This briefing has been prepared for the assistance of investment managers primarily considering carrying on investment management from Guernsey. It is intended to provide only a summary of the main legal requirements and general principles applicable to the establishment and operation of investment managers in Guernsey, as well as ancillary matters to be considered in carrying on business in and from Guernsey. It is not intended to be comprehensive in its scope. It is recommended you seek special legal advice before taking steps to establish an investment manager in Guernsey and we would be pleased to assist you in this respect.
A series of briefings on other aspects of Guernsey law have been produced by Ogier and are available on request or on our website, www.ogier.com.
This memorandum has been prepared on the basis of the law and practice as at April 2016.
In recent years a number of investment managers have set up operations in Guernsey encouraged by the pragmatic regulation and infrastructure in place.
Guernsey is a leading financial centre of the highest reputation and standards. The jurisdiction is one of the most established, transparent and well-regulated financial centres and was placed on the OECD G20 ‘white list’ in 2009, which reflects high standards on international compliance and transparency. Guernsey’s continuing success as a financial centre is based on various factors, including economic and political stability, the independence it enjoys, an easily accessible justice system and an independent regulatory regime. Its low tax status, proximity to the financial markets of Europe and sophisticated financial industry infrastructure also contribute to its success.
Guernsey is also ideally suited geographically being within the European time zone and conveniently placed between the US and Asian time zones. It is serviced by regular flights to and from Gatwick Airport and other major UK airports and enjoys reliable high quality communication links.
Whilst the finance industry in Guernsey is subject to regulation to protect all parties and ensure the smooth running of the industry, it does not suffer from overregulation nor the cumbersome, costly and time consuming requirements that often result.
The finance industry is regulated by the Guernsey Financial Services Commission (the Commission). In doing so it plays an important part in upholding Guernsey’s international reputation as a finance centre.
The establishment and operation of investment managers in Guernsey is governed by the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the POI Law) together with the rules made thereunder.
Under the POI Law persons who by way of business carry on ‘restricted activities’ in connection with ‘controlled investments’ in or from the Bailiwick of Guernsey, which includes Alderney and Sark, must obtain a licence. The activities of investment managers, for example, management, dealing, administration and advising, fall within the definition of ‘restricted activities’. As these are generally conducted in connection with ‘controlled investments’, which include collective investment schemes and general securities and derivatives, it is usually necessary to apply to the Commission for a licence.
It is not necessary for an investment manager to have a physical presence in Guernsey, though it will still require a licence, for example, if established as a Guernsey company even if its business is conducted entirely in or from within countries or territories outside of the Bailiwick.
If it does not have a physical presence in the Bailiwick it will need to be administered by an appropriately licensed Guernsey administrator.
Once licensed, an investment manager is required to comply with the Licensees (Conduct of Business) Rules 2014 (the COB Rules) and the Licensees (Capital Adequacy) Rules 2010 (the Capital Adequacy Rules). Further information can be provided on request.
As a matter of practice, the Commission requires an investment manager (with no physical presence in Guernsey) to have net assets of £10,000 or net assets and professional indemnity cover which, in the opinion of its directors, is sufficient to meet its commitments and withstand the risks to which the business is subject. If the investment manager has a physical presence in Guernsey, it will need to maintain net assets of £25,000 (or equal to the expenditure based requirement set out in the Capital Adequacy Rules, whichever is greater) and minimum professional insurance cover of £250,000 (or three times total revenue, whichever is greater). The Capital Adequacy Rules also set out an ongoing liquidity requirement.
To prevent any waste of time and costs it is possible, prior to a formal application, to ask the Commission for their initial view. Potential applicants who do not appear to meet the Commission’s expectations will be discouraged from making a formal application.
A formal application will comprise the completion and submission of a form and personal questionnaires in respect of directors, managers and various other officers of the company together with an application fee of £2,170.
A licence under the POI Law is issued in the form of a letter setting out the categories of investment business the new licensee may deal with and the restricted activities it may undertake in connection with that business. Conditions may be imposed on the licence.
Upon licensing, an annual licence fee becomes payable. This fee is presently set at £3,100.
One of the favourable aspects of conducting business in Guernsey is its tax regime.
A company incorporated in Guernsey as an investment manager will automatically be treated as resident in Guernsey for tax purposes.
However, companies, other than banks, fiduciary and insurance businesses, utilities or local property companies, will not be liable for Guernsey income tax because a zero rate of tax applies.
If the beneficial owners of the company are not resident in Guernsey for tax purposes, they will not be liable for Guernsey income tax. However, individuals who are resident in Guernsey may be able to benefit from a tax cap on their non-Guernsey income.
Guernsey is currently reviewing its corporate tax regime but remains committed to maintaining a competitive, internationally accepted tax system.
Guernsey company law is flexible in respect of director requirements and whilst a Guernsey company must have at least one director, directors may be individuals or corporate entities and there is no requirement for directors to be resident in Guernsey.
Whilst directors of the investment manager will be required to submit a form to the Commission containing personal information, there are no director qualification requirements.
Whilst not necessarily a director requirement, in the event that the investment manager is to establish a presence in Guernsey, the Commission will expect there to be at least two directors or persons employed by the company in Guernsey, in order to satisfy the Commission’s “four eyes” requirement. Where the company engages a local administrator, “four eyes” will often be provided by that administrator.
Markets in Financial Instruments Directive (‘MiFID’)
Guernsey does not form part of the United Kingdom. Accordingly, European Union (EU) directives on fiscal harmonisation, financial services and company law do not have effect in Guernsey.
As such Guernsey will not be subject to MiFID and investment managers as a result will benefit from not being subject to a further increase in compliance requirements.
MiFID originated in 2007 as a plan to facilitate cross-border equity trading in Europe as part of the larger scheme to create a single market in the EU. To date, it seems that MiFID has had limited impact on Guernsey investment businesses.
MiFID II was announced by the European Commission in October 2011 and is intended to expand on the original directive to encompass all asset classes (with the exception of foreign exchanged) and to shore up the weak areas of the original directive. The revised directive was adopted by the European Parliament on 15 April 2014. Guernsey entities intending to provide investment services in the EU may need to comply with the provisions of MiFID II. Of likely impact to Guernsey entities which are intending to provide investment services to retail clients in the EU is the proposal to require the establishment of a branch operation in the EU Member state where the retail clients are situated, as the branch operation will be subject to certain provisions of MiFID II.
Further updates will be provided once the possible issues and implications affecting Guernsey entities becomes clearer.
Alternative Investment Fund Managers Directive (AIFMD)
The AIFMD is an EU directive that seeks to regulate the non-UCITS fund sector, including hedge funds, private equity funds and real estate funds. All Alternative Investment Fund Managers (AIFMs) established in the EEA, whether they manage EEA or non-EEA Alternative Investment Funds (AIFs) are subject to the AIFMD. The AIFMD also governs the managing and marketing in the EEA of AIFs managed by an AIFM established outside the EEA (such as Guernsey). For the avoidance of doubt, for the purposes of AIFMD, all Guernsey regulated funds which are marketed into the EEA fall within the definition of an AIF.
Guernsey has introduced the AIFMD (Marketing) Rules, 2013 (the Marketing Rules) which ensure that investment managers established in Guernsey and Guernsey funds, which wish to market/be marketed into the EEA meet the requirements of Articles 42 and 43 of the AIFMD. The Marketing Rules introduce minimal notification requirements to the Commission by Guernsey investment managers and Guernsey funds in respect of marketing into the EEA. The Marketing rules also allow the Commission to co-operate effectively with the relevant EEA securities regulator. The Marketing Rules became effective on 22 July 2013.
Further, prior to the introduction of a pan-European passport, Guernsey operates an equivalent opt in AIFMD regime for Guernsey investment managers and depositaries. The AIFMD Rules, 2013 govern this opt in regime and became effective from 2 January 2014.
The Data Protection (Bailiwick of Guernsey) Law, 2001 (the Data Law) came into force in 2001 having been designed to mirror the 1995 EU Data Protection Directive. It is based on the 1998 UK Act and the introduction of the Data Law has resulted in Guernsey being recognised by the European Commission as providing adequate protection for the trans-border flow of data.
The Data Law provides for the rights of data subjects and requires data controllers to be registered on a register maintained by the Data Commissioner.
Housing and Right to Work
In addition to Guernsey’s progressive and favourable financial industry infrastructure offering commercial benefits, the residents of Guernsey enjoy a high standard of living, favourable weather conditions and picturesque surroundings.
There is no control over the ownership of property in Guernsey. However, the occupation of dwellings is subject to certain restrictions as governed by the Housing (Control of Occupation) (Guernsey) Law, 1994, as amended (the Housing Law). The property market in Guernsey is divided into ‘Open Market’ and ‘Local Market’ properties. The right to occupy ‘Local Market’ dwellings is controlled and only ‘qualified residents’ or those permitted by licence may occupy.
Although there are restrictions in place on occupying some housing, it is a straightforward process for persons to take up accommodation in Open Market accommodation and obtain the appropriate right to work documentation (which must be held by every person who is in employment in Guernsey).