With much uncertainty persisting around the UK’s departure from the EU, Dilmun Leach, partner at JFA member firm Collas Crill, takes a look at why Jersey’s ability to offer continuity and certainty should be music to the ears of non-EU fund managers…

Q: Jersey is outside of the EU – so how is it affected by Brexit?
DL: Jersey is not a member state (or associate member) of the EU and not part of the UK. Jersey has its own government which is elected locally, makes its own laws (including in respect of taxation) and has its own court system.

As far as its relationship with the EU is concerned, Jersey is currently part of the EU Customs Union by virtue of ‘Protocol 3’. When the UK joined the EU (the European Economic Community as it was then) in 1973, it was agreed that Jersey would benefit from the UK's membership of the EU by bringing it, along with the other Crown Dependencies, within the EU Customs Union for the purposes of trade in certain goods (but not services), whilst preserving its autonomy.  This agreement was set out in Protocol 3.  

The Protocol 3 relationship is dependent on the UK remaining a member of the EU and will cease to exist, simultaneously with all other treaty arrangements between the UK and the EU, once the UK's membership of the EU ceases.

Q: Without Protocol 3, how will Jersey trade with the EU?
‍DL: Jersey is able to market financial services to the EU because those services currently meet the requirements imposed by the EU – that will not change because of Brexit.  Services have always been outside the scope of Protocol 3.

Jersey has also taken steps to ensure continued market access for Jersey investment funds into the UK post-Brexit. Jersey’s financial services regulator, the Jersey Financial Services Commission, has signed a Memorandum of Understanding (MoU) with the UK’s Financial Conduct Authority which ensures Jersey firms can continue to use the UK’s National Private Placement Regime (NPPR) after Brexit.

That MoU will come into effect if EU law no longer applies in the UK, either through a ‘no deal’ Brexit or at the end of any transitional arrangements (that are agreed as part of a negotiated deal) once the UK leaves the EU.

Q: Will anything change for fund managers with Jersey funds and investors in the EU/UK?
DL: In short, no. It is expected to be 'business as usual' for Jersey funds.

As far as the UK is concerned, the MoU signed with the FCA, outlined above, provides certainty that access by Jersey funds and managers to UK investors will continue uninterrupted and irrespective of any Brexit outcome.

In terms of the EU, Jersey is not and has never been part of the EU. Rather, as a third country, Jersey will maintain access to the EU funds markets as a result of agreements between the Jersey Financial Services Commission (JFSC) and financial regulators in 27 of the 31 EEA States.

Q: Will the ‘NPPR’ route to market continue to operate through Brexit?
DL: Jersey funds are currently eligible to be marketed into the EU and EEA in accordance with the provisions of the AIFMD through NPPR, and that will not change.

In fact, NPPR is set to continue to operate for the foreseeable future, with a report undertaken by KPMG for the EU Commission at the end of last year confirming that NPPR is of added value to the EU, works in the interest of investors, and should remain in place. Certainly it’s a route to market that is proven to work well through Jersey – currently, more than 170 managers are marketing in excess of 300 funds into the EU through Jersey in this way.

NPPR permits the marketing of non-EEA alternative investment funds in the EEA, subject to national law and regulation in force in the relevant country.  In addition, certain conditions set out in the AIFMD must be met.  Those conditions include the need for supervisory cooperation agreements to be entered into between the JFSC and regulators in the relevant EEA countries in which the marketing is to take place.  Jersey benefits from cooperation agreements with regulators in 27 out of the 31 EEA countries.

Q: What about passporting?
DL: AIFMD made provision for "third countries" to be granted the same passporting rights as EU member states, subject to certain conditions being met. ESMA published its assessment of potential "first wave" third countries and, along with Guernsey and Switzerland, found that were no significant obstacles to Jersey becoming a third country jurisdiction.

The EU Commission has not yet pressed ahead with the implementation of the third country passporting regime, but the indications are that if and when the regime is put in place Jersey will be amongst the first non-EU countries to be granted passporting rights.  Until then, and potentially beyond it too, NPPR through Jersey will remain a key route to the EU market for non-EU managers.

As far as the ‘rest of the world’ is concerned, AIFMD is not relevant to Jersey funds with a Jersey manager which markets outside the EU/EEA, and these will continue to be subject to the laws of the countries in which the fund is marketed.  

Q: So is Brexit a good thing for Jersey?
DL: It is generally thought that actually Brexit presents opportunities for Jersey in the funds space. Jersey's NPPR remains best in class for accessing EU investors and there may be additional opportunities for Jersey (rather than our EU competitors, such as Luxembourg) to provide structures via which UK investors can invest in UK assets.

In addition, managers in the UK, US and elsewhere may be able to launch funds in a shorter time-frame and with lighter ongoing regulatory requirements than in an EU member state such a Luxembourg.  

On 12 March 2019, the European Council of Finance Ministers confirmed Jersey's status as a transparent and cooperative jurisdiction, and that Jersey's legal substance requirements are considered compliant with EU requirements.  The effect of this is that the European Investment Fund (EIF), being a specialist provider of risk finance for small and medium-sized enterprises across Europe, backed by the European Investment Bank, EU, and a range of public and private banks and finance institutions, confirmed that there is no impediment to the EIF investing in Jersey private equity or venture capital funds, meaning that Jersey funds continue to be open to billions of Euros of potential investments.

Real-life case studies compiled by the JFA to illustrate how NPPR is proving effective in accessing EU investor capital can be found here.