Cayman Islands: The Cayman Islands Financial Services – Regulatory Framework

Prudent and robust regulation is central to the Cayman Islands being an international financial centre of repute. As the principal regulator for the financial services industry of the Cayman Islands, the Cayman Islands Monetary Authority (CIMA) takes its responsibilities very seriously. Part of the CIMA's strategic planning process for the period 2014-16 included the crafting of a new mission statement to reflect CIMA's evolving role, and the dynamic nature of the industry which it regulates.

CIMA's renewed mission is, "To protect and enhance the reputation of the Cayman Islands as an International Financial Centre by fully utilising a team of highly skilled professionals and current technology, to carry out appropriate, effective and efficient supervision and regulation in accordance with relevant international standards and by maintaining a stable currency, including the prudent management of the currency reserve."

In addition, CIMA developed its first vision statement to reflect its dedication to continuous improvement, which reads: "Committed to continually enhancing the Cayman Islands Monetary Authority's position as a financial services regulator of excellence, consistent with the jurisdiction's standing as a leading international financial centre."

The Regulatory Framework

There are several elements which make up the framework for CIMA's regulation and supervision of financial services, and its cooperation with fellow regulators. Among these elements are the relevant laws and regulations passed by the government of the Cayman Islands; the rules and statements of principle and of guidance issued by CIMA; the regulatory policies and procedures detailed in CIMA's Regulatory Handbook and other manuals; the memoranda of understandings (MOUs) undertaken by CIMA; and the international standards to which CIMA adheres. The relevant international standards are those set by the Basel Committee on Banking Supervision; the International Organisation of Securities Commissions (IOSCO); the International Association of Insurance Supervisors (IAIS); and the FATF's 40 Recommendations.

CIMA takes a combined rulesbased and risk-based approach to regulation and supervision of financial services. CIMA processes licence/registration applications and performs due diligence. CIMA's remit includes responsibility for registration, licensing and supervision of banks, money services businesses, cooperative and building societies, trusts, insurance business, companies management, corporate services, investment funds and securities services.

A major development which occurred since our last update for this publication is the coming into effect of the Directors Registration and Licensing Law (DRLL). Under this legislation, non-resident directors and Cayman Islands-based directors of entities regulated under the Mutual Funds Law are now required to be either registered or licensed with the Cayman Islands Monetary Authority. This requirement is also applicable to certain "excluded persons" under the Securities Investment Business Law.

The filings must be done electronically through CIMA's Director Gateway portal. This requirement is expected to improve data quality and significantly enhance the CIMA's ability to effectively carry out its mandate under the Monetary Authority Law.

Status of Cayman's Financial Services Industry

The Cayman Islands is home to 195 banking institutions. The jurisdiction is ranked fifth internationally based on the value of cross-border liabilities booked from the Cayman Islands and sixth in terms of cross-border assets booked.

With regard to captive insurance, the Cayman Islands is the second largest jurisdiction in the world, the leading jurisdiction for healthcare captives, and a leading jurisdiction for catastrophe bonds.

The Cayman Islands also continues to be the premier jurisdiction of choice for fund domiciliation. As at 31 December 2014, the total number of regulated funds under CIMA's supervision was 11,010. It comprised 7,835 registered funds; 2,685 master funds; 386 administered funds; and 104 licensed funds. Such numbers indicate the strength of the hedge funds industry and also the confidence the global community has in the jurisdiction. It is therefore abundantly clear why the Cayman Islands was named the Best Hedge Funds Services Jurisdiction at the Hedgeweek 2015 Awards in London.

There were 137 trust services companies operating in the jurisdiction at 31 December 2014, thus maintaining the country's standing as a leading domicile for the provision of these services.

International Cooperation

The Cayman Islands Monetary Authority is very cognisant of the fact that the jurisdiction's thriving financial services industry exists as part of a global system. Therefore, every effort is made to increase international cooperation and collaboration, without compromising the rights to confidentiality of legitimate clients in order to ensure compliance with financial services best practice.

CIMA is represented in various bodies, including: the Group of International Financial Centre Supervisors (GIFCS) (formerly the Offshore Group of Banking Supervisors (OGBS)); Caribbean Group of Banking Supervisors (CGBS); Association of Supervisors of Banks of the Americas (ASBA); International Association of Insurance Supervisors (IAIS); Group of International Insurance Centre Supervisors (GIICS); International Organisation of Securities Commissions (IOSCO); and the Financial Stability Board's Regional Consultative Group for the Americas.

CIMA keeps abreast of relevant legislation in other jurisdictions which has an impact, or potential impact, on the Cayman Islands. This is done with a view to reassessing the adequacy of the jurisdiction's regulatory regime. For example, the Alternative Investment Fund Managers Directive (AIFMD), which was implemented across Europe on 22 July 2013. This directive is aimed at bringing managers of alternative investment funds, such as hedge funds and private equity funds managed or marketed in Europe, under similar regulatory arrangements as mutual funds and pension funds and their managers.

In order to ensure that Cayman domiciled funds continue to be marketed in the European Union (EU) under the AIFMD, CIMA has entered into MOUs with 27 EU countries and the Monetary Authority Law was amended in March 2013, to give CIMA additional powers to provide assistance to EU regulators pursuant to AIFMD requirements.

CIMA is looking at the suitability of the current regulatory framework in light of the potential extension of the passport regime to third countries (countries outside the EU – including Cayman) by the European Union during the course of 2015. In August 2014, the Authority's board commissioned the establishment of a working group to examine how the regulatory framework for funds and fund managers can be adapted to meet the needs of funds that would like to market their units in the European Union under a potential passporting regime. The working group met in December 2014 through February 2015 and examined potential amendments to the Mutual Funds Law and the Securities Investments Business Law, including the creation of new regulations.

In January 2015, CIMA issued two surveys to solicit the views of the financial services industry on matters relating to the AIFMD. One survey was intended to determine the needs and views of industry relating to the impact of the delegation provisions of the AIFMD on the Cayman Islands funds industry. This feedback will help CIMA to assess whether there is a need to strengthen the regime for fund managers that are delegates of European Union managers.

The other survey looked at depositaries and managers. The AIFMD requires a fund manager to appoint a depositary for each fund it manages. There is currently no regulatory regime for depositaries in the Cayman Islands, and any such regime implemented in the jurisdiction must meet the requirements for depositaries contained in the AIFMD.

Conclusion

CIMA is committed to playing its part in helping to ensure the continued success of the Cayman Islands financial services industry. A significant development in the first part of 2015 was the establishment of a dedicated Onsite Inspection Unit. This Unit is focussing primarily on high-risk entities and developing best practices and standards for onsite inspections across all regulatory divisions.

Another component of CIMA's role is continued enhancement of our processes to make it easier for industry stakeholders to do business, primarily through the use of technology. CIMA launched a new online portal in January 2015, which enables registered companies and licensees to submit applications and make change requests electronically. The system is called Regulatory Enhanced Electronic Forms Submission (REEFS).

The Cayman Islands – with its modern infrastructure; legal and financial services providers with strong multinational experience and capabilities; efficient regulatory body with an outstanding, proven track record – is well known as an attractive domicile for business. In fact, the Cayman Islands regularly receives high ratings and ranks well in the Global Financial Centres Index (GFCI), placing 39th in the GFCI 17 publication, which was released in March 2015.

Working together with government and industry, CIMA has been an active participant in the National Risk Assessment (NRA) currently being conducted for the Cayman Islands. This NRA will assist in identifying any deficiencies, which exist in how the jurisdiction identifies, assesses and understands money laundering and terrorist financing risks, and contribute to efforts to maintaining Cayman as a leading international financial centre.


About the Author

Cindy Scotland is the Managing Director of the Cayman Islands Monetary Authority. She represents the jurisdiction on all regulatory matters with other international bodies including the Group of International Financial Centres Supervisors, the International Organisation of Securities Commissions, the International Association of Insurance, and the Financial Stability Board Regional Consultative Group.


Originally published in Cayman Finance Magazine, 2015-2016, Issue 2

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.

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