The Cayman Islands Monetary Authority (CIMA) set out its approach to group (or consolidated) supervision in a November 2023 regulatory policy update (the Regulatory Policy). CIMA defines consolidated supervision as: "a group-wide comprehensive approach which includes the assessment and evaluation of an entire group, while taking into account the group's reputation and financial soundness, as well as the overall risks which may affect the group regardless of whether the risk is identified within the regulated entity, or another entity within the group". CIMA identifies such risks including:
Reputational risk: loss of confidence in the insurer if another group member finds itself in difficulty.
Contagion risk: where the risks undertaken by another group impact the regulated entity.
Intragroup risk: arising in the context of intragroup transactions which may not be entirely transparent, especially where such transactions involve transfers between regulated and unregulated entities.
Conflicts of interest.
Supervisory arbitrage: arising where members of a group conduct activities in a variety of jurisdictions with varying degrees of regulatory oversight.
Gearing: CIMA is concerned with the risk of the same capital being used as a buffer against risk in two (or more) legal entities within the group.
CIMA will not issue a licence under the Act if the potential applicant's group structure hinders effective group supervision. Further, CIMA's approach to group supervision is dependent on whether the applicant would result in CIMA acting as the "home" supervisor or the "host" supervisor.
Home Supervision
CIMA will act as the home supervisor where the group in which the regulated entity sits is based in the Cayman Islands and is not subject to group supervision by a regulator in another jurisdiction. However, certain situations may arise where CIMA is not the group's home supervisor but may be the individual home supervisor of a significant regulated entity within a wider group.
There are several factors which will be taken into consideration as to whether CIMA considers itself the appropriate body to act as the group supervisor.
- Is the group based in the Cayman Islands?
- Does CIMA have the statutory authority to supervise the group?
- Is the group's head office in the Cayman Islands? If not:
- Where are the group's main business activities conducted?
- Where are the group's main business decisions taken?
- What are the group's main risks?
- Where does the group have its largest balance sheet?
If the conclusion of CIMA's assessment is that it considers itself to be the most appropriate regulatory body, then CIMA will supervise the relevant regulated entity/group on a consolidated basis, including via an assessment of the risks and capital adequacy of the group considering the input of individual supervisors from other jurisdictions as appropriate.
Host Supervision
In contrast to home supervision, "host" supervision is considered to occur when CIMA exercises supervisory oversight over a regulated entity which is a branch, subsidiary or affiliate of an entity in a different regulated jurisdiction. CIMA will undertake analysis to confirm whether the regulated entity's home supervisor conducts group supervision effectively and in accordance with standards acceptable to CIMA.
In conducting its analysis of whether consolidated supervision is in a manner consistent with CIMA's expectations, CIMA takes into account the following internationally recognised supervisory principles, such as:
- The Basel Committee on Banking Supervision and the Basel Core Principles.
- The IAIS Insurance Core Principles.
- The Core Principles of the International Organisation of Securities Commissions.
- Any other international standard considered appropriate by CIMA from time to time.
Similarly to home supervision, CIMA will take into account a wide range of factors in determining whether host supervision is suitable, including:
- Does the home supervisor have any objection to the establishment of a branch, subsidiary or affiliate in the Cayman Islands?
- Does the home supervisor have any regulatory concerns with respect to the parent undertaking or its management?
- Would the branch be included in the group supervision regime of the home supervisor?
- Does the home authority have any restrictions on information sharing in place with respect to CIMA?
- Are there generally any other factors which could hinder effective group supervision of the applicant?
In the event that CIMA decides host supervision is appropriate, it may still request the regulated entity to submit financial statements of the parent undertaking together with seeking any information CIMA considers necessary that it may need to gather from the parent undertaking's home supervisor.
Likewise, CIMA may also require the provision of additional qualitative information including information relating to the operational and internal structures of the group. The intention is to uncover any inherent risks, internal controls and risk management procedures and to understand the details supporting the fitness and propriety of the shareholders, directors and senior managers.
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.
