The current consensus on the possible impact of Brexit on the Cayman Islands and indeed the Caribbean is simply that it all depends on the final Brexit deal negotiated between the U.K. and the EU. But there are a number of reasonable implications and we need to prepare for them.
A so called “hard Brexit” is by all accounts the more likely scenario if we are to believe the most recent reports, suggesting that when the ink dries on the U.K.’s deal to exit deal the EU, there will be immediate consequences for everyone. “Hard” also implies that the negotiations will be tough, and that means not only tough in terms of legal, trade and regulatory considerations, but also in terms of political ramifications.
Everyone expects there to be at least some reasonable transitional periods to allow a smooth transition even in the hard Brexit scenario.
How might this impact the Cayman Islands? The easy way out is to say we simply do not know at this stage, and of course it depends on the results of the negotiations. But to leave it there means the Cayman Islands is unprepared.
Banks and other financial services institutions in the EU are already considering what Brexit would mean for their existing access to EU market and their clients. In the case of the Cayman Islands, our financial services sector relies primarily on North America, as that is where the majority of our client base resides.
But we also have clients in many other parts of the world, including in the EU. Anecdotal evidence suggests this may account for somewhere between 15 percent and 20 percent of our clients. This may not appear to be significant, but it’s certainly likely to be a material source of revenue for many institutions operating from the Cayman Islands.
Operationally this may mean that some institutions would need to set up a physical presence in the EU in order to continue to have such access. A cost benefit analysis of that prospect could easily lead to some institutions making the decision to pull out of the EU market entirely. For others it would mean additional investment to set up within the EU. Either way it has financial implications.
From a regulatory perspective, it is widely accepted that the discussions will evolve around whether non-EU countries have a regulatory regime that is deemed “equivalent” to that of the EU, as a prerequisite to continue having access to EU clients.
That means that the Cayman Islands government may well be faced with further calls to amend its wider regulatory framework in order to meet any conditions if any aspect of our regulatory regime is not deemed to be equivalent. This implies more cost not only to the government, but also to the various institutions, as most regulatory enhancements lead to some actual costs incurred at the operational level in terms of new systems or staffing resources.
‘Tax haven politics’
A hard Brexit can only be preceded by tough discussions, which will involve politics. The Cayman Islands and other IFCs related to the U.K. have been under constant pressure (and that was putting it lightly) for years from the OECD and major onshore centers to make changes to our regimes. And while some of the requested changes relate to legitimate global standards, many are aimed at stemming the flow of legitimate business that we derive from areas such as the EU.
It should come as no surprise to us if a negotiation between the U.K. and the EU leads to centers such as the Cayman Islands being offered as pawns on the table. The EU may wish for the U.K. to pressure its territories to make further changes to our regime that we might not wish to make at this time or at all. That request may be attached as a quid pro quo for a separate benefit that the U.K. wishes to gain from the EU. We should be prepared to argue our case with objective evidence if these requests start to filter through.
Where does that leave us?
In addition to market access, regulatory pressures and political influence on the nature of our services to clients, the Cayman Islands should also be aware that generally our attachment to the U.K. means there are potentially numerous other general implications such as our basic EU-related travel privileges that may also come into play.
Brexit is still uncertain, but there are some very clear potential impacts, most of which are negative. If nothing else, we should be considering and putting contingencies plans in place both at the government level as well as operationally for individual financial services institutions.
In the case of Cayman Islands-based financial services institutions, this may mean seeking out possible partnerships in the EU, which is a cheaper alternative to setting up a physical presence. FIs can also look at ways to reduce the cost of the Cayman Islands operations in order to redirect investment to setting up additional operations in the EU.
In the case of the government, it means considering existing EU regulations that affect the financial services industry and how Brexit might impact them. The EU Savings Directive and the AIFMD are just two examples of such initiatives.
Paul Byles is owner and director of FTS, which provides regulatory, economic and management consulting services. He has worked in the financial services industry for 25 years and is a former director of a big four consulting firm and a former Head of Policy at the Cayman Islands Monetary Authority. He is also former chairman of the financial services council, the advisory body to the Cayman Islands government.