Isle of Man Structure and Regulation of the Legal Profession

The Island's High Court judges are the two Deemsters, who have jurisdiction over all the criminal and civil matters that in England would fall under the High Court, Crown Court and County Court.

The Manx Appeal Court, consists of the Deemsters and the Judge of Appeal, a part-time position filled by an English QC. The final court of appeal is the Judicial Committee of the Privy Council in London.

The Island has its own lay magistrates (similar to their English counterparts) and also two stipendiary magistrates (the High Bailiff and Deputy High Bailiff) who also act as coroners of inquest and preside over the licensing court.

Members of the Island's bar are called advocates; they are a fused profession, combining the functions normally carried out by English barristers and solicitors, and following professional standards set by the Isle of Man Law Society.

It has been a long-standing practice for senior English barristers to appear in Manx courts, after being granted a 'temporary advocate's commission', but this trend is now in decline as local expertise in complex litigation cases improves.

To be admitted as a Manx advocate, a person is required to have successfully completed the academic training necessary for admission as a solicitor in England and Wales and the Manx Law Examinations, and to have completed a period of two years' articles (analogous to the English training contract) with a local firm. Manx Advocates may employ, but not enter into partnership with, lawyers qualified in other jurisdictions. The Manx Law Society is, however, currently considering the introduction of multi-qualified partnerships.

Legislation was passed in 1986 allowing law practitioners qualified in other jurisdictions to practice as registered legal practitioners and advise on commercial law and international taxation, but it excludes them from conducting proceedings in Manx courts and certain tribunals or to prepare documents relating to Manx real estate. In effect, local firms have a monopoly on local litigation and property work and as a result only a few foreign law firms have established a presence in the Island, specialising in commercial and offshore private client work.

The admittance and qualifications of lawyers is governed by the Advocates Act 1995 (Part II) which replaces most parts of the Advocates Acts 1826-1976. Further regulations were laid down under the Advocates Regulations 1998, setting out qualification requirements. Sections 15-17 of the 1995 Act allow for the issue of a temporary advocate's licence to non-Manx lawyers provided that:

• he/she is a member of the Bar of England and Wales, Scotland or Northern Ireland;
• no Manx advocate is available for the proceedings; or
• he proceedings require knowledge and experience of a nature not ordinarily available in the Island.

Law firms are required to be licensed if giving investment advice. As with the offshore jurisdictions, law firms tend to have associate fiduciary companies and therefore it is common for legal advisers to also act as investment advisers.

However, advocates are exempted from the requirement to be separately licensed by the Financial Supervision Commission in the conduct of investment business by virtue of membership of the Isle of Man Law Society, provided they obtain an appropriate certificate from the Law Society and comply with the Law Society's Investment Business Rules 1993.

In 2008 there were 171 practising Advocates, 17 non-practising Advocates, 4 associate members and 32 student members.

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Isle of Man Codes of Conduct and Disciplinary Proceedings

These are set out in the Advocates Disciplinary Rules 2009. The Advocates Disciplinary Tribunal Guidance Notes have been produced to provide general information regarding the procedures adopted in dealing with formal complaints about advocates’professional misconduct. Where the rules are silent, the Isle of Man Law Society will tend to look for guidance from the equivalent English provision. As with the Channel Islands, difficulties may arise where the rules conflict. Additional information can be obtained from the Law Society.

As in other small legal markets, issues of conflict may arise during the course of obtaining legal or investment advice. The rules relating to conflict of interest are essentially the same as those applying to solicitors in England, ie it is not acceptable to have lawyers from the same firm acting for different parties to the same transaction.

With regard to confidentiality, there are no specific statutory provisions. The position in the Isle of Man is basically the same as that pertaining in England:

• codes of practice affirming client confidentiality;
• express/implied term of contract between advocate and his client;
• equitable duty of confidence;
• legal professional privilege.

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Isle of Man Solicitors' Accounts' Rules

Professional indemnity insurance is mandatory in the Isle of Man. There is no client compensation fund.

The holding of client money is regulated by the Isle of Man Law Society's Advocates' (Accounts) Rules 1993, which are similar to the English Solicitors' Accounts Rules and stipulate that client money be held in a designated client account. Rules also cover a client's entitlement to interest.

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Isle of Man Fees and Disputes

Notarial fees, where relevant, are included in the final bill to the client. Neither percentage nor contingency fees apply.

Given the diversity of work and expertise in the Isle of Man, billing rates differ widely depending on the nature of the work undertaken, whether it is domestic or international or which firm is acting. Leading firms advising on international transactions charge approximately GBP225-GBP275 per hour for a partner, and GBP150 per hour for a fee-earner.

The Advocates Act 1995 introduced a new regime for the assessment of Advocate's fees. Under Part III of the 1995 Act, advocates are under a duty to provide all clients with a written estimate of fees likely to be payable on an ongoing basis. Clients are also entitled to a written detailed breakdown of the fees payable. New clients may be asked to give money on account.

General complaints in respect of an advocate's professional conduct are dealt by the Advocates Disciplinary Tribunal, a body set up under the Advocates (Disciplinary) Rules 1997, updated by the Advocates Disciplinary Rules 2009.

The Tribunal is unable to deal with matters of negligence (a matter for the court), compensation claims or disputes as to fees (see below). The Tribunal may dismiss the complaint or, if proved, reprimand the advocate or order the advocate to pay the Treasury a penalty not exceeding GBP2,000. Very serious breaches of professional conduct may be referred to the Lieutenant Governor.

In the case of a dispute as to fees, the client may seek taxation by the Taxing Master. The Taxing Master assesses a bill of costs in accordance with the Advocates' Scale of Fees. Although the Taxing Master acts within the framework of the court system, and the taxation system is primarily used to assess litigation costs, theoretically any bill of costs, contentious or non-contentious, may be taxed. Accordingly, in the areas of international corporate and commercial work, advocates tend to ensure that clients are aware that fees will be charged on a time basis at an hourly rate.

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Isle of Man Recent Trends

The Advocates Act 1995 has not changed the current controversial rule that advocates and registered legal practitioners cannot be partners in the same firm. The rules are in effect contrary to EU equal treatment provisions. Increasingly, local law firms are employing English-qualified lawyers at below partner level.

In terms of the Island's legal market, leading advocates report a continuing healthy domestic and international workload. In particular, there has been an increase in all areas of substantive international financial and corporate work including:

Isle of Man Table of Statutes

This is a non-exhaustive list of the main Isle of Man statutes affecting offshore and non-resident business. The statutes are listed in alphabetical order – click on the statute for a fuller description of the statute, the legal regime it forms part of, or in some cases the text of the law.

Advocates Act 1995
Banking Act 1998
Banking Business Regulations 1991
Banking (General Practice) Regulatory Code 2005
Collective Investment Schemes (Compensation) Regulations 1988
Collective Investment Schemes Act 2008
Companies Act 1931
Companies Act 2006
Companies (Amendment) Act 2009
Companies, etc. (Amendment) Act 2003
Corporate Service Providers Act 2000
Employment Act 1991
Financial Supervision Act 1988
Financial Supervision (Restricted Schemes) Regulations 1990
Financial Services Act 2008
Income Tax (Exempt Companies) Act 1984
Income Tax (Instalment Payments) Act 1974
Income Tax Act 1970
Insurance (Limited Partnership) Regulations 2004
International Business Act 1994
Investment Business Act 1991
Investment Business Order 1991
Investment Business Order 2004
Limited Liability company Act 1996
Merchant Shipping (Registration) Act 1984
On-Line Gambling Regulation Act 2001
Partnership Act 1909
Partnership Act 1890 (UK)
Perpetuities and Accumulations Act 1968
Protected Cell Companies (Collective Investment Schemes) Regulations 2004
Purpose Trusts Act 1996
Recognition of Trusts Act 1988
Registration of Business Names Acts 1918 and 1954
Retirement Benefits Schemes Act 2000
Retirement Benefits Schemes (International Schemes) Regulations 2001
Trade Unions Act 1991
Trustee Act 1961
Trusts Act 1995
Variation of Trusts Act 1961

Developments in Company Law

Responsibility for the Companies Registry was transferred to the Financial Services Commission in 2000 as part of a package to reform corporate conduct. However, as a result of the recently reported re-organisation of Government Departments and associated functions, responsibility for the Companies Registry moved from the Financial Supervision Commission to the newly created Department of Economic development on the 1st April 2010.

In March 2010, the FSC expressed some doubts about this decision by the government, in particular "at the potentially serious effect which the lack of a formal regulatory connection with Companies Registry could have on the reputation of the Island as a respected and well regulated financial centre."

"Companies Registry was transferred to the Commission in the year 2000 expressly as part of a package to reform corporate conduct, and for all matters concerning the oversight of companies to come under the Commission. Companies continue to be perceived by international standard-setters and evaluators as vehicles which can present considerable reputational risks," the FSC stated, adding at the time that as an independent regulator, it proposes to continue its dialogue with Government on the matter.

The Companies, etc. (Amendment) Act 2003 came into partial effect in December, 2003, allowing unlisted companies to re-domicile in and out of the Isle of Man. Whilst companies conducting licensable business, e.g. banking, investment, insurance or corporate service provider business, will be subject to additional regulatory approvals, they will also be able to re-domicile should they so wish.

In addition, the Act ushered in a number of other provisions including: registration of prospectuses; the obligation to display a company’s name outside its premises; and procedures relating to a company’s ability to dispense with compliance with certain provisions of the Companies Acts. A right of appeal against a decision of the Commission to refuse to register documents under the Business Names, Industrial and Building Societies and Limited Liability Companies Acts is also introduced.

Other provisions facilitate the electronic filing of documents following the introduction of the FSC’s Online Search Facility. In addition, holders of corporate service providers licenses and their key staff automatically qualify to act as secretaries of exempt companies and international companies. Other provisions correct anomalies and make minor amendments to the Companies Acts 1931 – 1993 and related legislation.

Also, with effect from April 1, 2004, no new bearer shares may be issued by Isle of Man companies and the rights relating to existing bearer shares may not be exercised until the shares are registered.

In August, 2005, the government published draft legislation for the creation of a new type of business-friendly company. The new Manx corporate vehicle, or ‘NMV’, is designed to be simple and inexpensive to administer and to meet the Island’s obligations in terms of the commonly adopted benchmarks of international standards.

The concept, developed following a study of company law around the world, was originally scheduled for introduction early in 2006, to coincide with the Isle of Man’s move to a zero rate of corporate tax, but came into force on November 1. The first New Manx Vehicles, or '2006 Act companies' as they became known, were incorporated on the same day. Each 2006 Act company is allocated a number followed by the suffix “V” to distinguish the new-style companies from the more traditional companies, which may still be incorporated under the Companies Acts 1931-2004.

Further amendments to companies legislation entered into force on September 1, 2009, with the Companies (Amendment) Act 2009.

This law ushered in the following changes:

• Company prospectuses - The information contained in a prospectus (for a company incorporated under the Companies Act 1931) must include all matters that intended recipients could reasonably expect to find, instead of the previous specific list of information required under Schedule 4 to the Companies Act 1931 (which has now been repealed). A signed copy of the prospectus must be delivered to the Companies Registry for registration prior to its issue. Where the Companies Registry becomes aware of false or misleading claims in the prospectus, it has the power to make a direction to amend the prospectus. This direction will be placed on the company’s public file.
• Registration of charges - Companies will be permitted to file a certified copy of the charge instrument or the original document. This will remove conflicts that existed between the Companies Registry and Land Registry requirements.
• Changes to accounting provisions - The requirements under the Companies Act 1931 are clarified to require (for newly-incorporated companies) that the first financial statements must be prepared for a period of no longer than 18 months from the date of incorporation. The financial statements of a company must be laid at least once in every calendar year before the members in general meeting within 6 months of the financial year-end for a public company, and 9 months for a private company. This represents a reduction in the current time limit. Accounting provisions under the Companies Act 2006 permit accounting records to be held at a place other than the Registered Agent’s office, provided the Registered Agent is kept informed of where the records are held and further, that copies are remitted to the Registered Agent on demand but at least annually. The latest act, in addition to the aforesaid, empowers any member or director of the company to require financial statements to be prepared. Where the company fails to accede to the request, a member will have the right to have sight of the underlying accounting records. Also, the definition of who may audit an Isle of Man company has been expanded.
• Limited Liability Companies Act 1996 - Changes to the Limited Liability Companies Act 1996 remove the provision that provides for the automatic winding up of the company within 60 days for failing to file a notice in the prescribed form on the death, dissolution, resignation etc of a member.
• Treasury shares - The Act has added a new section 25A of the Companies Act 1992 and section 58A of the Companies Act 2006. These sections give the Commission powers to make regulations that could allow a company to create treasury shares. While the Commission has underlined that it currently has no intention to introduce treasury share regulations, it has asked that interested parties present their views on the matter. Should there be sufficient interest shown in this area, informed the Commission, consideration will be given to consulting further on whether to make treasury share regulations.

In fact, the Commission started consulting on whether to allow treasury shares in July 2009. Interested parties were asked to give details of the motivation and rationale for introducing treasury shares.

Respondents indicated that treasury shares are vital in ensuring that the Isle of Man remains able to compete as a premier offshore financial centre. The responses also suggested a need for prompt action. In acknowledging this commercial need the Commission released draft legislation early in 2010, which is needed to introduce treasury shares, for a limited period.

The Isle of Man government's February 2010 budget included a number of changes to company registration rules.

The changes affect every Isle of Man incorporated and registered company, business name and limited partnership. They also affect those who conduct searches or request information from the Companies Registry.

Company registry fees were increased in the budget, as part of the Isle of Man’s biennial review. The government increased the fees to ensure they maintain their value against changes in the annual rate of inflation, and also to provide the Isle of Man government with much needed revenues.

In February 2010, the FSC consulted on plans to allow companies whose shares are traded on a market to hold up to 10% of shares in treasury, to help companies manage their share capital more efficiently.

Section 25A of the Companies (Amendment) Act 2009, gave the Commission the power to make regulations to introduce treasury shares under the Companies Acts 1992.

Financial Services Legislation Consolidated

In June, 2004, the Isle of Man Treasury confirmed that changes would be made to the structure of the Island’s Financial Supervisory Commission, including the replacement of a political figure as chairman of the FSC, which would bring the Isle of Man into line with other offshore jurisdictions and with the conclusions of the 1998 Edwards report on the British dependent territories.

In June, 2006, the FSC issued a second consultation paper outlining initial proposals for regulated activities, exclusions and exemptions which will come into force under proposed new financial services regulatory legislation.

According to John Aspden, Chief Executive of the IoM FSC, the consultation gave the jurisdiction's financial services community the opportunity to identify areas where further legislative amendments are necessary to improve the current framework.

“This consultation primarily consolidates the provisions contained in existing legislation," Mr Aspden explained.

"However, the Commission anticipates that licenceholders and their advisers, who have first-hand knowledge of the changes occurring in their sphere of expertise, may identify areas where further amendment would benefit the industry," he added.

The draft Regulated Activities Order consolidates the activities previously encompassed by the Banking Act 1998, Investment Business Acts 1991 – 93, Fiduciary Services Acts 2000 and 2005 and Building Societies Act 1986, as amended, as well as incorporating certain aspects of the Financial Services Act 1988 relating to the managers and trustees of collective investment schemes.

In addition, the Order included a number of exclusions (activities which fall outside the scope of the legislation) and definitions of specific terms used within the Order.

The draft Financial Services (Exemption) Regulations consolidated the existing exemptions granted under the Banking Act 1998, Investment Business Acts 1991 – 93 and Fiduciary Services Acts 2000 and 2005, with certain outdated exemptions being removed.

To assist licenceholders and other interested parties in reviewing this draft secondary legislation, the Commission prepared a RoadMap showing the destination of current provisions in the draft new legislation, detailing any changes which are proposed and providing a brief rationale for the change, and the impact to industry that is anticipated as a result of such change.

"This consultation provides an opportunity to embrace developments in the finance sector and to ensure that its needs are met," the FSC stated.

"Suggestions for the modernisation of the existing provisions or proposed new activities will be welcomed from industry to ensure that a meaningful and workable framework is developed," the regulator added.

Mr Aspden said that the proposals were to be developed both through the consultative process, and in dialogue with the Legislative Liaison Group.

This process has culminated in the Financial Services Act 2008, which received Royal Assent on August 1, 2008. This Act consolidated a number of separate pieces of financial services legislation, and the following Acts have been repealed in whole or in part: The Financial Supervision Act 1988; The Investment Business Acts 1991-1993; The Banking Act 1998; The Fiduciary Services Acts 2000 and 2005; and the regulations of the Industrial and Building Societies Acts 1892-1986.

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Isle of Man Trust Law

The Isle of Man law of trusts is based on English law and is to be found in the following acts:

In addition, being a common law jurisdiction, there is a considerable amount of case law (mainly English) which is persuasive authority for the Manx courts. The distinctions between English law and Manx trust law arise principally from the fact that the Isle of Man has not adopted certain provisions of English trust law, for example, those relating to restrictions on accumulation of income.

Appeal from the Isle of Man courts is to the Privy Council in London.

Trusts do not need to be registered unless they involve real estate on the island, when settlements inter vivos must be registered. However, Unit Trusts (Collective Investment Schemes) are subject to various special requirements under the Financial Supervision Act 1988 (since consolidated into the Financial Services Act 2008). There is no stamp duty.

There are no statutory accounting or auditing requirements and there is no need to file tax returns. It is possible to obtain an advance clearance from the relevant registry based on a draft trust deed so that the identity of the settlor and the beneficiaries can be kept totally confidential.

The maximum perpetuity for Manx trusts is 80 years. There are no provisions for non-recognition of foreign judgements; asset protection trusts are not available.

Recent legislation in the form of the Trusts Act 1995 has secured the position of trusts established in the Isle of Man in the face of challenges in the applicable governing law by other jurisdictions, particularly in the area of 'forced heirship'.

Until 2005, trustees were not licensed or supervised by the Financial Supervision Commission, unless the fiduciary carried on business in investment, banking or insurance, in which case licences were required under those headings.

The Fiduciary Services Act, 2005, extended the Corporate Service Providers Act 2000 to require persons who, by way of business, provide certain services to trusts and partnerships or act as nominee holders of units in unit trusts, to hold a fiduciary licence.

The licensing of fiduciaries brought the Isle of Man into line with similar arrangements already established in other offshore jurisdictions such as Bermuda, Guernsey and Jersey and an external review of the proposals by London law firm Stikeman Elliot found the bill compares favourably with legislation in these places.

Alongside the Fiduciary Services Act, the Isle of Man Financial Supervision Commission updated its Fiduciary Services Regulatory Codes.

The Fiduciary Services Acts 2001 and 2005 were consolidated into the Financial Services Act 2008, which sought to simplify the licensing regime for the Isle of Man's financial services providers.

As in other jurisdictions whose trust law follows the English pattern, a beneficiary of the trust may apply to the court to stop a trustee from dealing with trust assets in an unauthorised manner. Loss as a result of an authorised conduct will result in the trustee being responsible for making the loss good. The asset value of the trustee is therefore an important consideration.

Where a breach of trust is committed by a corporate trustee, every person who at the time of breach was a director of the trustee may be deemed, in certain circumstances, to be guarantor of the trustee (ie personally liable) in respect of damages awarded by the court. Principles of constructive trusteeship also apply.

For the taxation of trusts in the Isle of Man see Offshore Tax Regimes.

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Isle of Man Banking Law

• The money received by way of deposit is lent to others; or
• Any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on the money received by way of deposit.

• Real Presence - the Commission will not licence a mere shell; the company’s management and control must be in the Isle of Man.
• Track record - a licence applicant must demonstrate a proven track record in the successful conduct of the regulated activity for which it seeks a licence, either by being part of a group that already undertakes the activity in another jurisdiction or by key persons having operated at a senior level in a relevant licensed business.
• Staffing – for most classes of business, the applicant should be managed by two “resident officers” who are supported by staff with suitable experience to fulfil the key roles.

Unlicensed banking operations remain a problem and have become known as 'brass plate' companies. These 'rogue' operations are, when reported, investigated by the Enforcement Division of the FSC.

The Banking Act (as amended) recognised the contractual duty of a banker to keep the affairs of his customer confidential and the customers' entitlement to confidentiality. There were very few limited exceptions to these principles, set out in the Financial Supervision Act 1988, and these included circumstances where disclosure was required to assist criminal proceedings or to enable the FSC to discharge its statutory functions.

All banking licence holders are required to participate in the Depositors Compensation Scheme. The FSC is the Scheme Manager. The Banking Business (Compensation of Depositors) Regulations 1991 extends to all licensed banking institutions, except those listed by name in the Schedule. Under the Compensation of Depositors Regulations 2008 as amended by Tynwald on October 23, 2008, the DCS compensates people who have money in current and deposit accounts in the Isle of Man with up to GBP50,000 of net deposits per individual depositor or GBP20,000 for most other categories of depositor. Cover is calculated per depositor, per deposit taker, if this bank fails.

Prior to the 2008 regulation, deposits were protected up to 75% of the first GBP20,000 per depositor and the Scheme extends to the sterling equivalent of foreign currency deposits.

The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man.

The government announced in July 2001 that it would become the first Crown Dependency with a financial ombudsman which means that customers worldwide will have access to an independent dispute-resolution scheme covering Isle of Man-based financial institutions. The 'Financial Services Ombudsman Scheme' covers complaints about financial advice and products across the range of personal finance such as banking, credit, insurance and investments. The scheme is open to individuals with a financial complaint against an Isle of Man firm that the firm has been unable to resolve.

In June, 2005, the Isle of Man's Financial Supervision Commission announced that a project was underway to update the Banking (General Practice) Regulatory Code 1999. The key drivers for this project were to update the Banking Code in line with current requirements whilst taking into account the recommendations made by the International Monetary Fund (“IMF”) inspection team following its visit in 2002.

As a result, the Banking (General Practice) Regulatory Code 1999 was replaced by the Banking (General Practice) Regulatory Code 2005 on July 1, 2006.

The Commission published its approach to Basel II adoption in February 2006.

Says the Commission: 'The EU has issued the Capital Requirements Directive (“CRD”) which all regulators of member states must implement. Although this encouraged adoption from January 1, 2007, the CRD contains a qualification that, where a bank has committed to the standardised approach by 1st January 2008 it can continue to report under Basel I during 2007.

'The Isle of Man is not part of the EU and is not under any legal obligation to require locally incorporated banks to report under Basel II from 1st January 2007 or 1st January 2008.'

However, the Commission says it understands that locally incorporated banks which are subsidiaries of banks in countries requiring Basel II reporting in 2007 may wish to begin similar reporting to the Commission, whether under standardised or more advanced approaches (re parallel runs). With this in mind the Commission intends to have available the necessary reporting forms and guidance during 2007 but may require these banks to also continue reporting under Basel I.

The Commission says it will require locally incorporated banks to report under Basel II with effect from 1st January 2008 for the standardised approaches, with some degree of flexibility on a case by case basis for later adoption.

Basel II will require the Commission to make some changes to the Banking (General Practice) Regulatory Code 2005, as amended (“the Code”). It is expected that these changes will be minor and will focus on capital, risk management, and reporting forms (which are specified in the schedule to the Code). In addition, the Commission anticipates that guidance notes will be utilised to supplement the Code to ensure compliance with Basel II principles contained within Pillar 1 and Pillar 2.

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Isle of Man Investment Management Law

With effect from May 1, 2010, the Isle of Man Financial Supervision Commission again permits the establishment of Regulated Funds in the Isle of Man, with Specialist and Qualifying Fund types both being relaunched as Registered Funds.

According to the Commission, the move is in response to the new market environment and recognizes the importance of appropriate regulatory oversight for funds.

On the basis of the proposed regulatory structure, the Irish Stock Exchange has confirmed that funds which are Isle of Man Regulated Funds under the Collective Investment Schemes (Regulated Fund) Regulations 2010 are suitable for listing on the Irish Stock Exchange without the imposition of a EUR100,000 (USD133,000) investment threshold criteria.

Commenting, John Aspden, Chief Executive of the Commission, said:

”I am delighted that, following discussion with industry and a review of our fund range, we have developed a modern flexible Regulated Fund. I view this as a flagship product underlining the quality of the fund range that the Isle of Man can offer. We have already had interest shown in the new fund type and look forward to its future success.”

“I am also pleased to announce that we have relaunched the Specialist and Qualifying Fund types as Registered Funds. In doing so we have taken the opportunity to review the regulations and introduce further flexibility.”

“I believe that the Island’s fund offering is first class, balancing appropriate regulatory requirements with the commercial flexibility needed in the modern financial environment.”

Licensing of investment management, including that of collective investment funds, was introduced by the Investment Business Acts 1991 to 1993, with a definition of activities to be licensed contained in the Investment Business Order 1991. The regulatory regime for collective investment funds is now governed by the The Collective Investment Schemes Act 2008 (CIS Act) which came into force on August 1, 2008, having been previously established by the Financial Supervision Act 1988.

Subordinate legislation made under the Financial Supervision Act 1988 continues to have effect as if it was made under the relevant provisions of the CIS Act.

Under the Investment Business Acts, the list of activities requiring a license included: brokerages offering life, pension and investment products; portfolio investment management; captive insurance management; and collective investment fund management. Futures and options were included in the definition of 'investments'; land and cash were not. Exemptions from the licensing regime included banks, building societies, and Manx and UK legal and accountancy professional firms.

Investment Business Order 2004

In October, 2004, the FSC announced Tynwald’s approval of the Investment Business Order 2004. The 2004 Order replaced the Investment Business Order 1991.

The government, in partnership with the finance industry, reviewed the 1991 Order to ensure that the definition of investment remained relevant to the current and future business and investment situation on the island.

The following changes appear in the 2004 Order:

• The position of UK and other overseas persons has been refined to allow only UK FSA authorised persons to ‘legitimately’ solicit investment business on the Island;
• The distinction between when non investment-business professionals act in their professional capacity and when they hold themselves out as providing investment business has also been clarified;
• The circumstances in which custody services constitute investment business have been clarified;
• The exclusion relating to introductions has been refined to apply only to introductions made to ‘independent’, permitted persons;
• Relevant CSP activities, regulated under the Corporate Service Providers Act 2000, have been expressly excluded; and
• The definition of futures has been updated and brought in line with the UK approach to achieve greater consistency.

The 2004 Order came into operation on December 1, 2004.

The Companies (Private Placements) (Prospectus Exemptions) Regulations 2000

New provisions to the 1931 Companies Act were approved by Tynwald in 2000 and came into operation on January 1, 2001. Known as The Companies (Private Placements) (Prospectus Exemptions) Regulations 2000, the regulations allow for the exemption of certain private placements of shares or debentures from the provisions of the Act.

The exemptions in the regulations apply inter alia under three circumstances:

1) Where the shares or debentures are offered to a restricted circle of fifty or less persons who are acquiring the securities for investment purposes and not for imminent resale

2) To persons who are sufficiently knowledgeable to understand the risks involved in accepting the offer

3) Or to persons whose ordinary activities as principal or agent involve them in the acquisition, disposal, holding or management of shares or debentures.

Applicants for an Investment Business License must have a 3-year profit record, and the Commission vets ownership and management arrangements. There are detailed regulatory codes; and substantial reporting requirements. All investment businesses need to have explicit policies directed against laundering of illicit proceeds.

Collective Investment Schemes Act 2008

Under the Collective Investment Schemes Act 2008 (CIS Act), a licence to carry on the Class 3 regulated activity of Services to Collective Investment Schemes permits a business operating in or from the Isle of Man (within certain criteria and with specified exclusions) to provide the following services to collective investment schemes: act as a manager, administrator, trustee, fiduciary custodian, custodian, promoter, asset manager or investment adviser.

The CIS Act sets out the statutory framework for the regulation of Collective Investment Schemes (“schemes” or “funds”), more commonly known as unit trusts, mutual funds or open-ended investment companies. The CIS Act sets out 3 classes of scheme:-

• Authorised Schemes under Schedule 1 to the CIS Act;
• International Schemes (including full international schemes and other prescribed classes of scheme) under Schedule 2 to the CIS Act; and
• Recognised Schemes under Schedule 4 to the CIS Act.

Regulatory Framework Reviewed

In October 2009, the Isle of Man Financial Services Commission announced a consultation on proposed amendments to the regulatory framework for Full International Schemes, Specialist Funds, Qualifying funds, and Experienced Investor Funds. The Commission also sought views on options for the future of Professional Investor Funds.

The review aims to update the legislation and bring it wholly into line with the Collective Investment Schemes Act 2008, to modernise the legislation and to build upon the Commission and industry’s experiences in implementing the new schemes framework in 2007.

As part of the review, the Commission proposes updating ancillary legislation which affects collective investment schemes.

As a result of this review, International Scheme have been superseded by the Regulated Fund. The Collective Investment Schemes (Legacy) Regulations 2010 means that no new International Schemes can be established however existing funds may continue. The Regulations also expand the jurisdictions in which a trustee or fiduciary custodian of an international scheme can be located by including Ireland and Luxembourg.

Full details of regulated activities, exclusions and exemptions from licensing may be found in the Collective Investment Schemes handbook. A licenceholder is obliged to comply with any licence conditions that have been imposed by the Commission and which are shown on the licence.

The Collective Investment Schemes handbook also contains links to other legislation relating to licenceholders, including the Financial Services Rule Book 2008, explaining the detailed rules to be complied with by all licenceholders. Guidance on rules and on other regulatory matters may also be found in the handbook.

The 2008 regime for collective investment funds distinguishes various types of fund:

Authorised Collective Investment Schemes

Any scheme established in the Island which is promoted to the general public in the Island (or the UK by virtue of the Island's designated territory status) must be authorised by the Commission under Schedule 1 to the CIS Act. Authorised Schemes are subject to detailed regulation concerning their structure and operation. With regards the investors compensation scheme the Authorised Collective Investment Schemes (Compensation) Regulations 2008 only applies to investors in Authorised Schemes.

International Schemes

N.B. It should be noted that the International Scheme has been superseded by the Regulated Fund. No new International Schemes can be established although existing funds may continue. Specialist Funds, Qualifying Funds and Experienced Investor Funds are now categorized as Registered Funds.

Any scheme established in the Isle of Man which is not an Authorised Scheme or an Exempt Scheme, is an International Scheme under Schedule 2 to the CIS Act. International Schemes may not be promoted to the general public in the Isle of Man.

• Full International Schemes. The Commission does not prescribe the types of schemes which can be full international schemes. The Commission aims to provide a flexible regulatory framework which meets the needs of the market place operators. Full international schemes are not subject to any direct approval or authorisation process, however the manager of such a scheme must have the Commission’s permission to act, and persons comprising the Governing Body of the scheme must be fit and proper persons. The manager and trustee/fiduciary custodian of a full international scheme must be Authorised Persons. In granting permission for the manager to manage the scheme, the Commission reviews the constitutional documents of the scheme. The Commission does not, and is not required to, comment on the investment objectives or strategy of the scheme or its suitability for any investor or any class of investor. Investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
  
• Specialist Funds. The Specialist Fund (SF) is a sub-category of International scheme which is available only to specialist investors who are generally institutional investors and high net worth individuals. The minimum investment in a SF is USD100,000. A SF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
  
• Qualifying Funds. The Qualifying Fund (QF) is a sub-category of International scheme which is available only to qualifying investors who are non retail investors. A QF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
  
• Professional Investor Funds. The Professional Investor Fund (PIF) is a sub-category of International scheme which is available only to professional investors who are generally market professionals and who have net assets in excess of USD1m. The minimum investment in a PIF is USD100,000. A PIF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.
  
• Experienced Investor Fund. The Experienced Investor Fund (EIF) is a sub-category of international scheme aimed at the “Experienced Investor”. From November 1, 2007 no new Experienced Investor Funds can be established. An EIF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure.

Exempt Schemes

Exempt schemes (as defined in Schedule 3 to the CIS Act) are Isle of Man schemes that must have less than 50 investors and their relevant constitutional documents must expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Exempt International Schemes are regarded as private arrangements and are not subject to regulation.

Recognised Schemes

Collective Investment Schemes which are managed in or authorised under the law of another country or territory outside the Island may not be promoted to the general public in the Island unless they have been granted recognition by the Financial Supervision Commission under Schedule 4 to the CIS Act. Once granted recognition, a Recognised Scheme may be promoted to the general public in the Island.

Taxation of Investment Products

In December 2009, the Isle of Man Treasury released a consultation paper on proposed changes as part of a review on the taxation of investment products, following talks with a number of private sector professionals.

The consultation document outlined proposals for the introduction of a new taxation regime for certain investment products in the Isle of Man, and was primarily concerned with the taxation of insurance bonds and roll-up funds.

The proposed new regime aims to remove this uncertainty by:

• Defining which products will be subject to income tax and which will fall outside the charge; and
• Defining when and how an income tax charge will be raised.

The Isle of Man Financial Supervision Commission (FSC) on March 1 launched another consultation, this time on amendments to Authorised Collective Investment Schemes Regulations, which have been drafted in order to maintain equivalence with the UK Financial Services Authority’s (FSA's) requirements. Equivalence will allow the island to retain its Designated Territory status, allowing the Isle of Man to market Authorised Schemes to the UK public.

While the FSC notes that amendments to the UK Authorised Schemes regime have tended to be minimal in recent years, as a result of the European Union UCITS III regime the UK has materially updated its regime for authorised type schemes. The Isle of Man FSC therefore considers that a full review of the entire Authorised Schemes Regime is needed in order to update the regime and to assist in preserving the existing business being undertaken in the jurisdiction.

In order to maintain equivalence, the Regulations have generally adopted most of the UK FSA’s requirements but with amendments to take account of the Island’s Collective Investment Schemes Act 2008. According to the consultation document, of the latest revision, the noteworthy points are:

• As the existing UK requirements are significantly different from the Commission’s current Regulations, there has been a major re-write of the requirements and therefore the FSC has said that it has not been possible to produce a “Road Map” of changes.
• Following informal consultation with existing market participants, it would appear that the view of the industry is that, whilst welcoming any initiative to enhance disclosure of key information to potential investors, the UCITS Simplified Prospectus regime is viewed as being of limited success in achieving its aim of improving investor disclosure. The Committee of European Securities Regulators and the EU Parliament appear to have accepted this by proposing a new regime, the Key Information Document, as part of the package of changes for UCITS IV although this has not been finalised by them. It has therefore been decided to introduce an optional simplified prospectus regime rather than require it in all cases.
• The UK FSA is considering whether to permit Authorised Schemes to be structured as protected cell companies (PCCs). If such arrangements are permitted in the UK, the Commission has said it would be keen to allow this. Therefore, as part of the review, the opportunity has been taken to include reference to PCCs to ensure that, if the UK does decide to extend its legislation, it will be possible to maintain equivalence with them. The Commission will be liaising with the FSA on developments in this area and should they not be progressed, then all references will be removed.

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Isle of Man Betting and Gaming Law

During 2001 the Department of Home Affairs progressed first the primary and then the secondary legislation to legalise the operation, from the Isle of Man, of well regulated on-line gambling sites. The primary legislation, the On-line Gambling Regulation Act, came into force in May. Four sets of Regulations were approved by Tynwald in June. The first three licenses under the regulations were issued in September.

The application fee was set at GBP1,000 and the licence fee at GBP80,000 per annum; in addition licence holders were required to deposit GBP2m as a guarantee for the payment of customers and to establish a formal reserve for gaming based on a stated formula. These terms were somewhat softened in 2003.

In January, 2005, the Isle of Man reversed its four-year-old policy prohibiting e-gaming firms based in the jurisdiction from accepting online casino bets made by US residents.

The US authorities have sought to maintain domestic restrictions on gambling by banning US residents from placing bets with e-gaming firms whose servers are located in foreign jurisdictions, as illustrated by its legal fight with Antigua & Barbuda which has contested that ban through the WTO.

Tim Craine, the Isle of Man’s head of electronic business, said: "There's a lot of business looking to relocate to a reputable, regulated jurisdiction," adding: "We're hoping to capitalize on that business."

However, Mr Craine pointed out in the report that the new policy applies only to online casino and poker games, and the ban on accepting sports bets from US residents remains in place.

John Gilmore, eGaming ambassador to the Isle of Man’s Department of Trade and Industry (DTI), said that the decision was motivated by the government’s desire not to contravene any US federal laws. “We will not extend the policy to sports betting, because the Wire Act prohibits sports betting across states in the US,” Gilmore explained. “But as there is no federal law against poker or casinos we will accept those types of bets from US citizens,” he added.

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Isle of Man International Agreements

In June 2000 the Isle of Man government wrote a 'Letter of Commitment' to the OECD's Financial Action Task Force (FATF) in which it promised to comply with international standards of transparency and mutual assistance. The government did not revealed what specific legislative consequences would follow, but some changes to company law followed, as did a strengthening of international treaty obligations, which are reflected in domestic law.

In September 2000, an inter-governmental report was published by the Offshore Group of Banking Supervisors and the FATF which praised the Isle of Man authorities for their successful endeavours in countering money laundering and related criminal activities with a 'robust arsenal' of pro-active initiatives. The report examined the effectiveness of the island's legislation, regulations and administration activities directed against money laundering. The authors were particularly impressed with plans to strengthen company sector regulations, saying that these enabled the Island to be "at the forefront of international efforts to prevent the abuse of company structures for criminal purposes."

The report also welcomed the creation of a new financial crime unit which draws on the combined efforts and expertise of the police, customs and regulators with a pro-active enforcement strategy. And financial professionals and institutions on the island have also been praised by the report - it says that the financial sector has a 'good compliance culture' which allows it to quickly highlight potentially suspicious transactions.

In October, 2002, the Isle of Man’s Treasury Minister, Allan Bell, signed a bilateral agreement with the United States of America which provides for the exchange of information on tax matters between the two countries. The agreement provides for exchange of information by specific case request.

Allan Bell said: “Today co-operation between governments is more important than ever as we work to ensure that no safe haven exists - either onshore or offshore - for funds associated with activities such as money laundering, terrorist financing or tax evasion.

“Equally the Isle of Man believes that the expansion of the global economy depends on both onshore and offshore international financial centres combining highly competitive entrepreneurial environments for business with a quality of regulation and stability.”

The Isle of Man sets out to be a well regulated and responsible jurisdiction and is financially strong, as evidenced by its Triple A rating with Moody’s and Standard & Poors. It has been recognized by the FATF as being "at the forefront of international efforts to prevent the abuse of company structures for criminal purposes".

Allan Bell continued: “The ability to exchange information in relation to criminal matters already exists between our countries via the Department of Justice in the United States and the Attorney General in the Isle of Man.

“The Island’s early commitment to OECD has permitted us to play an active role with the United States and other member countries in the development of a model agreement on which the agreement being signed here today is based. This provides an alternative route to obtain information in relation to criminal tax matters and also provides for a timetable for this to be extended to include civil tax matters.

“The development of a network of such agreements between member states and committed jurisdictions, whether on a multilateral basis, or a bilateral basis as adopted by the Isle of Man, will in due course evidence the existence of a new and truly international standard on Exchange of Information.

“The Isle of Man will continue to support the development of such international standards and seek to foster business relationships with other countries based on those standards and we look forward to participating in the ongoing discussions with the United States to further develop and establish closer economic and fiscal ties.”

The IOM's agreement with the US forms part of the jurisdiction's efforts to implement its commitments to the OECD, given in early 2001, which included a commitment to develop effective exchange of information. Over the following 12 months the Isle of Man, together with other jurisdictions, negotiated a Model Tax Information Exchange Agreement.

The Model being adopted provides for exchange of information based upon a formal request being received by the Competent Authority in the Isle of Man. A request must be made on an individual case basis and the subject of the request must be under investigation in the requesting jurisdiction. Other safeguards are included to prevent ‘fishing expeditions’ for example, the requesting party must first take all means available in its own jurisdiction to obtain the information. All information that is exchanged may not be passed on to third parties and there are strict confidentiality measures.

The US Treasury Department announced in September, 2006, that the Tax Information Exchange Agreement had entered into force.

According to the Treasury: "An exchange of letters between the United States and the Isle of Man was completed on June 26, 2006, thus bringing into force an agreement that allows for the exchange of information on tax matters between the United States and the Isle of Man."

In October, 2007, an association of Nordic countries concluded a package of Tax and Information Exchange Agreements (TIEA) with the Isle of Man, providing for the exchange of information between governments on a case-by-case basis, as the Manx government seeks to reinforce its global reputation as a well-regulated financial centre.

The Nordic countries started joint negotiations in July 2006 to conclude tax information exchange arrangements with jurisdictions that have made a commitment to apply the OECD standards on transparency and exchange of information in the tax area. The taxation and economic co-operation agreements have been signed with the seven members of the Nordic Council, namely Norway, Sweden, Finland, Iceland, Denmark, Greenland and the Faroe Islands. The package of 28 agreements was signed at a ceremony in Oslo. The package include tax information exchange agreements based on the OECD model of exchange of information on request on a case by case basis, and shipping and aircraft taxation agreements ensuring that a relevant business based in the Isle of Man will not be taxed in the Nordic countries so long as it is conducting international trade. By the end of 2008, all 28 of the agreements had been ratified and become operational.

In March 2009, the Isle of Man signed a Tax Information Exchange Agreement with France. This agreement was signed 7 years after the island signed its first TIEA with the USA. At the time, the island currently holds a quarter of the 51 TIEAs in existence globally.

The Isle of Man was one of the first nations to make a clear commitment to OECD standards on tax co-operation in 2000 and was recognised by the OECD as a ‘committed jurisdiction’ in 2001.

Minister Bell said: “We are delighted to announce the signing of our 14th TIEA, a significant milestone in our ongoing commitment to international tax co-operation. For nine years the Isle of Man government has been dedicated to achieving OECD standards, and this latest TIEA is part of our continuing work and mutual co-operation with not only France, but all other countries we have agreements with.”

Minister Bell commented: “In addition to our agreement with France and the recent one with Germany, we are at advanced stages of negotiation with several other countries and will continue to strive for effective co-operation based on agreed international standards by developing, signing and ratifying further TIEAs.”

Also signed at the ceremony was an agreement for the avoidance of double taxation with respect to enterprises operating ships in international traffic. This builds on the Isle of Man’s network of shipping taxation agreements, and will further enhance opportunities for the island’s highly regarded shipping sector.

The Isle of Man government on April 3, 2009, released a statement welcoming the island’s inclusion on the OECD ‘white list’ of countries complying with the global standard for tax co-operation and exchange of information.

The list, produced following the G20 summit in London, places the Isle of Man in the top tier of jurisdictions – along with nations such as the UK, USA, Germany, France, Sweden and Ireland – that have ‘substantially implemented the internationally agreed tax standard.’

Welcoming the Isle of Man’s recognition as a cooperative jurisdiction, Chief Minister Tony Brown said:

"The OECD white list provides recognition at the highest level of the Isle of Man’s place in the mainstream of economies that comply with the global standard on tax. This is a defining moment for us, confirming our position amongst the most responsible and co-operative countries of the world.”

Treasury Minister Allen Bell added:

“The OECD lists are a significant step forward in the debate about tax, as countries are now being judged and separated on the basis of agreed international criteria – not just size. The Isle of Man has always supported an objective, global approach to this issue and the G20 summit has confirmed this as the way forward.”

“Inclusion on the white list represents a major endorsement of the Isle of Man and of our long-term strategy of positive engagement with the OECD. This can only reinforce the island’s reputation and confidence in our future as an international business centre of quality.”

“The island has long been committed to the international standards of tax transparency developed by the OECD in 2000. We are at the forefront of small nations in delivering on that commitment.”

“Over the past seven years we have signed more tax information exchange agreements than any of our counterparts, including agreements with the UK, France and Germany. We have concluded a total of 14 so far, 12 with OECD countries, and there are several more in the pipeline.”

“The island also has a strong track record of complying with international standards of financial regulation, as assessed by the IMF and others. A series of independent, external reviews over the past decade have enhanced our reputation as a well regulated centre for international finance,” noted Bell.

The Chief Minister, meanwhile, stressed that the Island would continue to work with the OECD and other bodies promoting international standards on tax and financial regulation.

“The Isle of Man has a long-term policy of positive engagement with international initiatives and of supporting international standards,” declared Brown, adding: “At a time of global economic crisis this responsible, co-operative approach is particularly relevant and vitally important.”

“The G20 summit is clearly more of a beginning than an end. As work continues towards solutions to the global economic crisis, the Isle of Man is ready to play a constructive part,” concluded Brown.

At the time of writing, the Isle of Man has signed 16 TIEAs - more than any other offshore jurisdiction.

In February, 2005, agreements were signed with the Dubai Financial Services Authority, the UAE Central Bank, and the Bahrain Monetary Agency. The DFSA signed two memoranda of understanding with the Isle of Man's Financial Supervision Commission and Insurance and Pensions Authority.

The two agreements aim to provide a framework for the provision of mutual assistance and information exchange between the two jurisdictions with regard to cross-border transactions. In addition, the agreements are designed to improve compliance, thereby helping to prevent money laundering and fraud.

Under each agreement, the Middle East Agencies, the FSC and IPA will consult with each other on an on-going basis to enhance regulatory co-operation and to collaborate on international supervision between the regions.

The MOUs also provide a framework for regulatory cooperation through the exchange of information and mutual cooperation in the field of on-site examinations of entities, subject to regulation in both jurisdictions.

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