While the North American funds industry may have taken some hits in recent years, the two leading offshore centres set up to serve them are continuing to innovate and build business.
While the North American funds industry may have taken some hits in recent years, the two leading offshore centres set up to serve them are continuing to innovate and build business.
When comparing Bermuda to other jurisdictions, there is one mistake overseas visitors make and that’s to mix the jurisdiction in with the likes of the Cayman Islands and its neighbours. One thing needs to be made clear: Bermuda is not part of the Caribbean. However, it’s often compared to the islands close by when it comes to looking for a domicile by fund managers and more often than not, Bermuda is the one that’s chosen.
And it’s not hard to see why. Bermuda has been offering fund services for decades and in that time it has built up a loyal and educated workforce, a strong technical infrastructure - even if communications costs are comparatively high - and a regulatory and tax infrastructure that can attract most investors. When it comes to the North American timezone, Bermuda is at the top of the hill.
In the current market environment, reputation is everything. And with funds seeking the safest possible domicile for their investments, Bermuda has done reasonably well during the downturn with as investors fly to quality. “When we’re pitching to clients, we don’t have to sell Bermuda as a domicile,” says one administrator. “That’s a given. All we have to do is pitch ourselves.”
In addition to the huge investment funds market, Bermuda is also home to an enormous reinsurance and captive insurance industry, and the servicing of these markets is often inextricably linked to fund management. The past decade has seen a number of high profile moves to the island - Invesco, with $500 billion AUM moved in 2007, thanks to the Bermuda’s reputation and the number of similar types of firms already domiciled there.
While the US and, to a lesser extent, Canada have long been the focus of the Bermudan fund administration, these are mature markets. So while there will always be large amounts of business to be done, there is unlikely to be high growth. And as investors’ eyes have turned towards the hot Asian economies there has been the fear that Bermuda’s geography will make it too difficult to effectively service that region.
However, some forward-looking providers are casting their eyes towards newer markets. The Latin American funds sector is growing at a rapid rate, particularly in Brazil and Mexico, and Bermuda has set itself up to be in a prime position to capture more of the business. “Latin America is a growth area and this may be an alternative market that managers could tap into,” says Peter Hughes, managing director at Apex Fund Administration Services.
Regulation
The country recently introduced amendments to the Investment Funds Act 2006. The Investment Funds Amendment Act 2010 received assent at the end of 2010 and has the aim of aligning “the regulatory framework for funds and fund administrators more closely with the requirements that exist in other regulatory legislation in Bermuda, while ensuring that the framework overall remains risk-based and recognises the unique nature of the funds industry [in Bermuda].”
Under the Act, the definition of service provider has been expanded to include auditors appointed to a fund - previously it only applied to custodians, fund administrators, investment managers and registrars, as well as people and businesses that those providers outsourced their services. This means that auditors now have to comply with the jurisdictions rules on fit and proper persons.
In addition, section 9 of the Act sets out the criteria for exemption of a fund and includes the requirement to have a recognised fund administrator, an auditor and a Bermuda resident officer or trustee or resident representative who has access to the books and records of the investment fund. To bring exempted funds into line with authorised funds, the Amendment Act introduces the additional requirements for exempted funds to appoint an investment manager, registrar, custodian and/or prime broker. All such additional service providers will be included in the vetting process per section 7(1) of the Act in the same way as authorised funds.
The Amendment Act act also establishes that fund administrators are now required to notify the Bermuda Monetary Authority (the “Authority”) in advance when there is a prospective change of control. The Authority now has power under sections 45 of the Act to object to a change in control to prevent it happening or to object to existing controllers where, in the opinion of the Authority, they are no longer fit and proper to be controllers. These amendments mirror the provisions which already exist in Bermuda for other licensed entities such as banks and investment businesses.
Section 55 of the Act has been amended to provide a right of appeal in circumstances where the Authority has exercised its power to object under section 45. The person who is the subject of the Authority’s objection may appeal to a Tribunal constituted under section 56. This right of appeal provides that proper judicial review of the authority’s exercise of its powers in accordance with section 45 is provided for under the Act.
Cayman Islands
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.
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 on January 14, 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 said. “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
