I Overview of Recent Activity

The Isle of Man is an attractive place to anchor a business, offering a stable economy; zero per cent corporation tax; no capital gains tax, inheritance tax or stamp duty; a sophisticated infrastructure; an established financial services support industry; a large number of inter-governmental agreements; and, above all, a supportive, responsive and forward-thinking government.

The Isle of Man is a self-governing Crown Dependency and a general election was held in September 2016. The election saw a large number of new entrants to the House of Keys (the lower chamber of the Isle of Man’s parliament) from a range of industry sectors and Howard Quayle MHK becoming Chief Minister and Alfred Cannon MHK taking up the role of Treasury Minister. The new Council of Ministers published a Programme for Government setting out three strategic objectives: (1) an inclusive and caring society; (2) an island of enterprise and opportunity; and (3) a financially responsible government.2

The Isle of Man Financial Services Authority (IOMFSA) is now well established as the island’s financial services regulator, replacing the Financial Supervision Commission (FSC) and the Insurance and Pensions authority, which merged in late 2015 to provide a more cohesive approach to regulation in the Isle of Man and simplify compliance for the many financial services businesses that were previously regulated by both authorities.

In January 2017, the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) released its Fifth Round Mutual Evaluation Report following a visit to the Isle of Man in April–May 2016 to analyse the level of compliance with the FATF 40 Recommendations and the level of effectiveness of the island’s Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) system.3 The report is largely positive although to monitor progress in making improvements the Isle of Man is now in ‘enhanced follow-up’. This is not unusual after a Fifth Round Evaluation and 86 per cent of countries assessed so far have been placed in this category, including the US, Switzerland, Australia, Canada, Belgium, Singapore, Austria, Hungary and Norway.4

The Isle of Man prides itself on being responsive to international needs while maintaining a business-centric approach. The Beneficial Ownership Act 2017 came into force in June and the Department of Economic Development launched its online database under the Act on 1 July. The legislation was developed in line with the government’s commitment made to the United Kingdom in 2016 to enhance agreements for the sharing of information about the beneficial ownership of corporate and legal entities. The Act repeals the Companies (Beneficial Ownership) Act 2012 to introduce a new regime for ensuring companies know the identities of their ultimate beneficial owners and introduce reporting requirements.

The Channel Islands Stock Exchange rebranded as the International Stock Exchange in March, and created an Isle of Man listing segment and opened an office in the Isle of Man.5 The first Isle of Man listing member was approved in June 2017.6

II General Introduction to Regulatory Framework

The functions of the IOMFSA include:

  • a the regulation and supervision of persons undertaking regulated activities specified in the Financial Services Act 2008 (FSA08);
  • b the regulation and supervision of persons undertaking regulated activities in respect of insurance and pensions, in or from the Isle of Man;
  • c the regulation and supervision of collective investment schemes within the meaning of the Collective Investment Schemes Act 2008 (CISA);
  • d the regulation and supervision of retirement benefits schemes within the meaning of the Retirement Benefits Schemes Act 2000; and
  • e the conduct of investigations into any potential liability arising from breach of AML/CFT legislation by persons undertaking regulated activities.

Under the FSA08, a person must not carry on, or hold themselves out as carrying on, a regulated activity in or from the Isle of Man without a licence issued by the IOMFSA unless an exclusion (found in the Regulated Activities Order 2011 (as amended) (RAO)) or an exemption (set out in the Financial Services (Exemptions) Regulations 2011 (as amended)) applies. Regulated activities fall into eight classes, with each having further sub-classes of activity set out in the RAO for which an applicant to the IOMFSA may be licensed to carry out. These classes are: deposit taking; investment business; services to collective investment schemes; corporate services; trust services; operating crowdfunding platforms; management or administration of another person holding a licence issued under the FSA08; and money transmission services.

While investment advisers, stockbrokers and administrators delivering services for one or more collective investment schemes (CISs) must be licensed under the FSA08, the funds themselves are subject to the CISA and secondary legislation made thereunder. Promotion of CIS in the Isle of Man is generally prohibited under the CISA, other than to experienced investors.

Funds incorporated in the Isle of Man will fall into one of the categories outlined below.

i Authorised scheme7

The authorised scheme is a highly regulated form of CIS that is intended for retail distribution. An authorised scheme must be approved by the IOMFSA before launch and is required to have an Isle of Man-based licensed manager, and an independent fiduciary custodian appropriately regulated in a jurisdiction acceptable to the IOMFSA. There are detailed rules that apply to authorised schemes, which have their origin in the Undertakings for Collective Investment in Transferable Securities Directive, including restrictions on the types of investment that may be acquired, leverage and hedging policies and investment concentration, and concerning the content of the CIS’s constitutional documents and offering document. The prohibition on promotion of CISs does not apply to authorised schemes, which are suitable for selling directly to the general public.

An authorised scheme is an alternative investment fund under the Alternative Investment Fund Managers Directive 2011/61/EU. In European Economic Area jurisdictions that allow national private placement and where a relevant memorandum of understanding is in place, an authorised scheme may be sold providing all domestic requirements are met. In order to be sold in the UK, an authorised scheme must apply for individual recognition under the Financial Services and Markets Act 2000 (an Act of Parliament). Reciprocal arrangements operate between the Isle of Man, Jersey, Guernsey and Ireland in respect of authorised schemes. Authorised schemes are also subject to a fast-track approval procedure in Hong Kong and Australia, and the Japanese Securities Dealers’ Association have agreed that authorised schemes that have been recognised in the UK are eligible for promotion to Japanese residents.8

ii Regulated fund9

While the regulated fund is not as highly regulated as an authorised scheme, it also requires pre-approval from the IOMFSA and is subject to rules concerning its constitutional documents and offering document. Although the investment policies of regulated funds are not subject to the same constraints as authorised schemes, the fund will only be approved by the IOMFSA if it is satisfied that the policy is suitable and appropriately disclosed to investors. A regulated fund must have an Isle of Man-based licensed manager and a fiduciary custodian that is appropriately regulated in a jurisdiction acceptable to the IOMFSA. Regulated funds are aimed at retail investors or markets requiring a fiduciary depository and are generally sold by independent financial advisers.

iii Full international scheme10

The full international scheme has been superseded by the regulated fund and can no longer be established; however, a number continue to exist. A full international scheme must have an Isle of Man-based licensed manager and comply with detailed rules regarding the content of its constitutional documents and offering document.

iv Qualifying fund11

While the qualifying fund must report and make post-event notifications to the IOMFSA, it is not subject to regulatory pre-approval. Although there is no prescribed minimum initial investment, investors must be ‘qualifying investors’. Essentially, investors who are not professional or institutional investors must have their expertise certified by a financial adviser. An Isle of Man-based licensed manager is required, as is a custodian appropriately regulated in a jurisdiction acceptable to the IOMFSA. There are no restrictions on investment, borrowing or hedging policies but the offering document must disclose all material information that an investor would reasonably expect to be disclosed. Qualifying funds may not be widely promoted and are normally sold through independent financial advisers to qualifying investors.

v Specialist fund12

Like the qualifying fund, the specialist fund is not subject to regulatory pre-approval by the IOMFSA, but must make post-event notifications. The specialist fund is aimed at institutional and non-retail investors and must have a minimum subscription of at least US$100,000. Investors must certify that they are sufficiently experienced to understand the risks associated with investment and must fall into one of the categories of permitted investor, including professional investors, public bodies, affiliates of the fund’s promoters and managers, and individuals with a net worth in excess of US$1 million. There is no formal requirement for a specialist fund to have a custodian, although it must have a licensed fund administrator based in the Isle of Man or in another jurisdiction approved by the IOMFSA. There are no restrictions on investment, borrowing or hedging policies but the offering document must disclose all material information that an investor would reasonably expect to be disclosed.

vi Professional investor fund13

These funds can no longer be established but a number continue to exist and are similar to the specialist fund.

vii Experienced investor fund14

These funds were similar to the specialist fund but without a minimum subscription level. They can longer be established but a number continue to exist.

viii Exempt scheme15

An exempt scheme is a CIS that falls outside of the scope of regulation as a private arrangement, provided that it does not offer its securities to the public or any section of the public in any part of the world (and contains a prohibition to that effect in its constitutional documents), has fewer than 50 participants at all times and does not imply in any way in its constitutional documents that it is regulated in the Isle of Man. These are by far the most popular form of open-ended fund.16

ix Close-ended investment companies

The definition of a CIS in the CISA is drawn very widely, however, the Collective Investment Schemes (Definition) Order 2008 (the CIS Definitions Order) specifies certain entities and arrangements that are not considered to be a CIS for the purposes of Isle of Man law. This includes a statement that no other body corporate, other than an open-ended investment company (OEIC), shall be regarded as constituting a CIS. Whether an entity is an OEIC will depend, among other things, on whether its constitutional documents provide that participants have the right to require the redemption of their investments prior to the liquidation of the company. Close-ended investment companies (CEICs) are not captured by the CISA and are therefore not subject to regulation by the IOMFSA.

We understand that changes will soon be introduced to bring a limited number of CEICs (being those that are not listed or traded on an exchange and that are promoted by, or on behalf of, the CEIC’s board in such a way that their existence is designed to become known to consumers in general) within the definition of a CIS, and that these will be subject to regulation mirroring the regulations that apply to regulated funds.17

CISs incorporated outside of the Isle of Man may apply to the IOMFSA to become ‘recognised schemes’, which may be promoted to the general public in the Isle of Man, either by way of an application for individual recognition or a notification under a general regime open to CISs incorporated in the UK, Ireland, Jersey, Guernsey or Luxembourg.18

There are also almost 80 CISs domiciled overseas, which are administered in the Isle of Man by administrators licensed by the IOMFSA, the most common being from the Cayman Islands with 48 such funds known to the IOMFSA as at 31 December 2016.19

III Common Asset Management Structures

The Isle of Man offers a full range of vehicles for use as fund structures including OEICs, protected cell companies, limited partnerships and unit trusts. Companies and limited partnerships are registered with the Isle of Man Companies Registry (part of the DED), whereas there is no public register of trusts.

There are two co-existing company regimes in operation in the Isle of Man, with the Companies Acts 1931–2004 providing a more traditional form of company (a 1931 Act company) and the less prescriptive Companies Act 2006 offering a very popular form of company (a 2006 Act company). Some of the key features of 2006 Act companies include: no requirement for authorised share capital; no capital maintenance requirements (subject to satisfaction of a statutory solvency test); no prohibition of financial assistance; reduced compulsory registry filings; less prescriptive accountancy requirements; no distinction between public and private companies; and no requirement to hold an annual general meeting. A company incorporated as a 1931 Act company may re-register as a 2006 Act company to take advantage of the simplified regime; however, re-registration in the other direction is not available and it should be noted that an authorised scheme cannot be constituted as a 2006 Act company.

Also available are protected cell companies (PCCs), which can be incorporated as either 1931 Act companies or 2006 Act companies. Assets and liabilities can be attributed to a particular cell of the PCC and kept separate from one another, so each cell can be used as a separate sub-fund and share class. By segregating the interests of investors and other stakeholders within each cell, PCCs provide a low-cost and quick-to-launch means of creating legally robust new sub-funds. The Isle of Man also offers incorporated cell companies where each cell is a separate legal entity, however these are currently only available for insurance purposes.

Limited partnerships offer flexibility and tax transparency while retaining limited liability for investors. A general prohibition against a limited partnership consisting of more than 20 persons does not apply in the case of a CIS.20 Since the introduction of the Limited Partnership (Legal Personality) Act 2011, limited partnerships may be registered in the Isle of Man as a body corporate with separate legal personality.

The trust is an important feature of Manx common law that is also supported by legislation, with unit trusts being popular fund structures. The Trust (Amendment) Act 2015 made Manx trusts even more flexible by, among other things, abolishing the requirement for a trust to have a perpetuity period.

The Isle of Man also offers foundations and limited liability companies, but these are not generally used as fund vehicles.

IV Main Sources of Investment

While the Isle of Man does have business links across the globe, its closest links are with the UK, with over half of the island’s licensed deposit takers having the UK as their ultimate country of origin of their banking group.21 At 31 March 2017, 28 per cent of non-bank customer deposits originated from the UK, 36 per cent from the Isle of Man and just 4 per cent from North America.22

The Isle of Man has not been immune to the effects of the crash of 2008 and onwards. Total deposits have fallen from £58.133 billion at December 2008 to £44.603 billion at December 2016.23 At March 2017 there were just 19 licensed deposit-takers, whereas at the end of 2010 there were 34, and another deposit-taker surrendered its licence in April with at least three other banks having given notice of their intention to surrender their licences shortly.24

Property is by far the largest asset class for funds administered in the Isle of Man, with almost 100 funds shown in statistics collected by the IOMFSA and the next category recorded having less than 40 (this being ‘mixed’ tiers, including equities, derivatives, hedge, equities, derivatives, options, bonds, shares and cash and absolute return investments).25

On 31 December 2015 Isle of Man licensed life assurers had £58.8 billion of funds under management, with non-life insurers having £6.26 billion under management, both up on the previous year.26 Pension funds under management were valued at £7.2 billion on 31 December 2015.

The total number of Isle of Man companies under administration by licensed corporate and trust service providers (TCSPs) fell slightly in 2015–2016, although the number of 2006 Act companies administered in the Isle of Man increased while the number of 1931 Act companies decreased as this more traditional form of structure falls from favour.27 The number of trusts administered by TCSPs fell by 6 per cent in the 2015–2016 period.28

V Key Trends

A particular focus has been placed by the regulators on monitoring, reviewing and updating the island’s AML/CFT requirements for businesses operating in the financial services industry in light of the MONEYVAL visit in April and May 2016. As banking groups carry out wide reviews of their global operations, this is having a direct effect on the Isle of Man, with some banks leaving the island and surrendering their deposit-taking licences. In addition, as banks prepare for the European ring-fencing regime there has been a number of banking group restructurings. In June 2017 the IOMFSA issued a supervisory policy statement on Domestic Systemically Important Banks in response to the Basel Committee on Banking Supervision’s framework for dealing with domestic systemically important banks.29

The Isle of Man has a proven record of delivering assistance to consumers when faced with financial catastrophe. The Isle of Man Depositors’ Compensation Scheme (DCS) was activated on 27 May 2009 in respect of the insolvency of Kaupthing Singer & Friedlander (Isle of Man) Limited, and depositors have now received 100 pence in the pound plus interest.30 In addition, the manager of the DCS fund established in 1992 in respect of the Bank of Credit and Commerce International, resolved to terminate the fund in 2015 with the final payments having been made in August 2012.31

VI Sectoral Regulation

i Insurance

The law concerning insurers (both those incorporated in the Isle of Man (authorised insurers) and those incorporated elsewhere but operating in the Isle of Man (permit holders)) and insurance intermediaries is found principally in the Insurance Act 2008, the Insurance Regulations 1986 and the Insurance Intermediaries (General Business) Regulations 1999.

It is an interesting feature of Manx insurance law that a person does not need to have an insurable interest to effect a contract of assurance,32 which has helped give the island’s life assurance industry a unique selling point and global appeal. There has been a number of takeovers in the industry within the past year.

ii Pensions

The Retirement Benefits Scheme Act 2000 is the principal piece of legislation governing the operation and regulation of pensions in the Isle of Man. Almost all pension schemes in the Isle of Man must be registered with IOMFSA, however, the Retirement Benefits Schemes (Excepted Schemes) Regulations 2001 provide some exemptions. The Isle of Man has had legislation since 2001 to facilitate the creation of international pension schemes, which can be established by employers carrying on business outside the Isle of Man for the benefit of their non-Isle of Man resident employees.

iii Real property

Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).

iv Hedge funds

Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).

v Private equity

Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).

VII Tax law

The Isle of Man operates a very favourable tax regime, with no capital gains tax, no inheritance tax and no stamp duties. While corporation tax does exist, it is levied at zero per cent, save in respect of income derived from deposit-taking activity (subject to a 10 per cent rate) and from real estate in the Isle of Man (subject to a 20 per cent rate). This means that a corporate fund vehicle will automatically benefit from a zero rate of corporation tax without having to apply through an exemption process, as will its Isle of Man-based fund manager and administrators.

Investors will be subject to tax on their dividends and capital gains under the laws of their home jurisdictions. The Isle of Man has a number of double taxation treaties and tax information exchange agreements in place that reduce the risk of any double charge. The Isle of Man signed intergovernmental agreements to improve international tax compliance in 2013 with both the UK and the USA, and has been proactive in developing measures for compliance with The Foreign Account Tax Compliance Act and the Common Reporting Standard.

Fees charged by fund administrators and investment managers based in the Isle of Man in respect of services to CISs (other than exempt schemes) are not subject to VAT. Fees payable in respect of an exempt scheme are subject to VAT, but if the fund is established in a jurisdiction outside the scope of VAT then no VAT will be charged.

VIII Outlook

Changes to the CIS regulatory regime are expected to be implemented before the end of 2017, which will include bringing some CEICs within the definition of a CIS and also introducing an exemption from asset managers having to be licensed in specific circumstances. It is hoped that these changes will make the island’s funds offering more competitive internationally.33 There are also planned changes to the island’s insurance sector that are expected to come into force during 2018 as part of the IOMFSA’s roadmap for updating the Isle of Man’s regulatory framework for insurance business.34

In July 2017 the results of a high-level strategic review of the Department of Economic Development were announced.35 The recommendations of the report include renaming the department the ‘Department of Enterprise’ and establishing four new business development agencies with the categories ‘finance’, ‘digital’, ‘business’ and ‘visit’, to work with specific industries, entrepreneurs and innovators in understanding and creating the right climate and conditions for success and growth.

The Isle of Man currently benefits from an adequacy finding in respect of its data protection laws. The European General Data Protection Regulation (GDPR) will impact every enterprise that carries on business with Europe, and the Isle of Man is expected to introduce new GDPR-compliant data protection legislation in the near future.36

Although the Isle of Man is not part of the UK, and its population had no vote in the UK’s referendum to leave the EU, the result and eventual exit from the EU will affect the island. The Isle of Man is not a member of the EU but under Protocol 3 of the UK’s Act of Accession the Isle of Man is part of the customs territory of the EU so enjoys free movement of goods. The Council of Ministers published a first interim report on the potential implications of the referendum for the island in April 201637 and a second report shortly before the referendum in June 2016,38 so was perhaps better prepared for the result of the referendum than other jurisdictions affected. The island’s Chief Minister Howard Quayle has indicated that the Isle of Man will follow the UK’s approach by introducing its own ‘great repeal bill’, which will repeal the Isle of Man’s European Communities Act 1973 and make provision for the continuation, amendment or repeal of EU laws that apply to the Isle of Man under Protocol 3 as there are thousands of EU measures that have applied to the island because of Protocol 3 and hundreds that the island has applied through domestic law. The level of the island’s engagement over the Brexit process has been described as ‘unprecedented’ with close contact with the UK government as its negotiations with the EU continue, but quite how loud a voice the island will be given in such negotiations is yet to be seen.39

1 Simon Harding is a partner and Katherine Johnson is an associate at Appleby (Isle of Man) LLC.

2 www.gov.im/media/1354840/programme-for-government.pdf.

3 https://rm.coe.int/anti-money-laundering-and-counter-terrorist-financing-measures-isle-of/168071610e.

4 www.gov.im/about-the-government/departments/cabinet-office/moneyval/.

5 www.tisegroup.com/about/news-press/tise-launches-channel-islands-and-isle-of-man-segments/.

6 www.tisegroup.com/about/news-press/iqe-becomes-first-isle-of-man-member-of-tise/.

7 Authorised Collective Investment Scheme Regulations 2010.

8 ‘Guidance Note – Promotion of Authorised Schemes’ issued by the Isle of Man Financial Services Authority, January 2017.

9 Collective Investment Schemes (Regulated Fund) Regulations 2010.

10 Financial Supervision (International Collective Investment Schemes) Regulations 1990.

11 Collective Investment Schemes (Qualifying Fund) Regulations 2010.

12 Collective Investment Schemes (Specialist Fund) Regulations 2010.

13 Financial Supervision (Professional Investor Fund) (Exemption) Order 1990.

14 Collective Investment Schemes (Experienced Investor Fund) Regulations 2010.

15 Collective Investment Schemes Act 2008, Schedule 3.

16 Isle of Man Financial Services Authority Funds Quarterly Statistical Bulletin for Quarter Ended 31 March 2016.

17 www.iomfsa.im/lib/docs/iomfsa/consultations/cp1704_t05.pdf.

18 Collective Investment Schemes Act 2008, Schedule 4.

19 Isle of Man Financial Services Authority Funds Quarterly Statistical Bulletin for Quarter Ended 31 December 2016.

20 Limited Partnerships (Collective Investment Schemes) Regulations 2010.

21 Isle of Man Financial Services Authority Annual Report 2015/2016, p. 47.

22 Isle of Man Financial Services Authority Banking Bulletin March 2017, p. 10.

23 Isle of Man Financial Services Authority Banking Bulletin March 2017, p. 14.

24 Isle of Man Financial Services Authority Banking Bulletin March 2017, pp. 3-4.

25 Isle of Man Financial Services Authority Funds Quarterly Statistical Bulletin for Quarter Ended 31 March 2016.

26 Isle of Man Financial Services Authority Annual Report 2015/2016, p. 54.

27 Isle of Man Financial Services Authority Annual Report 2015/2016, p. 52.

28 Isle of Man Financial Services Authority Annual Report 2015/2016, p. 52.

29 www.gov.im/lib/docs/iomfsa/dsibpolicystatement.pdf.

30 In the Matter of Kaupthing Singer & Friedlander (Isle of Man) Limited CHP09/0037.

31 Isle of Man Financial Supervision Commission Annual Report 2014/15, p. 48.

32 Life Assurance (Insurable Interest) Act 2004.

33 www.iomfsa.im/lib/docs/iomfsa/consultations/cp1704_t05.pdf.

34 www.iomfsa.im/regulatorydevelopments/insuranceframework.xml.

35 www.gov.im/news/2017/jul/19/department-of-economic-development-concludes-strategic-review-and-announces-new-structure-and-focus/.

36 www.inforights.im/information-centre/data-protection/the-general-data-protection-regulation/.

37 www.gov.im/media/1351246/uk-referendum-on-eu-membership-implications-for-the-isle-of-man.pdf.

38 www.gov.im/media/1351808/second-interim-report-on-the-uk-referendum-of-eu-membership-implications-for-the-isle-of-man.pdf.

39 www.iomtoday.co.im/article.cfm?id=34829&headline=Brexit%20means%20the%20Isle%20of%20Man%20will%20have%20to%20pass%20new%20legislation&sectionIs=news&searchyear=2017.