At the end of January Cayman Finance, the association representing Cayman’s financial services industry, appointed its first CEO, Gonzalo Jalles. The Journal met with him to discuss some of the current issues facing the financial services industry.
The Cayman Islands financial services industry is facing many challenges. Jalles, the former CEO of HSBC Cayman who founded his own financial services consulting company Javelin Group late last year, believes international regulatory changes, changes to the domestic policy environment, including the general elections, and local and international public relations are the most pressing ones.
FATCA is the most important of the international regulatory changes, because it will impact a broad range of financial services entities in the Cayman Islands, he says. It will and has already led to an increase in the cost of business for firms as they have to establish the various systems and procedures to implement it.
This cost pressure will result, Jalles says, no matter what type of implementation path Cayman will ultimately follow; in other words irrespective of whether the country adopts Model 1 or 2 of an intergovernmental agreement governing the exchange of information either through local authorities or directly with the US Internal Revenue Service.
With regard to the EU Alternative Investment Managers Directive, a regulatory regime coming in effect in July for hedge funds distributed in Europe, Jalles says, “it is crucial that CIMA and the Cayman Islands government implement the necessary agreements to allow Cayman-based funds to be distributed in Europe”.
In addition to these two known issues that Cayman Finance is actively working on, Jalles notes, it is only reasonable to expect that in the attempt to expand their taxable base, foreign governments will introduce changes that are likely to affect, at least indirectly, the financial services industry in Cayman.
Locally, the upcoming general elections are also an important focal point for Cayman Finance “because we are always concerned about how a new administration may alter its policies towards the industry”, he says.
“As you know, we always pride ourselves on maintaining a close working relationship with the government and that is why Cayman Finance is also closely monitoring the proposed policies put forward by candidates during the campaigns as this may impact our agenda following the May elections.” A change in government is an opportunity to progress the relationship, according to Jalles, who adds that Cayman Finance is confident it will continue to enhance the way it works with government.
An ongoing issue for the association is how it can adjust its approach to ensure more effective communication on the integrity of Cayman’s financial services industry.
“We have had much success over the past few years, but our current challenge is that despite the substantial enhancements to our regulatory framework, there are still some international media which depict the jurisdiction in a 1980s world where no international financial centre, including those based on OECD countries, had the types of regulatory structures that we have seen over the past two decades.”
The former president of the Cayman Islands Bankers Associations believes Cayman Finance has done very well over the past few years in terms of addressing inaccurate articles particularly in the international media and adjusted its approach to work harder at educating the onshore world on the positive economic contributions of financial services centres such as the Cayman Islands.
“Often the messages relate to whether our regulation is up to standard, and I believe we have answered that question by our significant actions over the past decade as a jurisdiction in improving our regulatory structures.”
Yet Cayman’s regulatory framework continues to be criticised in international media. Most of the attacks focus on examples of financial failures.
“I guess part of it is the nature of the press and which stories sell. The problem is that in many cases the example is not well selected or the article is simply wrong, like in the recent Weavering case that was used in some media as a Cayman issue when none of the directors were based in Cayman, and no regulation would have been able to avoid it.”
Jalles argues regulation will never be able to prevent every single case of failure or intentional fraud. However, the media attempts to equate these cases to under-regulation, which refers to the lack of the essential rules to manage a certain type of risk.
“In my opinion when one looks at the facts it is obvious that Cayman is not under-regulated. Everyday literally there are instances of fraud in OECD countries. But that fact does not result in a widespread labelling of these countries as being completely infested with fraudsters, does it?”
Additionally the global recession has exacerbated the need for governments to collect revenue and is very appealing for politicians to find a foreign culprit to their problems, Jalles claims. “Whether through politically motivated actions or through misreporting by the media, it is only reasonable to expect that we will continue to be featured in a non-appropriate way. Cayman Finance will continue to respond to these articles and speeches and to educate the rest of the world of the facts about our financial industry.”