BVI regulator ready for scrutiny

As onshore jurisdictions ponder increased oversight of the hedge fund industry, the BVI believes its balance of principles- and rules-based regulation should be maintained.

The British Virgin Islands (BVI) takes the regulation of its financial services sector seriously. The Financial Services Commission (FSC), an autonomous regulatory authority established in 2001, is responsible for the regulation and supervision of financial services activity in the jurisdiction.

Brodrick Penn, director of the investment business division at the FSC, has been closely monitoring the international debate on financial regulation. He says the BVI welcomes changes to international regulatory standards if they “improve the overall global financial environment, both systemically and individually for investors.”

But he warns that new approaches to regulation should not have the effect of stifling ingenuity or over-regulating products and services which are currently well regulated. “Any new approach should be appropriately targeted towards higher-risk products and services with proven deficiencies. A balance of principles-based and rules-based regulation should be maintained,” he says.

The hedge fund industry is braced for increased regulation. In the US, rules requiring hedge fund managers to register with the Securities and Exchange Commission and disclose details of their activities to the regulator are currently under consideration. Under pressure from European leaders, the EU is also moving towards tougher regulation of the industry.

Penn says the BVI and many other offshore jurisdictions are “ahead of the curve” on this issue. The BVI has regulated hedge fund managers based in the jurisdiction for many years and will soon introduce mandatory rules to buttress the current reporting regime that requires local funds to file annual reports with the regulator.

He agrees attempts by onshore governments to regulate hedge funds could lead to potential conflicts with offshore jurisdictions.

“Because of the global nature of fund structures, rules adopted in one jurisdiction can certainly have an impact in another,” Penn admits. There are a number of BVI funds with investment managers, administrators, prime brokers and custodians based in the US and other onshore jurisdictions which may be impacted by new regulations.

“Any conflicts arising will hopefully be mitigated through international co-operation and dialogue,” Penn says. He also believes hedge funds will restructure their operations to minimise any potential conflicts.

Open to change
While the BVI maintains a robust regulatory regime, it will adapt to any international standards that emerge from the current debate, Penn stresses. He says the BVI’s philosophy is to implement prudent regulation which conforms to global standards and best practices and is also commercially attractive in its application.

This is done in part by making appropriate distinctions between different types of investment funds. “Robust regulation is absolutely necessary for retail fund products, which among other things demand appropriate investor protection,” says Penn.

At the same time the FSC strives to ensure that the regulatory framework remains sufficiently flexible and responsive to the demands of hedge funds and investment products aimed at professional and high net worth investors. For example, the most popular BVI hedge fund vehicle, the professional fund, is subject to a regulatory approach allowing for the speedy processing of applications and imposes standards that can be met by most properly structured offerings.

Penn says the FSC recognises the need for flexibility in the fast-moving world of international finance. It routinely incorporates rules and requirements in the form of subsidiary legislation which can be quickly implemented or amended. “This allows the FSC to be responsive to both the changing regulatory environment and the commercial exigencies,” he says.

The FSC also encourages the private sector to participate in the development of the jurisdiction’s regulatory regime. “This collaboration has in most instances led to a balance of appropriate regulation that is also commercially attractive,” Penn believes.

However, the demands of the private sector take a back seat to the need for prudent regulation. “While the competitiveness of the jurisdiction is a critical issue for the BVI, it is a secondary concern for the FSC.” For instance, the regulator has resisted calls from the private sector to relax the licensing rules for BVI-domiciled investment management companies. Some service providers argue the length of the licensing process has deterred some funds from establishing in the BVI.

Penn believes the FSC’s approach to licensing is appropriate. “We do not believe the process is onerous. In fact complete applications are usually determined in two to three weeks,” he says.

The licensing rules attempt to ensure there are consistent standards for BVI-domiciled managers and that they are assessed to a fit and proper standard. “In the current global environment, we are now seeing a paradigm shift in the approach of many other jurisdictions. They are contemplating changes to their minimum standards, requiring at least licensing or registration and reporting obligations for fund managers.”

The regulation and supervision of fund managers in the BVI should not unduly influence whether a fund sets up in the jurisdiction, Penn points out, because a BVI fund has the option of using a manager domiciled in a number of recognised jurisdictions, including all the major international financial centres. The vast majority of BVI funds have investment managers based outside the BVI.

The FSC takes a lead role in updating and streamlining the regulatory framework in the BVI. The current priority is the implementation of the Securities and Investment Business Act (SIBA). This will bring under one piece of umbrella legislation the requirements for conducting securities and investment business in the BVI. It has been a major undertaking.

Stricter rules
Under current rules only entities which are carrying on business as funds or involved in managing, administering and advising fund structures are regulated in the BVI. SIBA will expand the regime to include the regulation and supervision of investment activities such as dealing, asset management, investment advice, administration and custody of all types of investment activity.

The Act will cover four separate but related areas: the regulatory and supervisory rules for investment business; public issues of securities; mutual funds (the existing Mutual Funds Act will be subsumed in SIBA); and market abuse.

“The effect on existing funds and service providers will likely be minimal as we have tried as far as possible to maintain the status quo in relation to funds and their service providers. Nevertheless, there will be some material changes relating to reporting and auditing requirements for funds,” Penn says.