including: • • •
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Short selling rules and reporting conditions. Thresholds for reporting long only holdings. Marketing stipulations for selling funds, including information on private placement, licensing regimes and reverse solicitation. Information on key regulators and reporting methods. Contact details for key local legal experts and counsel. Fund and manager domiciliation information.
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THE AIFMD IN GIBRALTAR ADRIAN HOGG OF GRANT THORNTON FUND ADMINISTRATION SPEAKS TO HFMWEEK ABOUT THE STRENGTHS OF GIBRALTAR AS A FUND DOMICILE AND HOW IT CAN BENEFIT FROM THE IMPLEMENTATION OF THE AIFMD
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n the run up to the implementation of the AIFMD, Gibraltar was confident and fully prepared for the new regulations. Since the Directive has come into effect, the British Overseas Territory has embraced the changes that the AIFMD has brought and has positioned itself as an alternative jurisdiction for hedge funds wanting to redomicile. HFMWeek speaks to Adrian Hogg of Grant Thornton Fund Administration to find out more.
Adrian Hogg is a founder and director of Grant Thornton Fund Administration. He is a specialist in investment business with over a decade’s experience involving various investment structures in Gibraltar and the Caribbean. Hogg is an FCA, an FSC-licensed person, former chairman of GFIA and sits on the FSC’s Funds Panel.
HFMWeek (HFM): Gibraltar has positioned itself as an alternative jurisdiction for funds looking to re-domicile in light of the AIFMD. What advantages does Gibraltar offer over other offshore domiciles? Adrian Hogg (AH): Gibraltar is not an offshore jurisdiction but enjoys a special status within the European Union (EU). In 1973, when the UK joined the then European Economic Community, Gibraltar was included as a dependent territory in Europe, under Article 277(4) of the Treaty of Rome. It was however excluded from the common market provisions, the common agricultural policy and the harmonisation of turnover taxes (in particular VAT). Gibraltar is a member of the EU and therefore an EU finance centre. Gibraltar is fully compliant in respect of EU investment business and fund legislation and the AIFMD was transposed into Gibraltar law on 22 July 2013. The fact that Gibraltar is part of the EU as well as fully AIFMD-compliant is a major benefit for those seeking to redomicile who, by using a Gibraltar structure, would benefit from passporting throughout the EU. This avoids the need to rely upon national private placement regimes in order to market their products.
which the re-domiciled structure will be located, the taxation issues relating to the fund and the rule of law of the jurisdiction. Managers also need to consider from a practical point of view the ease of visiting the location from which the fund will undertake its activities for meetings with the regulator and service providers. Gibraltar has a developed professional services infrastructure (of banks, audit firms, law firms and administrators). Investment income of funds is exempt from tax and Gibraltar has its own legal system based on English law. From a practical standpoint it’s an easy and pleasant place to visit. HFM: The Experienced Investor Fund (EIF) is the predominant fund structure in Gibraltar. What are the benefits of this structure and is it likely to remain popular following the implementation of the AIFMD? AH: There are several benefits to the EIF structure. The rules in respect of the asset classes, investment objectives, strategies and the principal of risk-spreading and restrictions (including leverage restrictions) are selfdetermined by an EIF as set out in its offer document. This makes the EIF an extremely flexible regime that should cater to all types of funds, which is a key consideration when re-domiciling. Advantages of re-domiciliation can be lost somewhat if the re-domiciliation of the fund is to the detriment of a fund’s asset classes, investment objective, strategy and/or restrictions. In addition, the EIF regime permits funds to be established via a process of regulatory notification which means that the EIF is the quickest EU fund product to market. EIF regulations also permit the use of an external administrator which can ease the process of re-domiciliation. Finally under the EIF regime, funds can meet AIFMD requirements in-scope or out-of-scope which allows managers to run their entire portfolio from one location. This can be a huge benefit for managers.
FUNDS CAN MEET AIFMD REQUIREMENTS IN-SCOPE OR OUT-OF-SCOPE WHICH ALLOWS MANAGERS TO RUN THEIR ENTIRE PORTFOLIO FROM ONE LOCATION. THIS CAN BE A HUGE BENEFIT FOR MANAGERS
HFM:What steps should managers be taking if they are considering re-domiciliation to Gibraltar? AH: Gibraltar has regulations specific to re-domiciliation which permit re-domiciliation from all of the major non-EU fund centres including the Cayman Islands, the British Virgin Islands and the Channel Islands. Managers should consider the financial services environment in
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HFM: Do you think the Directive will give investors the protection and confidence needed to increase inflows to the hedge fund space? How well placed are H F M W E E K . C O M 29
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Gibraltar’s service providers to cope with any growth in assets? AH: The heightened transparency provisions of the AIFMD along with the enhanced role of the depositary should provide investors with confidence and protection. As previously discussed the EIF regime permits external administrators. There is no requirement for the manager to be based locally and the Gibraltar regulator is due to permit external depositaries within the AIFMD transitional provisions. The Gibraltar fund product can make use of applicable service providers throughout the EU. HFM: As hedge fund managers look to appoint a depositary, how can potential custodians stand out? What should managers look for in a depositary? AH: In my opinion a depositary needs to be flexible. They should permit funds to place their assets with external brokers (subject of course to depositary control) so that managers can undertake their activities to the best of their ability using multiple brokers if their strategy so dictates. Managers also need to consider what limitations 3 0 H F M W E E K . CO M
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are imposed by a depositary and ask if they permit the use of external brokers, what systems they are using and what their costs are? HFM: What are the biggest challenges facing Gibraltar’s hedge fund industry? How can these be overcome? AH: The introduction of the AIFMD, along with Gibraltar being an EU finance centre, means that Gibraltar has gone from being one of many possible funds jurisdictions to being one of four (alongside Luxembourg, Ireland and Malta). Larger funds are likely to domicile in larger jurisdictions, such as Luxembourg and Ireland. There will, however, be a significant number of funds seeking an EU base and Gibraltar’s funds industry will grow as a result. The Gibraltar government, the regulator and the funds sector have the minds and infrastructure to deal with such growth which will certainly be Gibraltar’s biggest challenge. It is a challenge that the local industry is happy to take on. Gibraltar is AIFMD-compliant, competent and ready for the challenge. Q
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