Financial services need a strategy

Paul Byles

Cayman needs to adopt a greater sense of urgency to address the two most recent threats to the financial services industry.

If you owned a car dealership and found out that people might stop using cars to get from point A to point B, what would you do?

Would you: check the veracity of this threat to cars, assess the impact on your dealership, find out what other means people might use to get from point A to B (assuming you feel they still need some form of transportation)? How about all of the above?

Or would you simply keep your head down and sell as many cars as you could until the crash occurs, essentially taking whatever riches you could while doing nothing to protect younger/future car dealers?

The Cayman Islands financial services industry is facing a range of new challenges. Two of these challenges are unique due to their potentially direct impact on the core foundations underpinning our traditional service offerings to clients. The prospect of “something similar” to a central registry of beneficial owners, and the OECD base erosion and profit shifting (BEPS) initiative are the two challenges that we need to address.

 

Central registry 

The main concern relating to the central registry equivalent is that if not handled with ultra care, it potentially signals to legitimate clients that the right to financial privacy is all but gone. There are many valid reasons why clients will not wish to have their ownership information easily accessible to the public. The Cayman Islands doesn’t need to give clients another reason to re-domicile their entity. Entities require attorneys, accountants, corporate administrators, various directors and pay annual fees to the government and so on. They therefore have significant economic impact in the jurisdiction where they are domiciled.

 

BEPS initiative 

The larger concern relates to the OECD BEPS initiative, which targets the legitimate structuring that is utilized to help make multinational firms globally competitive. This initiative is far more serious than any regulatory enhancements of the past.

This is not a new regulatory standard that simply requires changes to local legislation and millions in resources. It’s not a blacklist that we can either ridicule or respond to with new measures to get de-listed. It’s targeted at the very product offering, attempting to remove the tax efficiency of typical offshore structures. It doesn’t simply aim to change the rules or move the goalposts. It threatens to end the “game” entirely.

Given the potential risks posed to the jurisdiction by these two challenges and the reliance on the industry for government revenues and employment, we should be taking equally significant steps to better understand and prepare for their potential impact.

Our efforts should be akin to reviewing the country’s business plan, examining which parts of it may become obsolete, looking for new opportunities arising from the changes and putting a formal strategy in place. All with the sense of organization, expertise and urgency that reflects the downside we should avoid: that eventually we are relegated to a typical Caribbean tourism destination where we compete for revenues and jobs with sun, sand and amenities and where the golden goose on which the economy has been built for the past four decades, is no more.

 

Threat assessment 

This effort will require a technical assessment of the threats to the financial services industry and devising recommended action steps to address them. It will also require an examination of any potential market opportunities created by these new initiatives. Essentially what we need now is an investment into the main driver of the economy. We have invested heavily into regulatory infrastructure over the years (and to be honest we have received very little recognition of that globally).

But we now need a significant investment of time and resources into assessing and revitalizing our business plan so that the jurisdiction can offer opportunities to the next generation. And neither is this an academic exercise; it’s equivalent to protecting more than 300 million in government revenues and several thousand jobs for Caymanians.

This will require a lot more than being fully aware of the initiatives and having a sense of urgency. It requires very serious, proactive, coordinated and deliberate efforts involving multiple stakeholders, toward formulating a strategic action plan.

Now back to that car dealership question: Do we keep our heads down and hope it all blows over, or do we act with the sense of urgency that reflect 60 percent to 70 percent of our economy being at risk?

 

About the author: Inside Offshore is a syndicated column on topics relating to international financial services. Paul Byles is managing director of First Regents Bank & Trust. He also serves as an independent director and consultant to financial services firms. He is an economist and former regulator who has worked in the offshore sector for more than 20 years. He is author of “Inside Offshore” and “Introduction to Offshore Financial Services: A BVI text.” 

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