Cayman’s financial services industry never sits still when it comes to keeping up with and often leading the way on compliance and regulatory issues. Late last year training company FTS welcomed three professionals within the field of regulation to speak to local professionals about ways in which industry can work with the regulator. Business Editor Lindsey Turnbull reports. Last in a four-part series.
As the first in a series of informative training events, tailored specifically to staff within the financial services industry, ‘Working with your Regulator’ drew professionals from a variety of fields within Cayman’s financial services industry, to appreciate ways in which the private sector can create cohesion with regulators at home and abroad.
This first event featured three well known and highly respected regulatory experts who delivered a practical seminar targeted at improving the approach to regulatory risk management by better understanding and managing relationships with financial regulators.
Former Chairman of the Cayman Islands Monetary Authority, Tim Ridley, gave his views on the subject as follows.
Fit and proper
An important reason why local service providers should be alert and proactive with their client licensees or registrants (funds) is the fit and proper requirement of the various regulatory Laws. Let me put that in full perspective by specific example. It is more than reputational and legal liability risk. The Banks and Trust Companies Law, the Companies Management Law, the Insurance Law and the Mutual Funds Law allow CIMA to take action if it is of the opinion or satisfied that the direction and management of a licensee or registrant (fund) has not been conducted in a fit and proper manner or a director, manager or officer is not a fit and proper person to hold the position. There are differences in the wording of the various Laws (due to different drafting styles in place at the times when the relevant provisions were prepared), but the substance is essentially the same. In 2002, CIMA issued extensive guidelines setting out the criteria to be applied by CIMA in determining fitness and propriety. I recommend you read it if you have not done so recently. In particular, it should be noted that CIMA “may have regard to the cumulative effect of a number of factors which, when considered in isolation, may not be sufficient to show that the person is not fit and proper”. That means if you or your clients keep doing the same minor things badly, they may come back to haunt you as a big thing. This would extend for example possibly to employees of a licensed service provider here who demonstrated a practice of acting as directors of funds that suffered major losses or became insolvent, not because the market went against the fund but because the flawed structure of the fund approved by the directors at the outset and/or the lack of proper ongoing oversight by the directors was a direct cause of or major contributor to the losses or insolvency. This failure by the directors could lead to an adverse finding by CIMA as to fitness and propriety against both the individual directors and the licensed service provider itself, resulting in those individuals not being permitted to act as directors in the future and the service provider losing its licence. There are other sanctions against the service provider available to CIMA as spelled out in the various Laws.
Show me where I sign
We used to joke at Maples about certain service providers who were so keen to get new business that they would just say “show me where I sign” and without asking any questions or reading the documents. That has been shown to be a recipe for disaster. But one of the issues that has developed over the years with the increasing sophistication of the structures and transactions is that it is often extremely difficult to fully understand the complexity and the risks. Long Term Capital Management in 1998 and recent history suggest that even those rocket scientists who create the structures and transactions in New York and London do not understand them either. Relying on the promoter to cover the bases and backstop exculpatory and indemnification clauses and insurance to protect the service provider and directors is wishful and flawed thinking.
This poses real difficulties for the service providers (and their professional indemnity insurers) and individuals who are asked to serve as directors and approve and oversee the structures and transactions. One solution is to turn the business down (increasingly likely post 2008); another is to reach out to persons who have the necessary knowledge and expertise to serve (there are very few in Cayman and they are becoming very expensive); another is to train employees better and to give them the skill sets they need. But perhaps the best long term solution is to recognise that the directors may not have the indepth knowledge to understand the intricacies of a broad range of structures and transactions (after all how many Directors of General Motors actually understand what makes a car work?) and to build into the deal the wherewithal for the directors to retain outside advisors who can fill the gaps.
I hope my comments have been constructive and have given you some insights that may help you in your understanding of and relations with CIMA.