The Emergence of Super-IFCs

How are domiciling decisions changing as managers and jurisdictions position themselves for the future and what does that mean for Jersey?

Elliot Refson: Twenty-five years ago, when international finance centres, or IFCs, were in their infancy, Jersey would have been seen as regulated, expensive and inflexible.

Fast forward to today, and Jersey is seen as proportionately regulated and competitive from a cost perspective. Jersey has always been an early adopter of regulation and legislation, which has meant a minimal change outlook, while others, playing catch up, are facing headwinds. For example, for Jersey, substance legislation has simply meant a codification of prevailing best practice. But some other jurisdictions are struggling because they don’t have the depth of expertise required.

Political uncertainty is also an issue for some IFCs. For example, we have moved or established over 120 collateralised debt obligations and collateralised loan obligations from Cayman to Jersey this year, because European investors have become more wary of that jurisdiction.

Philip Pirecki: I think we are moving into a world of what I call super-IFCs with full substance, and I would put Jersey in that category. Jersey is like a mini-London; we have capital markets, banking, funds, private wealth – the full spectrum. That depth and breadth is a real differentiator because most jurisdictions simply don’t have the human capital to make that happen.

Politically speaking, there isn’t the appetite in most IFCs to import thousands of people to do the work, so you need to rely on homegrown talent. If you don’t have a population big enough to support that – and to become one of these super-IFCs – you will increasingly become a niche player in the offshore world.

What are the key regulatory drivers that are shaping the IFCs of tomorrow?

PP: In onshore jurisdictions, we are seeing a move away from cross-border capital efficiency towards greater politicisation of regulation and, particularly in the European context, greater activism by regulators. It is impossible to say how long this will last, but it is the situation that we are facing right now.

ER: In terms of specific regulation, BEPS – base erosion and profit shifting – and substance requirements have had the biggest impact in recent years. Looking forward, however, I would say that the future lies in tokenisation. We have a working group made up of fund managers, government and the Jersey regulator, discussing this issue currently. That joined up approach between industry, regulator and government is something that allows Jersey to innovate and stay ahead of the curve.

What impact is a global focus on ESG having on fund domiciling decisions and the services you are required to offer?

ER: ESG is not a product or service line, but rather a holistic approach that needs to be embraced by all levels of society within an offshore jurisdiction such as Jersey. The Jersey government has a push towards carbon neutrality by 2030 and is fully aligned to the UK’s longer-term net-zero transition pathway under its Paris agreement commitments. For its part, Jersey Finance has a strategy, launched in 2021, aimed at making Jersey the leading IFC for sustainable finance in the markets it serves while delivering on its responsibility to support the global economic shift to a sustainable model. Meanwhile, Jersey accepts any ESG reporting that is acceptable to another recognised regulator. Presently, there are lots of competing standards around the world. When one of these emerges as the global standard, our pragmatic approach today means that we will be prepared.

PP: I think it will be interesting to see the extent to which ESG informs decision making around domiciling going forward. Ultimately, I expect it will become difficult for institutions committed to sustainable investing and good governance to invest in vehicles domiciled in jurisdictions on the anti- terrorism or anti-money laundering grey lists or the tax avoidance blacklist, for example. I think that is the way we are moving.

How are IFCs future proofing themselves in terms of infrastructure and skill sets?

PP: There is a bare-knuckle battle for talent right now, due to the volume of work. Experienced people are extremely valuable in all IFCs. However, the government of Jersey decided some time ago to invest a significant amount into making sure the island is 21st century ready. What that means in practice is that every dwelling on the island has fibre optic cable going straight to the premises, which consequently means we have one of the fastest broadband speeds in the world.

On top of that, Jersey has made a substantial investment in digital education programmes. The government has made a commitment to ensure that an entire cohort of young people are growing up with a focus on export-orientated digital solutions and that’s a real differentiator for Jersey.

We want to develop a workforce that is fit for the 21st century, and that involves a commitment to education, and to building the infrastructure to support it.

Taking all of this into account, what do you see as the future for domiciling?

ER: The fund jurisdictions that will be most successful in the future will be those that are stable with strong expertise and infrastructure, and robust but flexible regulatory frameworks. This has really been Jersey’s mantra for the past 20 years, and it’s continuing to open up new opportunities for us today.

The US is a case in point – we recently took that message to New York, Miami, Chicago and San Francisco through our US Roadshow, and it landed really well. It’s no coincidence that the funds business in Jersey from US promoters has more than doubled over the past five years.

PP: Looking ahead, and as Elliot mentioned earlier, the future will also absolutely involve tokenisation. The technology is there. So far, it is unregulated, and many institutional investors have some degree of reticence.

Nonetheless, tokenisation marks the direction of travel. Of course, if you have a workforce that is native to these technologies, and that is comfortable with the increased digitisation of both service offerings to clients and the actual mechanisms through which you are accounting and engaging with the regulator, you are going to be ahead of the curve. This is where I see the concept of super-IFCs coming in.

We are starting to see a separation and that separation isn’t linear. If a jurisdiction gets left behind by even a year or two, the distance those laggards experience is compounded as the competitive edge that the super-IFCs boast grows. A one- or two-year lag becomes the equivalent of five or six years. I would argue those jurisdictions are providing services to a world that is rapidly disappearing.

This interview was first published in Private Equity International.