Capital Fund Services
Capital Fund Services Isle of Man Solutions for Asset Managers
Capital Fund Services Background
Start-up and existing asset managers of Collective Investment Schemes (“CIS”) are facing increasing regulation of their businesses. Reflecting the alternative or private nature of Unregulated Collective Investment Schemes (“UCIS”), these structures have often been able to operate under limited exemptions for licensing; however, these structures are now firmly within the regulatory spotlight and regulatory frameworks now require these to meet applicable regulatory and reporting standards. AIFMD and other international pressures are likely to increase; as a result, asset managers need to find a jurisdictional base that understands their business. The regulatory framework needs to be proportionate to these needs and to be attainable.
Recognising the importance of both funds and asset managers to the IOM financial sector, The Isle of Man Department of Economic Development (“DED”) is determined to assist start-up and relocating asset managers. This assistance is provided by grants to businesses seeking to establish a new financial services business in the Isle of Man.
The costs and complexity of increasing regulation are going to impact upon the majority of asset managers. Recent changes to regulatory exemption in Switzerland are a good example of regulatory “creep”; due to international pressure, each jurisdiction needs to ensure that their regulatory requirements are both predictable and robust. In acknowledgement of these challenges, the Isle of Man (“IOM”) has developed a clear framework within which asset managers can operate.
Regulatory framework in the Isle of Man As well as establishing a flexible and competitive suite of CIS options, the Isle of Man Financial Supervision Commission (“FSC”) have recognised the importance for asset managers associated with CIS to be able to operate effectively in the IOM. To attract and facilitate this demand, the FSC has developed a licensing regime for start-up asset managers, smaller asset managers and associated asset managers (that are part of larger regulated
groups); this reflects a graduated approach in which each application is considered on its own merits. Having developed an asset manager licensing regime that is both proportionate and recognises cost constraints, the IOM allows fledgling asset managers and established asset managers to operate effectively and to flourish within a recognised and high quality jurisdiction.
DED provides grants to a maximum level of 40% to help cover the following costs: • External supply of consultancy costs (such as IT services); • Relocation costs of key staff and equipment and office rents; Other specific costs associated with setting up a business on the Island.
Asset Managers in the Isle of Man
Asset managers may establish full service operations, but the graduated approach allows for other categories of asset manager: Associated Asset Managers The asset manager must be part of group or be under common control where the associated member is regulated in an acceptable jurisdiction for similar activities. As such, consideration is also given to the normal requirements in relation to the staffing of the local office with some functions being allowed to be carried out by staff in other group offices located in an acceptable jurisdiction. The Management Company must be an Isle of Man company with one local resident director appointed to the board with management and control on the Island.
Managed Manager Newly establishing asset managers have the opportunity to contract with a Licensed Administrator to provide infrastructure and operational support that allows a relatively lowcost start up for newly establishing asset managers. Specialist Asset Managers Limited to asset managers of IOM Specialist Funds or specialist type funds, this option is used for asset managers that are not part of a group or who do not fall under common control under a regulated entity. The asset manager would be required to have real presence on the Island, but are exempted from prescriptive requirements as to number and seniority of staff located in the Isle of Man. This is an ideal route for start-up operations headed up by officers and controllers with relevant experience.
In acknowledgement of the costs associated with establishing new funds and the full licensing costs of establishing asset managers, under the graduated manager legislation, the FSC have established a “start up licence”. The license is granted for an initial period of 12 months; this allows for the fund and their asset management services to be marketed to prospective subscribers. The start up licence holder must demonstrate the following: • Real presence – centre of business activities and management and control should be on Isle of Man; • Proven track record of key individuals in the licensed activity and entity and controllers are fit and proper with appropriate experience; The graduated manager is granted in relation to the successful launch of an associated fund; at the second stage the graduated manager will then ‘graduate’ to a full license condition and be required to meet the full regulatory requirements of an asset manager (as outlined above).
Capital Fund Services Regulatory Exemption in the Isle of Man
However, within the Collective Investment Schemes Act 2008 (CISA”) the legislation allows for the establishment of private collective investment schemes known as “exempt schemes”; these have primary restrictions of being limited to less than 50 participants and with no public offer allowable. An exempt scheme can be established in the IOM or if it is incorporated in another jurisdiction but does have the characteristics prescribed under CISA will qualify as an exempt scheme. Subject to the fund meeting the requirement of an exempt scheme, IOM regulation allows for the establishment of an exempt manager that is exempt from the requirement for licensing. The board of the Fund will delegate the management and asset management of the Fund’s assets to the exempt manager. The Board of the exempt manager is then responsible (in the normal way) for the management and reinvestment of the Fund’s assets pursuant to any guidelines and restrictions as detailed in the Offering Memorandum for the Fund. As with any functions delegated by
the board of the Fund these remain subject to their review and their assessment of suitability. In turn the Board of the manager are likely to delegate the day to day dealing and execution of trades under power of attorney to one of its board members. The Manager will be managed and controlled with the majority of its directors based in the Isle of Man – however, the delegated responsibilities for trade execution can be to a director situated in another jurisdiction. The board of the manager are subject to the same responsibilities as the board of the Fund and will regularly monitor the effectiveness of its delegated function. An exempt manager is limited to providing asset management services to one exempt scheme. An exempt scheme and an exempt manager are required to be administered by a licensed administrator in the IOM. The ability to structure the Fund with an exempt manager allows the structure to operate without any regulatory registration; if the Fund is successful in meeting its investment objectives, builds up a good ‘track record’ and attracts additional subscriptions, it is relatively easy to change the existing structure to one which can be more widely
Capital Fund Services Limited www.capital-iom.com T : +44 (0) 1624 654310 F: +44 (0) 1624 654311 E: firstname.lastname@example.org Capital Fund Services Limited is a member of the Capital International Group Capital Fund Services Limited is licensed by the Isle of Man Financial Supervision Commission Registered Address: Capital House, Circular Road, Douglas, Isle of Man, IM1 1AG
distributed. At this time the exempt manager can consider what form of regulatory licensing is appropriate to their business going forward. Fees payable from the exempt scheme to the exempt manager will normally be subject to VAT. However if the fund is established in a jurisdiction that is outside the scope for VAT then fees can be received with no VAT by the IOM Manager. Capital Fund Services are specialists in the cost effective structuring of fund solutions for emerging start-up managers. Our Capital International Group brochure reflects a case study reflecting a structure similar to that detailed above.
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In common with other jurisdictions, the Isle of Man has limited opportunities for regulatory exemption.