Cayman’s fund business faces more transparency

(CNS): The director of the country’s regulator has warned that the future of the fund industry will be about deeper disclosure and transparency, as well as broader oversight and tighter control. In a speech at a recent fund conference, Cindy Scotland said that the more stringent international regulations, which were the inevitable outcome of the global financial crisis, were taking shape and the country’s industry players would need to ensure they participate and help the rest of the world understand that the Cayman Islands is not part of the problem. Scotland said those working here may see the jurisdiction as a world-class international financial centre, but if Cayman is not to be marginalised it has to play by international rules.

“We do know that part of the objective of these initiatives is to curtail the use of jurisdictions such as the Cayman Islands, which offer competitive advantages. We are still seen as part of the problem. As a jurisdiction, we have to make it known, both in our talk and in our walk, that the services we provide to entities in other jurisdictions in fact complement and enhance the economic activities of those jurisdictions rather than detract from them. They meet international standards and are open to scrutiny,” Scotland said in a speech, which was delivered to the Campbell’s fund conference by Patrick Bodden, Cayman Islands Monetary Authority Deputy Managing Director of Operations.

Talking about the changes around the world and their potential impact on the Cayman Islands financial sector, she said the Dodd-Frank Wall Street Reform Act removed the previously-existing ban on US banks paying interest on demand deposit accounts.

“As you probably know, many US banks have established relationships here to utilize ‘sweep account’ facilities, through which their demand deposits can earn overnight interest. The removal of the ban on interest payments on demand deposits in the US will therefore have an impact on the consideration of such facilities offered in Cayman. Will this mean a loss of this type of business for us? The answer will depend on what additional value we are providing to the users of these services,” Scotland noted.

“Another provision of the Dodd-Frank Act will bring within the Securities and Exchange Commission’s regulatory net most private advisers to US funds/investors by July 2011. This will likely affect many of our fund managers, carrying with it increased reporting obligations to, and scrutiny by, the SEC. Affected advisers will have to garner additional resources in order to meet these requirements.”

Basel III requires banks to hold larger minimum capital reserves, which will limit the availability of credit to businesses, but Scotland pointed out that the minimum capital that CIMA has always required Cayman-licensed banks to hold has been higher than the Basel requirement. “Significantly, none of our banks failed during the financial crisis and the banking sector has always been able to make loans available,” she added, noting that on that principle at least Cayman is ahead of Basel III.

But she said current times present serious challenges and like it or not there would be increasing regulatory requirements for service providers to gain access to US and European markets.

“As the jurisdictional regulator of financial services, the Cayman Islands Monetary Authority remains committed to meeting international standards as they develop,” the regulatory boss stated. “At the same time, we are cognizant of the increased competitive forces and the need to retain our international competitiveness.”

While the framework governing the conduct of business in and from the Cayman Islands is sound, Scotland observed, it was still something that has to be internalised by every individual who operates in and from the Cayman Islands.

“We may convince ourselves that as individuals our responsibility is to our bottom line and that of our clients. But let us understand this: How far the movement to new regulations both internationally and locally eventually goes will be determined in great measure by how market participants operate,” she said.

The director revealed that in its goal to help Cayman’s finance industry remain competitive and innovative, CIMA has spent time assessing the current environment and identified four strategic priorities which it will be pursuing over the next two years.

Number one, Scotland said, was to further modernise and enhance regulation and supervision relevant to Cayman business. Number two was to intensify CIMA’s international cooperation and involvement of international rules and standards that affect this jurisdiction, and to enhance the jurisdiction’s reputation. The third priority is to facilitate the development of the Cayman Islands as an International Financial Centre; and finally for CIMA itself to improve efficiency.

She said that while the industry was at a crossroads it had faced many turning points over the last 50 years of existence. “We have always been able to move to higher ground when faced with the challenges. I believe we can do so now,” Scotland added.