Guernsey Finance chief executive Fiona Le Poidevin considers
the impact of AIFMD and Guernsey's response to
it. (Editor's note: We are grateful for the opportunity to publish these views; as ever, they are those of the author, and not necessarily shared by this publication.)

So, it's finally here. Or is it? The 22 July 2013 deadline
for EU and European Economic Area member states to transpose the
Alternative Investment Fund Managers Directive into national law has
now passed.

A new survey from the Alternative Investment Management
Association and Ernst & Young shows that 12 out of 31 countries have
completed full legislative transposition within the deadline. However, the
AIFMD does allow member states some discretion to provide a transitional period
to allow the market to adjust to the Directive. The survey shows that countries
such as Spain, Portugal and Belgium are only in the very early
stages of drafting or have not finalised their required domestic legislation.

Guernsey is not in the EU
(although it is in the European time zone) and therefore, is not required to
implement AIFMD. However, with Europe still
one of our biggest markets, a large proportion of business relates to the EU in
some form. Yet, we also have a substantial amount of funds business which
originates outside of Europe and does not
touch the EU at all. Therefore, Guernsey is
evolving its regime to ensure that we can continue to service both EU and
non-EU business in the most effective way.

Non-EU/NPP/AIFMD

The first thing to say is that Guernsey alternative
investment fund managers and alternative investment funds (AIFs) with
no connection to the EU continue to be able to use the existing regulatory
regime which is completely free from the requirements associated with the
AIFMD.

Secondly, Guernsey's
position as a 'third country' means that we have not had to introduce a fully
equivalent AIFMD regime for our AIFMs and AIFs to maintain access to EU markets
post 22 July. Those who want to be able to access Europe
continue to be able to use National Private Placement regimes, which it
is expected will remain until 2018. Ahead of 22 July, the Guernsey Financial
Services Commission signed bilateral co-operation agreements with 27
securities regulators from the EU and the EEA, including the UK, Germany
and France.
These agreements mean that Guernsey funds
continue to be able to receive investments from appropriately qualified
investors in these European countries through their NPP regimes post 22 July,
subject to completion of the notification procedure of the relevant national
securities supervisor.

However, the Directive does also provide the framework for
establishing a full passporting regime and the European Commission is expected
to implement this regime for non-EU AIFMs in July 2015. Guernsey
intends to fully engage with the consultations on the third country passporting
regime to ensure that our AIFMs will be ideally placed to take advantage of
being able to market AIFs on a pan-European basis with a single authorisation,
as passporting is currently envisaged to operate.

Indeed, the GFSC is expected to shortly issue a domestic
consultation on a full AIFMD equivalent opt-in regime. It is expected that
these opt-in rules will be introduced early in 2014 and they should be in
operation well in time for the implementation of the passporting regime for
third countries in July 2015. For those marketing into the EU, it is likely
that the NPP route will continue to be favoured by many due to the depth and
breadth of the requirements that fund managers will have to satisfy for the
AIFMD. Indeed, it is expected that full-blown AIFMD compliance will only be
sought if there are particular reasons to do so, for example for investor
relations.

For those managers with elements of EU and non-EU business,
the potentially onerous and costly compliance with AIFMD will mean that
parallel structures are likely to be given serious consideration. It will be
possible to break the non-EU business away into a parallel or feeder structure
for which AIFMD compliance would neither be required nor necessary. If on the
other hand, it is necessary or otherwise desirable to comply with the AIFMD requirements,
then you can do this in Guernsey too.

What we are trying to say is that a one size fits all
approach does not suit everyone and Guernsey
is able to provide a range of options. However, the real implications of the
Directive are still evolving due to the fact that much of the detail is open to
interpretation by member states.

Substance

A recent survey of European asset managers by fund software
provider Multifunds showed that 77 per cent of respondents were considering
establishing AIFs for non-EU investors "offshore" as a way to put them outside
the scope of the Directive. However, this can only be achieved if there is
sufficient substance offshore. This also applies to managers of AIFs for EU
investors who are looking to avail of the continuing NPP regimes.

What is clear is that letterbox entities cannot merely claim
to be managers and substance will be required in a jurisdiction where a manager
is claiming to be domiciled.

Similarly, the extent to which activities such as portfolio
and risk management can be outsourced must be considered and care must be taken
to ensure that the real decision making powers lie with the entity that is
claiming to be the manager.

Guernsey has a huge
advantage as a fund domicile in the existing standards we already employ
regarding oversight, and the substance that is already present in existing
Guernsey-domiciled structures. For example, Guernsey
already plays host to a number of major managers, such as Apax, BC Partners,
Man Group, Mid Europa, Permira and Terra Firma which all have offices and staff
in the island. In addition, Guernsey hosts a
range of fund administrators, ranging from major international names to
boutique, independent operations, coupled with a significant pool of qualified
non-executive directors, who are experienced in providing management functions.

The AIFMD requires depositories to provide extra oversight to the fund
structure. Unlike many of its competitor jurisdictions, Guernsey
already has a wealth of custody businesses well established on the island. They
provide dealing and settlement, and also offer services over and above
traditional custody services to encompass robust support for corporate
governance, often performing a fiduciary role.

Yet, much of Guernsey's core business of closed-ended
private equity and real estate funds will be able to access the AIFMD's lighter
touch regime for non-financial assets that permits a wider range of entities,
such as lawyers and registrars, to carry out custody functions, thus benefiting
from cost and operational advantages of not requiring a formal custodian.
Indeed, we are already seeing some Guernsey-based administrators setting up
depository functions to provide a 'one-stop shop', especially for clients new
to the requirement for a depository.

Of course, providing they can prove sufficient substance to
their arrangements, one option might be for a fund to opt to be self-managed.
However, it would be wrong to assume that all existing Guernsey
funds will opt to be self-managed and, therefore, be non-EU managed. Some will
want their European operation to be the AIFM and, therefore, be AIFMD
authorised but managing a Guernsey fund.

Optionality

To conclude, Guernsey's
position as a third country, its regulatory regime and its infrastructure and
expertise mean that as a domicile it ultimately offers optionality for the
international fund community. The way in which it has dealt with the AIFMD
demonstrates that Guernsey has recognised not
only the importance of the EU market but also the truly global nature of its
investor base.

* Co-operation agreements

At the time of writing, Guernsey has signed 27 co-operation
agreements with the securities regulators from the following EU/EEA countries: Austria; Belgium;
Bulgaria; Cyprus; Czech
Republic; Denmark;
Estonia; France; Finland;
Germany; Greece; Hungary;
Iceland; Ireland; Latvia;
Liechtenstein; Lithuania; Luxembourg;
Malta; Norway; Poland;
Portugal; Romania; Slovak
Republic; Sweden;
The Netherlands; and the United
Kingdom.

Originally published by HFMWeek, August 2013.