That dog will no longer hunt

Cayman Finance chairman calls for more immigration changes to further financial services growth, reports Basia Pioro McGuire.
Speaking at the inaugural Cayman Finance Summit held Thursday 6 May, Cayman Finance Chair Anthony Travers underscored the importance of the financial services sector to the Cayman Islands, arguing that “government revenues will follow the fortunes of the financial services industry”.
He pointed to a recent study which found that in 2007, approximately 5,800 people were directly employed in the financial industry, while indirectly 13,000 jobs depended on the sector, making up nearly 40 per cent of the local employment, nearly 50 per cent of government revenue and $1.2 billion or 55 per cent of gross domestic product.
“More crucially, employment in the fund administration industry was running at about 50/50 Caymanians to expatriates.” he said.
“400 fund administration jobs exported to Canada, as a result of the roll-over policy and immigration issues, generally means therefore 400 fewer jobs for young Caymanian professionals.”
Travers argued expansion of the financial services sector will contribute to increased government revenues, employment and broader societal benefits.
He pointed out that increasing the number and types of activities the sector conducts will demonstrate the kind of “substantial presence” overseas regulators will be looking for and thus have a hand in deflecting “the future attacks on the Cayman Islands that are already formulating.”
He suggested Cayman can expand in such areas as fund management, investment and merchant banking, reinsurance and expand fund administration to attract long-term financial professionals.
“We will not be accepted as a financial centre until we provide the range of services typically provided in a financial centre,” he argued.
“So in terms of direction of the financial services industry, having concluded that tax competition is and remains the concern of certain G-20 jurisdictions and that lack of substantial presence will be the OECD’s weapon of choice, we must increase and improve the range of financial activities undertaken in the Cayman Islands rather than in New York, Chicago or London,” he said.
“Anecdotally and in simplistic terms, if the fees charged on a transaction are 95 per cent payable in New York and 5 per cent payable in Cayman, we need to work on evening out that percentage.”
Noting the importance of supporting an immigration policy that financial professionals would find attractive, he said financial services should also be supported because Cayman’s traditional financial markets, the US and the UK are experiencing economic difficulties, resulting in a drop of government revenues and revenues payable to the private sector.
“Current transactional flows resemble 2004/2005 and so if nothing more is done, one simple solution is for government to return to its expenditure levels in the2003/2004 budget which is some CI$317m annually,” he noted.
“Interestingly, when looked at from the opposite perspective, the current deficit supports the maths of that conclusion. But that would require extensive cuts in government expenditure and whilst cuts to that expenditure may be an essential short-term expedient, the recommended approach for the long term is to boost government revenue.”
However, to charge these higher fees the financial services industry has to provide a higher quality of service and of a sort in relation to financial engineering management and administration not previously provided in the Cayman Islands.
“This again means more and higher quality personnel,” he said.
“As has always been the case, government revenues will then follow the fortunes of the financial services industry.”
Travers argued the current administration’s approach to immigration has done a good deal to redress the negative effects of both a tightened immigration and roll-over policy, but more will have to be done for financial services industry to develop an enhanced state of revenue generation per transaction.
“We really have to confront the 800 pound gorilla in the room and deal with the heresy that the highest quality financial professionals can be attracted the Cayman Islands to develop the financial services industry with the requisite substantial presence on the basis that they are here for the short term and with the view to being replaced,” he said.
“That dog will no longer hunt. It is an unrealistic delusion.”
Travers argued for “decoupling” the issue of work permits and security of tenure for financial professionals from the issue of status and voting, calling the current situation a “conundrum”.
“Of course, we must ensure proper integration for Caymanian professionals but at no time was the roll-over policy ever the correct response to an evident failure to provide that integration,” he said.
“As a corollary however, no one in the financial industry should, in the absence of income tax and payroll taxes, mind paying $20,000 dollars or more for a professional’s work permit, provided these work permits can be obtained by the Cayman financial organisation when they want them and kept for as long as they want them,” he continued.
“The stakes here are high. If we cannot elevate our financial services industry by providing substantial presence and verifiable value added, the recent fee increases will not be sustainable and we face a further exodus of organisations and employment opportunities, and then the inevitable race to the bottom on fees with lower cost jurisdictions which will ultimately see government revenues from financial services decline not increase.”
Arguing against direct taxation, he suggested supporters of direct taxation on a “highly mobile” financial industry “are at best guessing at the outcome or to the more cynical amongst us, have a very good idea of the outcome but the fact is that we have no positive basis whatsoever that would justify that decision.”
He questioned the appropriate welfare and public service spending, free medical health and pensions benefits for an Island population of 60,000.
“If we first do not answer that question correctly and make appropriate legislative modifications to ensure the benefit levels are appropriate and sustainable, there is no certain limit to the revenue that must be generated to pay for the programmes and therefore no upper limit to the rate of taxation that may be applied,” he said.
“Those who suggest any form of taxation without first ensuring that public expenditure is under control, need to understand that they do not thereafter, whether the tax is income tax, payroll tax, community service tax or any other form of tax, control either the rate of tax applied or the resulting rate of the exodus of the financial services industry.”
Putting forward the hidden agenda of the OECD, a theory elaborated on later in the day by speakers like Dan Mitchell of the Cato Institute, with respect to its actions geared toward harmonising global tax rates, Travers argued the negative depiction of the Cayman Islands can mostly be laid at the feet of on three main sources: social activist bloggers, onshore public relations campaigns waged by national governments and supranational agencies, as well as politicians and regulators hoping to direct blame for poor practices away from themselves.
The origins and consequences of such attitudes merited a lengthy discussion, with Travers concluding that a significant outcome has been that, “the US and European position on tax competition may now be aligned and that is a fundamental shift, the importance of which for Cayman must not be ignored”.