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Funds Legal and Regulatory Update

January 2015 - Finance. Legal Developments by Ogier .

More articles by this firm.

Period covered:  30 September 2014 to 31 December 2014

 

1 Alternative Investment Fund Managers Directive (AIFMD)

1.1 ESMA call for evidence 

A call for evidence was issued in October 2014 by the European Securities and Markets Authority (ESMA) to gather views on the extension of the AIFMD passport to third countries by July 2015 in line with the original text of level 1 of the AIFMD.

The deadline for the submission of responses to the call for evidence was 8 January 2015.  Ogier worked closely with the Jersey Funds Association on preparing a response. It is anticipated that responses will in due course be published on the ESMA website and that ESMA will provide further clarification on the extent and timing of the extension in the coming months.

1.2 Changes to Offshore Board Arrangements in respect of AIFs

The UK Finance Act 2014 has introduced changes that exempt certain non-UK incorporated alternative investment funds (AIFs) from being tax resident in the UK, even if the core management and control functions in respect of the AIF are carried out in the UK. 

This change was enacted in July 2014 and is treated as having come into force on 5 December 2013 and is an extension of the rule that has previously only applied to UCITS. Promoters and their advisers should be aware that, notwithstanding these amendments, Jersey regulated funds and fund services providers must still have a minimum of two Jersey resident directors on their boards; however the change in approach is expected to allow greater flexibility in the administration of vehicles of this type. Any UK VAT issues would need to be considered separately.

2 Regulatory Updates

2.1 Sound Business Practice Policy

On 3 November 2014 the JFSC published the Sound Business Practice Policy (which replaced its previous policy on sensitive activities). The Policy has been issued to meet the JFSC's legislative requirement to protect the integrity of the Island in commercial and financial matters and the best economic interests of Jersey and sets out in more detail the principles regarding activities that the JFSC considers sensitive, namely:

(a) regulated activities (including registered, authorised and/or supervised activities); and

(b) non-regulated activities that may pose a potential reputational risk to Jersey.

The Policy applies to Jersey entities and entities that require consent under the Control of Borrowing (Jersey) Order 1958 (COBO), including entities wishing to circulate a prospectus in the Island (where an exemption is not available).  Pursuant to the Policy, entities that are seeking COBO consent and carrying out sensitive activities (whether inside or outside the Island) will be required to disclose relevant details with their applications.

Trust companies and others advising on company incorporations should be mindful of the Policy and be prepared to liaise with the Registrar where a proposed structure will include a Jersey entity carrying out sensitive activities. 

2.2 Revised COBO application forms

The JFSC has published new COBO application forms for companies and limited partnerships, together with related guidance on how to complete the forms. The Companies Registry will accept application forms in the old format until 30 April 2015. After that date all applications will be expected to comply with the content of the new forms. Copies of the published documents are available on the JFSC's website.

The new forms require detailed regulatory analysis to have been undertaken prior to incorporation, so local administrators will need to ensure they capture this analysis when establishing new entities.

2.3 Managed Accounts

We have previously provided updates regarding the consultation on the proposed new managed account regime for Jersey hedge fund managers. We are pleased to report that an exemption enabling Jersey-regulated fund managers to be appointed in relation to managed accounts has now been introduced. This exemption will enable hedge fund managers that are already regulated under the Financial Services (Jersey) Law (FS Law) in Jersey to carry out fund services business to also service qualifying segregated managed accounts (QSMAs) without the need to seek additional regulation for the conduct of investment business under the FS Law. For a link to our more detailed briefing on the QSMA regime, please click here.

2.4 Trustee Liability Insurance

In the recent case of Rathbone Brothers Plc & Anor v Novae Corporate Underwriting Limited & Ors [2014] EWCA Civ 1464 the English Court of Appeal examined insurance and indemnity agreements in place for a Jersey trust company business. For a detailed summary of the case, please refer to our briefing here.

2.5 Review of regulatory regime

Lord Eatwell, Chairman of the Board of Commissioners of the Jersey Financial Services Commission, delivered a speech on 9 October 2014 in relation to regulatory reform in Jersey. The speech covered a range of issues faced by Jersey as a financial centre, and highlighted current and future reforms. With regards to the funds industry, a review of the funds regime was anticipated, with a central aim being to streamline the authorisation process. To read the full speech, please click here.

2.6 Anti-Money Laundering (AML) Update

Following the Island's accession as a member of MONEYVAL, the body within the Council of Europe tasked with ensuring compliance with AML international standards, a number of key changes have been made to reform the Island's AML legislation.

There are significant changes relating to the substance of AML offences, including the creation of a positive obligation to report suspicious activity and more stringent requirements in respect of tipping off. Following these legislative amendments, the JFSC is in the process of amending the AML Handbook, and these changes will significantly impact the way in which businesses approach areas such as due diligence, record keeping, reporting and on-going monitoring.

Ogier will shortly produce a detailed briefing on the changes, which will be available on request from your usual Ogier contact.

2.7 Civil Liability for Breaches of the Codes

Our previous briefing mentioned the publication of draft primary legislation to provide the JFSC with the power to impose civil financial penalties for material contraventions of the Codes of Practice (including the Funds and Fund Services Business Codes) and the AML Handbook.  The relevant legislation (the Financial Services Commission (Amendment No.6)(Jersey) 201-) has now been passed by the States of Jersey and is in the process of being reviewed and approved by the Privy Counsel. 

A consultation including on the levels of penalty that are proposed, which may be up to 8% of a businesses' income, has also been launched by the JFSC with responses required by 16 February 2015.  We envisage that a number of Jersey financial services providers would be interested in responding to this consultation, particularly in light of the upcoming changes to the AML handbook noted above.  Ogier will be involved in this consultation process and will be submitting a response.

2.8 The Base Erosion and Profit Shifting Action Plan and its Impact on Jersey

In July 2013, OECD and G20 countries adopted a 15-point Action Plan (the Action Plan) with a view to addressing the perceived flaws in the international tax rules that were discussed in the OECD's February 2013 Base Erosion and Profit Shifting (BEPS) report. The first stage of work was completed in September 2014 and addressed 7 of the 15 points under the Action Plan, and it is anticipated that completion of all 15 actions will take place in December 2015.

Jersey has a longstanding reputation for being fully compliant and cooperating with developing international standards, and is well-regarded for its transparent tax systems.  This puts the Island in a good position to align with the OECD's focus on greater disclosure. In addition, the Island has significant resources such as a knowledgeable population and sizeable business operations, meaning that it is well placed to provide the support that businesses may wish to develop in complying with best practice OECD requirements in this area.


About Ogier

We provide advice on British Virgin Islands, Cayman Islands, Guernsey, Jersey and Luxembourg law through our global network of offices that cover all time zones and key financial markets.  We regularly win awards for the quality of our client service, our work and our people.

Author

Niamh Lalor, Partner, Jersey