Cayman Islands
04 April 2012
While the Caymans remain one of the largest offshore domiciles in the world, increasing competition in the market is nibbling away at their advantage
Image: Shutterstock
The growth of the Cayman Islands - along with some of its Caribbean neighbours - can directly be attributed to the fall of the UK’s influence as a major world power. With many of Britain’s colonies becoming independent in the aftermath of the Second World War, the home government looked for ways to both reduce the cost burden of running its outlying dependencies, and retaining some influence globally. The creation - or, more accurately, recreation, of the offshore market, with many existing or historic British ties, has proved a runaway success, and the model used in the Caymans has been copied in dozens of other jurisdictions.
With more registered companies than people, the Cayman Islands has for decades been a sought-after destination for firms looking for a low tax business environment in close proximity to the US and with an educated and motivated workforce.
The British Overseas Territory has the highest standard of living in the Caribbean, and one of the highest in the world. It has a stable currency, pegged to the US dollar, and no income tax, capital gains tax or insurance tax (although if you want to buy a car on the islands, you’ll essentially be paying the salary of at least one teacher for a year in tax).
One legend explaining the lack of direct taxation on the island involves a shipwreck in 1794, where nine British merchant ships and their naval escort ran aground on reefs off Grand Cayman. Plucky islanders raced out in their canoes to help, and managed to save all but eight of the seamen on board. Known as the Wreck of the Ten Sails, the story goes that such was the gratitude of the British that it removed taxation from the inhabitants. It’s a nice story, but unfortunately the British Government has never been quite so generous about tax, and records indicate that tax-free status didn’t come into being until some time later.
The focus on financial services began in the 1950s when the islands were considered relatively isolated and not particularly developed. The Government, in the form of the Cayman Island Investment Bureau made huge investments in transport and communications to take the place of traditional industries, such as fishing, agriculture and shipbuilding. Combined with efforts to attract tourists, the islands boomed.
With over 400 banks holding assets of over $500 billion, the aim of becoming a major financial centre certainly worked - an effort capped with the opening of the Cayman Islands Stock Exchange in 1997. Today, there are over 6,000 Cayman Islands-registered hedge funds, over half of the global total. In the most recent Global Financial Centres Index, the Cayman Islands was ranked 40th. This is based on five indices:
The people index summarises the availability of a skilled workforce, the flexibility of the labour market, the quality of the business education and the skillset of the workforce.
The business environment aggregates and values the regulation, tax rates, levels of corruption, economic freedom and how difficult in general it is to do business. To measure regulation an online questionnaire has been used.
The market access index looks at the various equities and bonds available. The volume and value of trading but also the cluster effect of the number of different financial service companies at the location influence the index.
The infrastructure index furthermost accounts to the price of real estate at the location. Other factors such as public transport have a minor impact.
General competitiveness relies on more traditional economic factors as quality of life and economic sentiment.
Regulation
As part of its remit to be one of the most innovative centres for funds and fund administration, the Cayman Islands regulator has a reputation that’s second to none.
It’s a major player on the international stage when it comes to creating and implementing rules that affect financial services, particularly when related to the funds sector, and although it retains the ability to restrict knowledge of ownership, is widely regarded as one of the best run ‘offshore’ domiciles.
As the Alternative Investment Fund Managers Directive (AIFMD) moves closer to coming into force in Europe, the Cayman Islands Monetary Authority (CIMA) recently joined 51 European and international organisations in responding to the European Securities and Markets Authority’s (ESMA) request for input on strategies for implementing the directive.
ESMA, which succeeds the former Committee of European Securities Regulators’ (CESR), has been mandated by the European Commission to draft measures, guidelines and technical standards to facilitate the implementation of certain parts of the Directive.
ESMA received responses to the Call for Evidence that the CESR issued in December seeking stakeholders’ input on the AIFMD to help in its drafting of technical advice on the content of the implementing measures. ESMA intends to publish this draft technical advice for formal consultation during this year.
CIMA’s response paper, which it submitted a year ago, focused on key aspects of the Call for Evidence, namely general questions relating to the scope of the AIFMD, choice of legislative instrument and impact assessment, as well as the specific issues relating to depositories, cooperation arrangements and the authorisation of non-EU managers.
CIMA’s managing director, Cindy Scotland, said it was important for Cayman to have a voice in the development of AIFMD implementation strategies, “not only because of the importance of the funds industry to this jurisdiction but because of the valuable insights that we have gained, and can offer, from having such a large pool of funds domiciled here for most of the last 20 years.”
Other organisations responding to the Call for Evidence included banking associations, regulatory bodies, investment services, and insurance, pension and asset management associations, as well as individual firms. They represented jurisdictions including Jersey, Sweden, Germany, and Ireland. The European Parliament formally accepted the AIFMD on 11 November 2010, mandating implementation by early 2013.
The Cayman government is planning to amend legislation to create a new Mutual Fund Administrators (MFA) licence category to attract small to medium or niche service companies. W. McKeeva Bush, the leader of Governent Business on the islands, said the change was part of the goal to develop greater substance in the area of mutual fund administration.
“Currently, many of our licensees conduct only one component of mutual fund business, for example, registration and transfer agency services,” he says. “However, there is no provision in the Mutual Funds Law to allow an applicant to apply for a Mutual Fund Administrators license in order to conduct partial business.
The new MFA License will cater to those entities looking to provide registrar and transfer agency services in the Islands. It will require a nominal net worth, professional indemnity insurance, and an obligation to have a principal office on island.”
But the authorities are preparing to get more flak over the coming years. Back when the financial industry - and hedge funds in particular - was at the eye of the financial storm, the islands - along with many other domiciles - came under increasing criticism about the activities of the firms registered there.
While most now realise the criticism was mostly unwarranted, there are concerns that politicians looking to deflect the blame for failings within their own countries will once again come after the industry.
In fact, this has been seen only in the past couple of weeks, as the Greek government hit out at ‘speculators’ for increasing its borrowing costs, regardless of the fact that it has effectively failed to control spending.
“All you need is for a few politicians to need a scapegoat and then a whole load of new regulation comes down the line that damages our business,” says one fund administrator.
“Compared to the major financial centres like London and New York, the Cayman Island - and many of the other domiciles in the Caribbean - have a much better standard of regulation. And that can almost be proved - it wasn’t the banks based here that got into difficulties because they didn’t know the extent of their liabilities; it was the likes of Lehmans and that was regulated in the US.”
With more registered companies than people, the Cayman Islands has for decades been a sought-after destination for firms looking for a low tax business environment in close proximity to the US and with an educated and motivated workforce.
The British Overseas Territory has the highest standard of living in the Caribbean, and one of the highest in the world. It has a stable currency, pegged to the US dollar, and no income tax, capital gains tax or insurance tax (although if you want to buy a car on the islands, you’ll essentially be paying the salary of at least one teacher for a year in tax).
One legend explaining the lack of direct taxation on the island involves a shipwreck in 1794, where nine British merchant ships and their naval escort ran aground on reefs off Grand Cayman. Plucky islanders raced out in their canoes to help, and managed to save all but eight of the seamen on board. Known as the Wreck of the Ten Sails, the story goes that such was the gratitude of the British that it removed taxation from the inhabitants. It’s a nice story, but unfortunately the British Government has never been quite so generous about tax, and records indicate that tax-free status didn’t come into being until some time later.
The focus on financial services began in the 1950s when the islands were considered relatively isolated and not particularly developed. The Government, in the form of the Cayman Island Investment Bureau made huge investments in transport and communications to take the place of traditional industries, such as fishing, agriculture and shipbuilding. Combined with efforts to attract tourists, the islands boomed.
With over 400 banks holding assets of over $500 billion, the aim of becoming a major financial centre certainly worked - an effort capped with the opening of the Cayman Islands Stock Exchange in 1997. Today, there are over 6,000 Cayman Islands-registered hedge funds, over half of the global total. In the most recent Global Financial Centres Index, the Cayman Islands was ranked 40th. This is based on five indices:
The people index summarises the availability of a skilled workforce, the flexibility of the labour market, the quality of the business education and the skillset of the workforce.
The business environment aggregates and values the regulation, tax rates, levels of corruption, economic freedom and how difficult in general it is to do business. To measure regulation an online questionnaire has been used.
The market access index looks at the various equities and bonds available. The volume and value of trading but also the cluster effect of the number of different financial service companies at the location influence the index.
The infrastructure index furthermost accounts to the price of real estate at the location. Other factors such as public transport have a minor impact.
General competitiveness relies on more traditional economic factors as quality of life and economic sentiment.
Regulation
As part of its remit to be one of the most innovative centres for funds and fund administration, the Cayman Islands regulator has a reputation that’s second to none.
It’s a major player on the international stage when it comes to creating and implementing rules that affect financial services, particularly when related to the funds sector, and although it retains the ability to restrict knowledge of ownership, is widely regarded as one of the best run ‘offshore’ domiciles.
As the Alternative Investment Fund Managers Directive (AIFMD) moves closer to coming into force in Europe, the Cayman Islands Monetary Authority (CIMA) recently joined 51 European and international organisations in responding to the European Securities and Markets Authority’s (ESMA) request for input on strategies for implementing the directive.
ESMA, which succeeds the former Committee of European Securities Regulators’ (CESR), has been mandated by the European Commission to draft measures, guidelines and technical standards to facilitate the implementation of certain parts of the Directive.
ESMA received responses to the Call for Evidence that the CESR issued in December seeking stakeholders’ input on the AIFMD to help in its drafting of technical advice on the content of the implementing measures. ESMA intends to publish this draft technical advice for formal consultation during this year.
CIMA’s response paper, which it submitted a year ago, focused on key aspects of the Call for Evidence, namely general questions relating to the scope of the AIFMD, choice of legislative instrument and impact assessment, as well as the specific issues relating to depositories, cooperation arrangements and the authorisation of non-EU managers.
CIMA’s managing director, Cindy Scotland, said it was important for Cayman to have a voice in the development of AIFMD implementation strategies, “not only because of the importance of the funds industry to this jurisdiction but because of the valuable insights that we have gained, and can offer, from having such a large pool of funds domiciled here for most of the last 20 years.”
Other organisations responding to the Call for Evidence included banking associations, regulatory bodies, investment services, and insurance, pension and asset management associations, as well as individual firms. They represented jurisdictions including Jersey, Sweden, Germany, and Ireland. The European Parliament formally accepted the AIFMD on 11 November 2010, mandating implementation by early 2013.
The Cayman government is planning to amend legislation to create a new Mutual Fund Administrators (MFA) licence category to attract small to medium or niche service companies. W. McKeeva Bush, the leader of Governent Business on the islands, said the change was part of the goal to develop greater substance in the area of mutual fund administration.
“Currently, many of our licensees conduct only one component of mutual fund business, for example, registration and transfer agency services,” he says. “However, there is no provision in the Mutual Funds Law to allow an applicant to apply for a Mutual Fund Administrators license in order to conduct partial business.
The new MFA License will cater to those entities looking to provide registrar and transfer agency services in the Islands. It will require a nominal net worth, professional indemnity insurance, and an obligation to have a principal office on island.”
But the authorities are preparing to get more flak over the coming years. Back when the financial industry - and hedge funds in particular - was at the eye of the financial storm, the islands - along with many other domiciles - came under increasing criticism about the activities of the firms registered there.
While most now realise the criticism was mostly unwarranted, there are concerns that politicians looking to deflect the blame for failings within their own countries will once again come after the industry.
In fact, this has been seen only in the past couple of weeks, as the Greek government hit out at ‘speculators’ for increasing its borrowing costs, regardless of the fact that it has effectively failed to control spending.
“All you need is for a few politicians to need a scapegoat and then a whole load of new regulation comes down the line that damages our business,” says one fund administrator.
“Compared to the major financial centres like London and New York, the Cayman Island - and many of the other domiciles in the Caribbean - have a much better standard of regulation. And that can almost be proved - it wasn’t the banks based here that got into difficulties because they didn’t know the extent of their liabilities; it was the likes of Lehmans and that was regulated in the US.”
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