Cayman Islands: Regulatory Update

Bolstered by transparency, and a robust regulatory framework, the Cayman Islands continues to be a leading jurisdiction in the financial services world. As the principal regulator, the Cayman Islands Monetary Authority ("CIMA" or "the Authority") is committed to developing and maintaining a regulatory structure which emphasises adherence to international standards through contemporary legislation, rules, procedures, guidance and other legal mechanisms in order to stay abreast with the ever evolving dynamic nature of the global financial industry.

INDUSTRY UPDATE

Overall, the industry remains highly competitive in several areas, as of 30 September 2017:

Boasting 10,630 funds, the Cayman Islands maintains its position as the top domicile for hedge funds, compared to 10,831 on 30 September 2016. The number of new fund registrations with the Authority continues to experience the effects of global trends whereby lack of start-up capital and post-crisis regulatory barriers are cited as two of the main reasons for the decline in new fund launches. Additionally, although the number of legal fund structures has dropped, there has been an increase in the number of multi-fund structures, such as segregated portfolio companies.

The Cayman Islands is also a top international location for the provision of trust and corporate services, with 149 Trust companies, 116 Company Managers and 26 Corporate Service Providers licensed to provide these services in and from the jurisdiction. The Authority has not experienced a significant increase or decrease in the number of licensed Trust companies in recent years. However, since 2012, there has been a consistent growth in the number of licenses issued under the Companies Management Law.

With 705 international insurance licensees, including captive insurance companies, the Cayman Islands remains the second largest domicile of international reinsurers. Part of this success is due to the new formations and expansion of existing companies. As of 30 September 2017, the industry gained 24 new reinsurers. In addition to reinsurance companies, there are 31 insurance brokers and 46 insurance agents operating within the domestic market, and 29 insurance managers operating within the international market.

The Cayman Islands is also home to nearly ten Portfolio Insurance companies, which are standalone entities within a Segregated Portfolio Structure. As a leading jurisdiction for healthcare captives, the market currently attracts over 40% of the companies with writing medical malpractice and professional indemnity as their primary line of business. With 155 licensed banks, the banking sector also continues to contribute to the overall success of the industry.

As at June 2017, total international banking assets and liabilities were reported as US$1.028 trillion and US$1.029 trillion, respectively. The Cayman Islands is also home to 40 of the top banks worldwide. As the trend in increasing global compliance costs continues, international banks have become increasingly cautious, reducing their risk profile by withdrawing from certain markets, product lines, customers and customer segments. This has been most discernible in the net decrease of European and US bank branches. To date, the domestic retail banking sector has not undergone any changes in the composition or services offered.

However, the importance of access to international markets through correspondent banking relationships continues to be emphasised.

The jurisdiction's money service businesses and smaller private banks continue to endure challenges as a result of de-risking exercises by US correspondent banks in recent years. CIMA, in partnership with other local, regional and international stakeholders, remains actively engaged in dialogue to identify a long-term solution.

THE REGULATORY FRAMEWORK

In preparation for the recent assessment by the Caribbean Financial Action Task Force (CFATF), which took place in December 2017, the Authority took several steps to implement measures and recommendations that help combat terrorist financing and money laundering.

In conjunction with the preparations of the assessment, the Authority held several stakeholder dialogue sessions to ensure that regulated entities and interested parties understood the expectations of the CFATF and their role throughout the process. Several chosen topics include risk-based approach, administrative fines and guidance notes.

NEW LEGISLATION

Recent legislation changes such as the Monetary Authority (Amendment) Law, when it comes into effect, will grant CIMA the ability to impose administrative fines to natural and legal persons for breaches of the regulatory and anti-money laundering laws. This supervisory tool helps the jurisdiction achieve technical compliance with FATF standards and other supervisory core principles issued by the international standard organisations, such as the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors.

The Terrorism Law, the Proceeds of Crime Law and the Money Laundering Regulations were also revised to more closely align with the FATF 40 recommendations. Additionally, the Companies Law and the Companies Management Law saw recent amendments and both now capture provisions that enable the establishment and maintenance of beneficial ownership information.

Under the Companies Management (Amendment) Law 2017, CIMA has been granted the power to revoke licenses and/or impose other licensing and supervisory sanctions for infringement of the Companies Law and Limited Liability Company Law.

NEW MEASURES

The Authority has issued and revised several measures which had an impact on the various regulated sectors throughout the past year. The Statement of Guidance on Professional Indemnity Insurance was issued for Trust, Insurance, Mutual Fund Administrators, Securities Investment Business and Company Management Licensees and Directors. This measure sets out the minimum criteria licensees should follow when obtaining and maintaining professional indemnity insurance.

Another measure that has undergone revision is the Statement of Guidance on Responsibilities of Insurance Managers, who are now required to highlight their obligations to CIMA and emphasise their role as service providers. Earlier this year, the Authority also published a revised Statement of Guidance on the nature, accessibility and retention of records. This Statement of Guidance applies to all entities which fall under CIMA's regulatory umbrella. Such changes include guidance on the maintenance of electronic records including related information outside of the Cayman Islands.

Furthermore, an amendment was made to the Regulatory Handbook to highlight the principal objectives of CIMA's onsite inspection. The handbook highlights expectations of licensees in addressing deficiencies and matters requiring immediate attention. The revision also clearly outlines the classifications of deficiencies: high, medium or low priority.

INCREASED USE OF SUPERVISORY TOOLS

The Authority continues to produce its biannual publication – Supervisory Issues & Information Circular, with the aim of providing insight to the financial industry on current regulatory activities. The circular discusses the trends of the regulated sectors. It also highlights supervisory developments and offers guidance to improve any related compliance standards.

BASEL II AND BASEL III

Through various consultations, the Authority continues its efforts to implement the Basel II and Basel III capital standards. Basel II Pillar II focuses on the Supervisory Review Process which is intended to not only ensure that banks have adequate capital to support their risks, but to also encourage banks to develop and use better techniques in monitoring and managing these risks. Basel II Pillar III is centred on Market Discipline whereby disclosure requirements seeks to allow market participants to assess key pieces of information, capital, risk exposure, risk assessment processes and the capital adequacy of the banks with which they do business. Following a quantitative impact study conducted at the beginning of the year, the Authority is assessing the potential implementation of Basel III compliant standards within the Cayman Islands.

CONCLUSION

While much if its work ahead will still revolve around the recent CFATF assessment, CIMA will continue to promote strength and stability within the financial sector. Key partnerships with the government, the regulated sectors and other stakeholders play a part in developing a regulatory infrastructure that promotes a stable and prosperous financial sector. Given its proven track record, the Cayman Islands will continue to thrive as a leading financial centre, and CIMA remains devoted to contributing to the ongoing success of this industry.

ABOUT THE AUTHOR

Cindy Scotland is the Managing Director of the Cayman Islands Monetary Authority. She oversees the implementation of policies to ensure the sound management of the Cayman Islands' currency and the effective supervision of various regulated entities operating in and from the Cayman Islands. She also has responsibility for the development and maintenance of strong working relationships between the Authority and other international regulatory 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.

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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