There is a current EU Draft Directive out for consultation on the Alternative Investment Fund Management industry, something that the Isle of Man specialises in, which could have a drastic and potentially detrimental impact on who can invest in financial products (e.g. funds) in such locations and to whom the Isle of Man could market fund management and administration services to. Drivers behind the EU’s aim of standardising regulatory standards include the Madoff affair, global organisations such as Lehmans falling into acute financial difficulties and global political pressure against offshore financial centres.
Isleofman.com asked David McGarry, Senior Partner of KPMG how this could affect the Isle of Man financial services industry. Mr McGarry said “Should the EU Draft Directive go through as it is presently constituted, it would have a major impact, primarily on the Island's fund industry. It will therefore impact both third party fund administrators, of which there are many on the Island, and also the manner in which fund management operations on the Island are structured.”
Clearly this is being considered by those within the industry as a far reaching and radical change to current practices and regulation. One person advised isleofman.com that this could be equally significant to many areas of the financial services industry in the Isle of Man as was the white/grey/black OECD tax transparency lists that were published a few weeks ago. A key issue is that the Isle of Man is not within the EU and the directive looks to place limits on both where and with whom EU investors (corporate and individuals) can invest their money. The Isle of Man, along with other offshore territories, has specialised in looking after the portion of international pension funds and other diversified investment vehicles that are allocated to alternative investments (e.g. hedge funds, derivative funds, property funds and private equity fund etc).
The United States are looking to introduce rules with similar overriding objectives, which may lead to a mutual agreement between the US and the European Union to accept each others approved investment products. Not being a part of the EU is seen by some as creating the possibility of the offshore finance centres such as the Isle of Man being left outside of this arrangement.
Mr McGarry commented “Certainly, the Draft Directive is very blatantly designed to drive business back onshore, particularly with the ‘3 year lock out’ incorporated within the provisions against the offshore jurisdictions. Onshore jurisdictions, which are all now very challenged from a fiscal perspective, continue to resent the levels of business channelled through the offshore locations, and both measures (OECD list and EU directive) are designed to adversely impact that level of business.”
In the directive there is a concept of approving "passports" to investment managers and the funds they manage that are outside of the EU (e.g. Isle of Man) so that they can be treated as if they were part of the EU. The criteria for being granted a passport includes amongst other factors that the regulation in the non-EU jurisdiction is effectively enforced and equivalent to regulation within the EU (as judged by the EU) and that the non-EU country complies and continues to comply with OECD standards on exchange of tax information, with which the Isle of Man currently complies. However, after the directive becomes effective there is a 3 year lock out period for non-EU jurisdictions, only after which such passports can be issued. The directive itself also significantly increases the regulatory requirements for EU countries and as such compliance with the yet to be disclosed equivalence requirements could necessitate wholesale changes to the current laws and regulatory standards governing the financial services industry in the Isle of Man.
A further consequence might be that the Financial Supervision Commission would need to be much larger than it currently is to cope with the increased level of supervision required to demonstrate that the local regulations are "effectively enforced" and open to scrutiny by the EU on an ongoing basis. However, on the point of local laws and regulations, David McGarry takes a more positive view that the Island is handling this situation well at the moment, commenting that… "....... in order to qualify for a "passport" to market non-EU funds into the EU, equivalence of legislation and regulation is required. It is my view that, with the levels of regulation which have been introduced over recent years, the Isle of Man is pretty close to qualifying as an equivalent regulatory regime. However, as noted above, it may be construed that the Directive is partly designed to be anti-competitive and there are no clear indications of the manner in which equivalence of regulatory standards will be measured i.e. no clear tests have been established. However, it remains a core strategy for the Isle of Man to achieve this status, and avoid the 3 year lockout. This would create a very significant opportunity for the Isle of Man."
Isleofman.com understands that a great deal of activity is already taking place to protect this part of the Island's important financial services sector. The Isle of Man Fund Management Association has formed a working party to review the legislation. Various legal opinions have been taken by the Isle of Man Fund Management Association and a formal submission will be made to Treasury within a matter of weeks. Following that exercise it is hoped that in due course the Isle of Man Government will make a formal submission to Brussels. Additionally various fund management businesses on the Island are also members of other trade associations in the UK, all of which are heavily involved in lobbying through the United Kingdom Financial Services Authority and the UK Government.
