Cayman Islands: The Cost Of Compliance

In recent years, an avalanche of regulation has significantly increased the costs of compliance within the hedge fund industry, with looming change and uncertainty ever present.

It is widely known that hedge fund assets, originating from institutional investors, have grown significantly since the financial crisis. The compelling and persistent theme is the continued force and momentum with which the global hedge fund industry is becoming increasingly institutionalised.

This trend brings due-diligence, risk-management and transparency- management processes of funds and their managers to the forefront, with the obvious result being an increase in hedge fund compliance costs.

In October 2013, KPMG, the Alternative Investment Management Association and the Managed Funds Association partnered to undertake a comprehensive survey titled The Cost of Compliance, which represents one of the largest global surveys of hedge fund managers. The survey included the views of 200 hedge fund managers representing more than US$910 billion in assets under management (AUM). It also included in-depth interviews with managers from North America, Europe and Asia. Total industry costs, related solely to compliance, are estimated to be in excess of US$3 billion and hedge fund managers are convinced the costs and resources associated with regulatory compliance will increase over the next five years. Additionally, fund managers are often subject to a mix of regulations, each of which will incur different costs and require various resources depending on the scope, geographic location and customers that the fund and manager serve.

In terms of ranking the cost of compliance across different regulatory regimes, it is quite apparent that certain regulations are exacting a higher toll than others. The Alternative Investment Fund Managers Directive (AIFMD) and the Foreign Account Tax Compliance Act (FATCA) have ranked highest in terms of cost, time and need for external support; this is due to their complex nature and global reach. Securities and Exchange Commission (SEC) registration and reporting ranked as a close runner up.

Key Survey Findings Include:

  • The use of outsourcing and third-party vendor support will increase significantly as managers seek to focus on their core business.
  • On average, the industry is spending more than 7 percent of their total operating costs on compliance technology, headcount or strategy. Smaller- fund managers are spending US$700,000 on compliance on average, medium-fund managers are spending approximately US$6 million, and large-fund managers are spending more than US$14 million. Additionally, survey participants responded that cost is not limited to capital investment with many regulations carrying high resource cost in terms of time or management attention.
  • North American firms report spending more as a percentage of their AUM than those in other regions. In part, this likely reflects the already-in-process compliance requirements in the US, which include Form PF reporting and SEC registration, versus the expected compliance requirements of AIFMD.
  • Overwhelmingly, managers are absorbing the cost of compliance rather than passing it on to their funds.
  • As a result of the increased cost of compliance and capital investments, new players are facing significant barriers to entry with larger players facing constraints on growth. The large pool of managers say they have not considered moving their fund domicile, management company or centre of main economic activity in response to the regulatory change.
  • The lack of a consistent regulatory approach across all markets is creating uncertainty and complexity for many managers and, as a result, is limiting investments.
  • Product and fund selection may reduce somewhat as a result of regulation; however, this gap may be filled by firms developing regulated products. Market participants are eager to work with regulators to reduce complexity and enhance investor protection.

Fund managers overwhelmingly support the aims and goals of much of the recent regulation and are dedicated to increasing transparency.

Managers appear to be focusing on creating a culture of compliance. As one UK manager noted, "We want to be robust in our compliance so we need to always strive to ensure we have an ethical culture that emphasises the importance of doing things the right way. That's how you deliver longer-term value".

The industry has limited financial resources to dedicate to compliance and smaller managers are already meeting significant barriers to entry as a result of the rising cost of regulation. On the other hand, managers who are adapting and leveraging their compliance capabilities, are ultimately creating a competitive advantage.

In this new paradigm for the hedge fund industry, managers that can demonstrate vigorous institutional-type operations in complying with headline regulations will not only survive, but also be well placed to become the large players of the future.

The Cayman Islands, as the premier hedge fund jurisdiction of choice, has remained nimble in adapting to the evolving global regulatory landscape. This has been due to ongoing and productive collaboration between the public and private sector. Cayman has modernised its legislation and has signed 33 TIEAs and 27 MOUs with respective AIFMD countries, as well as Model 1 IGAs with the United Kingdom and most recently the United States.

Niko Whittaker, Director of Business Development with KPMG in the Cayman Islands, stated, "As a jurisdiction, we have to be cognizant of the regulatory landscape we're in, in addition to the increasing competitiveness of the offshore environment. We have to remain cost competitive without compromising our regulatory product".

Cayman service providers are squarely focused on AIFMD and FATCA and are looking to seize opportunities in this area. From an AIFMD perspective, large Cayman administrators are supporting their clients by providing management- company services in Ireland and Luxembourg and, in addition, providing independent-depository services. On the FATCA side, and with the deadline looming, local administrators have geared up by adding FATCA-related products, such as ongoing reporting, or even offering FATCA Responsible Officer services.

The cost of compliance continues to plague the hedge fund industry, creating advantages for the large players and barriers to entry for small ones. Similarly, from a jurisdictional perspective, increased regulatory costs will act as a barrier to entry for smaller offshore centers; however, Cayman is a forerunner in this ever-evolving, regulatory environment. Service providers have continued to adapt by not only offering a range of complementary services, but also demonstrating the expertise needed to provide timely solutions. Ultimately, Cayman may have a competitive advantage, given the significant progress in complying with these regimes.

About the Author

Jonathan Cohen is an Audit Director with KPMG in the Cayman Islands. With over 10 years of experience in serving financial services clients, his portfolio includes some of the largest hedge fund groups in the world, private-equity funds and structured products.

Jonathan is a member of the Institute of Chartered Accountants in Australia and of the Cayman Islands Society of Professional Accountants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
JP Funds Group
Appleby
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
JP Funds Group
Appleby
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions