Country report: Mutual funds – why use the BVI?

By Ruth Chadwick, director of Investment Business, Financial Services Commission

For most people, regulatory regime is not going to be the first criterion for making comparisons between competing offshore jurisdictions. However, once a shortlist of suitable jurisdictions has been assembled based on other criteria (such as cost, investment type and accessibility, language, contacts, location, climate, etc.) then a comparison of regulatory regimes certainly assists in the final choice.

For 25 years the BVI government has welcomed offshore business and has created a world-standard regulatory structure to avoid money laundering and other criminal activity. For the last 20 years, the BVI International Business Company has been one of the world’s most successful offshore products, used extensively in financial holding and investment structures, as well as for mutual funds. This legislation has recently been replaced by the BVI Business Companies Act, which not only retains many of the features that made the International Business Companies Act so popular, but also introduces a number of key enhancements that should see the BVI continue to develop and strengthen its thriving financial services industry.

In relation to mutual funds, the Mutual Funds Act 1996 (‘MFA’) came to a pre-existing fund management sector in the BVI. In 1998, when this legislation came into force, some 1400 applications were submitted from mutual funds and 360 applications from mutual fund managers and administrators. Since then over 4000 funds have been registered or recognised (the difference depending on the exact nature of the mutual fund) and over 750 mutual fund managers and administrators have been licensed. Of these regulated entities very few are actually located
in the BVI.

So what makes the BVI so popular as a jurisdiction for the regulation of mutual funds and their managers and administrators?

There are a number of distinct advantages to establishing a mutual fund in the BVI compared to other jurisdictions, including:

A tax neutral environment;
A stable political and economic jurisdiction;
A recognised and respected legal system derived from English Common Law as supplemented by modern local legislation;
No regulatory restrictions on investment policies or strategies, or on performance and other fee arrangements;
No requirement to appoint local directors or local functionaries;
Fast-track procedure for professional funds;
The ability to amend the memorandum and articles of association of the fund without (in most cases) requiring a vote of the members;
Statutory segregated portfolio ring-fencing;
Low start-up and ongoing fees and costs;
No requirement for a local auditor sign-off on the fund’s accounts.

The BVI Financial Services Commission (‘FSC’) recognises 25 jurisdictions as having sufficiently prudent systems of regulation/supervision of mutual fund business in place to allow it to approve applications for recognition and registration by BVI mutual funds that list a functionary (for example; a manager) from the recognised jurisdiction. Although there are now over 540 entities providing management and/or administration services to mutual funds in the BVI, mutual funds do not have to be managed or administered from within the BVI. Regulated service providers in the 25 jurisdictions around the world are accepted by the FSC to provide management and administration services to BVI funds, allowing greater flexibility when appointing service providers. Similarly, a non-BVI mutual fund does not need to be regulated under the MFA, provided that the management or administrative service provider is a BVI entity, licensed under the MFA.

Unlike some of its competitor jurisdictions, the BVI regulates mutual fund managers and administrators that provide services in or from within the BVI. In addition, the BVI has adopted a differentiated approach to the funds themselves: mutual funds whose investors are deemed sufficiently experienced and knowledgeable that they do not require the same level of protection as the general public are exposed to a lighter regulatory regime than public mutual funds. These are just a couple of examples of the flexibility, continual modernisation and enhancing of legislation and regulation that the FSC is committed to.

It is well known that the BVI is regarded as being particularly cost-effective compared with many other offshore jurisdictions. However, those using the BVI for financial services can rest assured this is not any way reflected in the FSC’s ongoing commitment to providing high quality legislation and a regulatory environment of global standards.

The BVI is well able to defend its excellent reputation against scams, criminals and drug money, and also to ensure that not only are investors’ monies exempt from tax but that they are also secure.