Participants had numerous opportunities to ask
questions about what is happening in the banking
industry

Mark Whiteside of the Bank of Austria asks a question
about Basel II

Timothy Ridley of the Monetary Authority, Conor
O’Dea, Director of the Bankers’ Association, H.E the
Governor Stuart Jack, Eduardo D’Angelo Silva of the
Bankers’ Association, and David Walker of
Caledonian Bank & Trust

Timothy Ridley of the Monetary Authority asks about
the EU Savings Directive

Duncan Nicol of the Tax Information Authority,
Eduardo D’Angelo Silva of the Bankers’ Association
and Alasdair Robertson of Maples and Calder

Karen O’Brien of Global Compliance Solutions, Alex
Wood of Dextra Bank & Trust, Sophie Ebanks of
Deutsche Bank and Polly Skibinski of Foreshore talk
about outsourcing solutions

Malcolm Eden of the Monetary Authority and David
Walker of Caledonian Bank & Trust

David Ritch, Chairman of the Work Permit Board,
Sophia Harris, Chairperson of the Business Staffing
Plan Board and Conor O’Dea, Director of the Bankers’
Association

David Walker of Caledonian Bank & Trust asks about
lending requirements for expatriates in light of the
rollover policy

Speakers at the Bankers Conference: Joseph Conway
of Brothers Brown Harriman, Tom Valleé of UBS,
Michael Donnelly of Cayman National Insurance
Managers and Iain McMurdo of Walkers

As the cornerstone of the financial sector in the Cayman Islands, the banking sector faces growing international regulation, more competition from other jurisdictions, a shortage of qualified personnel, higher customer service demands, as well as the implementation of the new seven-year work permit limits, under the Immigration Law, (2003).

Numerous industry experts addressed the challenges and opportunities the banking industry faces at the recent Cayman Islands Bankers Conference at The Ritz-Carlton Grand Cayman last week.

The Chairman of the Cayman Islands Monetary Authority (CIMA), Timothy Ridley discussed the current international developments such as Basel II, the Financial Stability Forum, the Financial Action Task Force, International Monetary Fund and their implications for the Cayman Islands. Mr Ridley stated that an important issue is cross border cooperation between jurisdictions, which is currently being reviewed by International Monetary Fund and the International Organization of Securities Commission (IOSCO).

“The Government and CIMA have worked extremely hard and with considerable success to better inform IOSCO executives through written memoranda and meetings of the Cayman regime and that it is substantially similar to the regime in some key IOSCO member countries,” said Mr Ridley.

“As a result, there is a new spirit of understanding and restraint on the part of IOSCO, which we find encouraging. CIMA, in conjunction with Government, will continue its work and dialogue with IOSCO on issues relating to cross-border cooperation and CIMA’s application for membership in IOSCO.”

Mr Ridley also addressed the failure of other jurisdictions to give reciprocal recognition of the equivalency of our anti-money laundering and countering the financing of terrorism regimes. CIMA already maintains a list of jurisdictions that have equivalent legislation, but there is inconsistent recognition by other countries.

This issue was raised at the recent Offshore Group of Banking Supervisors (OGBS) meeting.

“OGBS has undertaken to develop a framework for the development of criteria which could be used by members to determine equivalency and thus to assess or list other members. In the meantime, members were urged to utilize public mutual evaluation reports or assessments by international bodies like the IMF or Caribbean Financial Action Task Force when assessing the equivalency of legislation in other member jurisdictions,” he said.

The Head of Banking Supervision with CIMA, Malcolm Eden, discussed efforts in preparing for Basel II and what it will mean to the Cayman Islands banking industry.

”Banks adopting Basel II will realize significant benefits, but adoption will pose significant challenges as well,” said Mr Eden.

“For sure, banks will have to place more focus on risk management. The Authority’s proposed new rules, enhancements to the regulatory framework, and Basel II are pointing banks in this direction.

“With respect to the new Capital Accord, it is likely that Basel II will lead to competitive pressures, particularly for banks that remain on Basel I. Basel II could result in credit-risk-based capital requirements that differ among the categories of banks. Banks applying an advanced approach, where approved by the regulator, may be able to hold less capital than other banks against certain types of assets. As a result, Basel II banks may be able to offer more competitive credit facilities than Basel I banks on similar assets.

“Banks that remain on Basel I may therefore have to seek other credit or investment products and opportunities in categories less impacted by Basel II.”

He added that Basel II might lead to further consolidation within the banking industry. So in order to remain competitive, some banks may feel a need to adopt Basel II, particularly as pressure could come from ratings agencies and shareholders that may view that Basel I banks are not managing risks as well as Basel II banks.

Iain McMurdo of Walkers described how private equity funds work and the opportunities they offer to banks and their clientele.

Mr McMurdo said that most private equity funds are not available to the man on the street, because frequently the minimum capital investment is $5 million. This effectively limits private equity funds to high net worth individuals, institutions and pension funds.

“The opportunity for the banks that are not themselves forming their own private equity funds would appear to be in creating funds with the strategy of investing in these private equity funds,” said Mr McMurdo.

“Known as a ‘fund of funds strategy,’ the fund collects assets of its investors in a fund vehicle and invests through that fund in various private equity funds. The advantages to the investors are that they get access to funds that they would not otherwise be able to participate in and they get a diversification of risk with respect to the investments in the various private equity firms in which the fund invests.”

He added that these funds often get access to private equity funds either as initial investors, or by buying the limited partner interests in the secondary market.

The secondary market has developed because the interests are not listed on any stock exchange and are not transferable without the consent of the General Partner of the fund. Therefore, opportunities arise to acquire these illiquid interests from Limited Partners who are not able to meet the drawdown of the capital commitment and risk forfeiting their investment unless they can sell their interest to another investor willing to assume the remaining balance of the capital commitment. 

“Private equity “fund of funds” are offered by banks and other institutions as a platform of funds comprising various fund offerings with tailored terms for its retail and institutional clients,” he said.

“It is not uncommon for the platform to include a fund for retail clients offering lower minimum capital commitments and a separate fund for the institutional clients offering higher capital commitments for lower management and placement fees,” Mr McMurdo noted.

Partner with Maples and Calder, Alasdair Robertson, talked about Cayman’s approach to the Europeans Union Savings Directive (EUSD)

One unanticipated result when Cayman implemented its version of the EUSD was that its funds became EUSD-compliant while Bermuda and the Bahamas were deemed non-compliant. Therefore, a number of Switzerland investors have switched to Cayman funds. Furthermore, a number of hedge funds have switched their domicile to Cayman in order to be designated as EUSD-compliant. This has given the Cayman Islands an unexpected competitive edge over the Bahamas and Bermuda.

Moreover, it demonstrates that Cayman should continue to address difficult international initiatives head on to make sure the country continues to have a voice and maintains its position as a premier financial centre.

Mr Robertson noted that a large loophole in the Savings Directive is there are no reporting requirements for corporations, which has been common knowledge throughout the industry including the European Commission. Therefore, most high net worth individuals have simply switched their holdings to corporate accounts to avoid the reporting requirements for the EUSD or bilateral agreements such as with the Cayman Island’s that are EUSD-compliant.

In most cases, there will be no reporting tax information requirement for clients in this jurisdiction, he said.

Peter Larder of International Trust Companies Association described how Cayman stacks up to its competing jurisdictions.

“As everything is becoming global Cayman needs to think international, and not just do a better job than the Bahamas or Bermuda. The Channel Islands, Dubai, Singapore and Switzerland are all areas with new initiatives that could potentially take business away from Cayman.”

Mr Larder noted that many clients today prefer service providers that have offices in multiple jurisdictions, which, means that service providers are opening offices or forming associations with offices in other jurisdictions.

Another emerging trend is that more jurisdictions are implementing similar legislation, so the competitive edge will boil down to service. This will in turn increase the pressure to retain high quality staff.
Joseph Conway of Brown Brothers Harriman discussed developments in technology that are impacting the banking industry:

“Asset managers are moving away from multiple system formats to using a single hub that uses industry standards,” said Mr Conway.

“By doing that banks will be trying to stay competitive. If banks don’t keep up with technology they will be left behind, because no one will want to deal with them, because it is too expensive to work in multiple platforms.”

shurna@caymannetnews.com