How to work with your Cayman regulator

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. Second in a three-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.

“We indeed live in interesting and worrisome times, and the relationship between the financial services industry and CIMA has perhaps never been more important.

“The relationship has been a solid one over the years since 1997 when CIMA first came into existence. And I believe that CIMA works hard to enhance the relationship by meeting with and listening carefully to all its stakeholders, both individually and through industry association lunches, round tables etc., in order better to understand their businesses, goals and concerns and by proceeding to issue new statements of guidance, rules, policy statements and the like only after full consideration and consultation. An approach best described I think as constructive restraint. Equally, CIMA is prepared to work with the industry to resolve problems and also to move quickly on enforcement action where that has been necessary. That is not to say that CIMA could not improve its performance, particularly in its response timeliness, in the application of its risk-based supervision and in its resolution of problems. Further, CIMA is unfortunately not in a position to expedite the introduction of legislation and regulation to meet industry (or CIMA) needs as that rests with the Government not CIMA.

“It is interesting to note that the Financial Stability Forum report of 10 October, 2008, on Enhancing Market and Institutional Resilience states, ‘There is growing consensus among authorities and the industry that for oversight to be effective there should be direct communication between the supervisors and the firm’s board and senior management…….it is the high level of the exchange between supervisors and the boards that should help each better discharge their respective duties.’ I think we can safely say with some satisfaction that Cayman is a good example of this and where others should follow.

“I think it is fair to say that the current stresses in the global financial markets will result in problems to the industry here over and above those that are already identifiable. What those problems, the unknown unknowns, may be we do not yet know. And there will be lessons that the industry, CIMA and the Government should learn for the future. And also opportunities. That is the way of crises.


Front end
“There are four frontline supervisory divisions at CIMA – banking, fiduciary, investments and securities and insurance. There are broad similarities in the regulatory laws under which these divisions and the industries they supervise operate.

“But they are not the same, and you should not assume they are.

A few tips.
“First, it is important that your relevant staff is very familiar with the relevant laws and regulations before you allow them deal directly with CIMA. Like all regulators, CIMA lacks the resources it ideally needs. It must compete for funding with other government departments, statutory authorities and public projects. So CIMA staff , while available and willing to assist, should not be treated as day to day educators of or legal counsel to the industry. That is the job of the organisations themselves with the assistance of their own advisors, industry associations and CIMA sponsored workshops. So rather than calling CIMA and asking the question, use the CIMA website (being upgraded) for your education and use your in-house institutional knowledge. Also, lawyers are paid to give advice, not to get it for free from CIMA. And be careful what you ask as you may not get the answer you want. When I practised law, I proceeded on the basis not to ask the regulator a question unless I already knew the answer! If there are major issues of uncertainty or need, submit these concerns in writing to CIMA. Even better, liaise with the relevant industry associations and present an agreed position and possible solution or recommendation to CIMA.

“Second, if the application is complex and/or unusual, arrange a preliminary meeting with CIMA to discuss it. You should make sure you understand the nature of the complexity, can explain it to CIMA and answer questions. If you are unsure, do more homework and consider asking the client also to attend the meeting with CIMA.

“Third, get your applications and supporting documents (and fees) complete and in good order before filing them. One of the ways not to get timely processing of the application is to hopefully wing it and file an incomplete application. I recognise that CIMA sometimes seems unnecessarily bureaucratic by asking for otiose documentation. Sometimes, CIMA has no discretion under the relevant Law. But sometimes it can, should and does exercise its discretion and commonsense. After all how many references do you need on the current or former senior partner of a major law firm in Cayman whom has well known to CIMA for many years and in connection with a low risk application?

“Fourth, respond to questions and requests from CIMA promptly and constructively. I recognise that sometimes the clients may be slow to give you the information, but it is frustrating for CIMA staff to be told that an application is urgent, yet missing information or documentation that is then slow in being submitted. Client education is part of the art.

“Lastly, be open, honest and fair with CIMA. Do not be economical with the truth or the facts. And do not file an application as urgent just because the client tells you it is. Exercise some healthy yet respectful scepticism with a client who always tells you the application is urgent. The odds are that not every one is. I think you will find CIMA acts with speed on urgent applications for you if it knows they are genuine. “

“Some of you may be transactional and do not have an ongoing relationship with the licensee/registrant and CIMA. Others will have a continuing role. It is important you pay attention to this.

“First, if your organisation is the local service provider to whom CIMA looks as the liaison to the licensee/registrant, regularly review the matter to make sure filings with CIMA and fees are current. Again, this often requires client management that can be frustrating. But it is essential that CIMA be notified of matters required by the regulatory laws and, where relevant, CIMA approval secured. Particular relatively routine examples are changes in directors, changes in business plans, filing of audited accounts and payment of fees. Even more importantly, keep CIMA informed promptly and early of major events that may fundamentally impact the licensee/registrant, such as cessation of business, receivership, liquidation/winding up, potential insolvency, suspension of redemptions, major lawsuit threats etc.

“Second, make sure you update the licensee/registrant (assuming it has no physical office in Cayman) regularly of changes in relevant Laws, Regulations, rules, statements of guidance and policies, and identify clearly any action required by the client. I am aware of situations where offshore banks (with no physical presence here) were entirely unaware of changes in important local regulations that potentially impacted them. Annual visits by the client to meet with the local service provider and CIMA are highly desirable and recommended.

“Third, be ever mindful of your statutory obligations and your positive reporting obligations. These can arise under the money laundering regime (Proceeds of Crime Law and Regulations) in terms of suspicious activity reports to the Financial Reporting Authority and also under the regulatory Laws under the relevant whistle-blowing provisions. For instance, under the Mutual Funds Law (section 17) a mutual fund administrator is required to notify CIMA, inter alia, if it has knowledge or belief that a regulated mutual fund to whom it provides the principal office or a promoter or operator of the fund is or is unlikely to meet its obligations as they fall due or is carrying on business in a manner that is or is likely to be prejudicial to investors or creditors of the fund. Under both the Mutual Funds Law (section 35) and the banks and Trust Companies Law (section 13) the auditor is required to notify the Authority in similar circumstances and also if the relevant entity is carrying on business fraudulently, in a criminal manner or otherwise in breach of the relevant regulatory Laws or the money laundering regime. In due course the Insurance Law and Companies Management Law are likely to be amended to conform their provisions to those of the other two regulatory Laws.

“Over the years, the industry has become far better at exercising good judgment commonsense with respect to its various reporting obligations, in order that they can be helpful and effective when made. Bottom line is still, if in doubt report it. I would not go so far as to say “Report early and often”, but you get the picture.

“Fourth, and connected to the preceding recommendation, remember that CIMA also has a statutory obligation to file SARs in the same circumstances as the industry. Also be mindful that the FRA can pass information to CIMA. Now it is often possible for different conclusions legitimately to be drawn from the same facts, one conclusion leading to a SAR and the other not. There are perhaps concerns about tipping off if the matter is discussed between the service provider and CIMA in terms of filing a SAR. However, I am of the view that, wherever possible, the information and the decision should be shared (particularly if has resulted during an onsite inspection) to avoid as far as possible the situation where one party has filed a SAR and the other has not. It certainly raises questions in my mind if CIMA has filed a SAR and the service provider with the same information has not. Those questions go to the adequacy or robustness in the structure and implementation of the service provider’s in house aml/kyc regime.

“I know there is continuing frustration in the industry (shared by CIMA) over the feedback (or lack of) from the FRA about the outcome of SARs. Often the FRA itself may not know either, given that it passes the information to law enforcement both locally and internationally and is reliant on the feedback from them. But a way needs to be found to improve this so that SAR filers know that SARs do in fact help the fight against crime and produce results, rather than gathering dust somewhere(perhaps electronically in a computer server).

“Lastly, the onsite inspection. As you will be aware, over the past few years CIMA has developed and implemented an internal risk rating methodology for all its licensees. The system is not identical for all the divisions and takes into account the particularities of each industry. A rating, broadly high, medium and low risk, with subsets within each headline category, is assigned to every licensee. That in turn drives the level of ongoing supervision, and in particular the schedule for onsite inspections, e.g. annual, triennial, quinennial etc. Due to continuing resource issues, CIMA has not been able as yet fully to meet the desired inspection timetable. However, it is looking at various ways internally and externally that would improve the efficiency of the inspections.

“There is one important aspect where both CIMA and the licensees must work very hard to do better. That is the speed at which the onsite inspection and the resultant report are completed. A report that is delayed is less than useful (a lesson the Cayman Islands Government is learning with respect to its own accounts and reports), and delays cost time and money.

What seems to happen is that neither side proceeds with due expedition or sense of urgency. And before anyone notices six months have passed and recriminations start. I believe the missing ingredient is an upfront “closing schedule or timetable” agreed between CIMA and the licensee that is rigorously implemented and adhered to by both parties. So the agreement would spell out the number of days for the onsite inspection, the date for delivery of the draft report and the date for its completion and delivery to the licensee. Protracted exchanges of correspondence on points of disagreement in a vain endeavour to reach consensus should not be allowed to drag out the process. If the licensee does not agree with an item in the report, it should simply make a written submission setting out the reasons for the disagreement and that can be placed in the CIMA supervisory file for the licensee.”

Next month Ridley explores consultation with the regulator, as well as the regulator’s powers of enforcement



Paul Byles and Tim Ridley