We are witnessing one of the biggest transformations of the financial industry for all international financial centers, including Cayman.
Historically, most of these centers built their industries providing, among other benefits, another layer of confidentiality to the end customer. Recent global initiatives are removing the differences in confidentiality across countries and completely removing the possibility of offering secrecy – something Cayman abandoned a long time ago.
The way in which IFCs adapt to this new environment will be key in determining their future viability, and Cayman is one step ahead of its competitors in this regard.
Over the past decade, Cayman transitioned to providing a wide range of products and services focused on the institutional market, a segment of the industry that does not require additional confidentiality. Cayman has, therefore, undertaken a proactive stance when it comes to a number of global initiatives that have attempted to increase transparency of tax information around the world.
Critics of this position argue taking such a proactive stance will damage this crucial industry.
Cayman’s financial services industry is the core of its economy, contributing directly to 49 percent of its gross domestic product and over 70 percent indirectly, according to a study undertaken by Oxford Economics. The industry also provides 52 percent of government revenue, and 36 percent of all employment as per the government statistics.
Cayman has the 10th highest GDP per capita of any country around the world – a standard by which the quality of life is measured – largely due to the vital role the financial services industry plays within Cayman’s overall economy.
Not long ago, the Cayman Islands lagged behind in the number of tax information exchange agreements, ending up on one of the usual “name and shame” lists issued by several international bodies. The consequences were significant, and we found ourselves rushing to sign as many agreements as we could, arriving at the total of 35 TIEAs we have today.
Just as enough TIEAs were in place and things started to calm down, the United States brought the Foreign Account Tax Compliance Act, known as FATCA.
Cayman decided to implement FATCA through an Inter-Governmental Agreement (known as IGA1); and as more and more countries chose IGA1, the automatic exchange of information became a political/diplomacy issue. For example, how can France justify politically to provide this information to the U.S. and not to Germany? And so, originated by five European countries, the multilateral pilot on exchange of information came to be, with Cayman being the first country outside Europe to commit to it.
This is the new reality of the world we live in, facilitated by technology and promoted by the global fiscal crisis. The concept is aligned to Cayman’s strategy to provide other relevant authorities with the information needed to enforce their laws. The multilateral pilot attempts to produce a level playing field where there is a standard applied across the globe, and Cayman is confident in its ability to succeed in a level playing field.
The automatic exchange of information (FATCA and all its siblings) will without doubt change the shape of the global financial industry as we know it today.
Cayman has embraced transparency for years, and the implication of being a first mover toward transparency initiatives is that the sectors of the financial industry that will be most affected have likely already chosen other jurisdictions and have been replaced by institutional business that is not directly affected.
The sector of the industry that is likely to see the biggest impact is the one related to private wealth, which only represents a relatively small fraction of Cayman’s current business.
The implementation of these initiatives will carry significant costs to the global financial industry in a way that does not discriminate against Cayman; if anything, it discriminates against size, as the cost is likely to affect smaller institutions and jurisdictions more severely.
The automatic exchange of information and the continued additional regulatory requirements will act as a barrier of entry to other offshore centers and has the potential of putting some of them out of business.
As the unavoidable consolidation occurs due to this increased regulatory burden, Cayman is ideally placed to reinforce its leadership position in the region.
As the business becomes more focused on the institutional side, the importance of common law legal and judicial framework becomes bigger, putting the U.K. Overseas Territories one very big step ahead of their competitors.
Of the Overseas Territories in the Americas, only three have achieved the absolute minimum critical mass to respond to the additional requirements; and of those three, only Cayman can claim a really diversified industry, being a leader in hedge funds, leader in structured finance, leader in banking, second in captive insurance, and a significant player in trusts and the ability to grow in a way the other two simply cannot because of its available usable land.
While the current and upcoming transparency initiatives are capable of reshaping the industry in ways one can only speculate about, Cayman has the potential to emerge as the undisputed leader in the region. Only the political decisions of each of the leaders in these Territories will determine if the potential is realized by Cayman or taken away by another jurisdiction.
FATCA and its siblings are also likely to have a significant positive effect for Cayman, which has been consistently improving its public image from an outdated, Hollywood-based fallacy. As tax information is exchanged automatically on a beneficial ownership basis, and Cayman continues to succeed, those that choose to represent our industry as a hiding place will need to open their minds and eyes to the reality of Cayman’s true role in the world economy, granting it the recognition it has deserved for many years now.