Cayman Finance update: What’s in store for 2013?

Cayman Finance gives its political and economic outlook for this year. 

2013 promises to be busy for Cayman Finance, not least because it marks our 10th anniversary of service to the Cayman Islands financial services industry. We will continue to find new ways to improve our effectiveness in communicating the integrity of our industry as well as embrace our evolving role as a body which advocates and represents the industry on key matters. 

In 2013 there are a few major developments with implications for the Cayman Islands financial services industry. Some of these such as the so styled ‘fiscal cliff’ situation in the US are out of our control, while others such as FATCA are partly in control of the Cayman Islands government and by extension the industry stakeholders via the usual consultative process.  

While the fiscal cliff is reported to be largely avoided, there is general consensus that times will remain challenging for the US economy and many US citizens for the time being. On the one hand, tighter rules on US taxes will drive capital offshore. But on the other, tax policies for US investors, nonprofits and businesses will continue to tighten, thereby removing treasured tax breaks. For investors, more foreign source income could be taxed immediately. The president’s budget may seek to end deferral on US companies’ foreign profits, making it less necessary to form and operate foreign subsidiaries and vehicles. For investment managers, commodity funds could lose their status as regulated investment companies. For pensions and charities, debt-financed unrelated business income from abroad could be taxed. All of these changes could impact Cayman by making foreign transactions less profitable and reducing the demand for our services. The question is what changes if any will be implemented now that the president’s honeymoon period is over.  

The US treasury released its ‘Model 2’ version of the Intergovernmental agreement for FATCA in November 2012. In summary, Model 1 which was released earlier in the year, relies on exchange of information between governments. This was established partly to address concerns that some foreign financial institutions may face from domestic laws in their own country which prevents them for reporting directly to the IRS in the US. Model 2 on the other hand attempts to address these concerns in an alternative way while allowing direct reporting to the US. Cayman Finance has been involved with the Ministry of Finance in discussions relating to this important initiative and will update the industry as the discussions continue. 

There are some draft proposals relating to improving the governance of the funds industry and Cayman Finance has been involved in the early discussions both as part of our involvement with the Financial Services Council as well as separately. We have taken the position that these proposals need to be discussed further to better understand the implications for the industry and expect to revert to our members in the coming months as the proposal takes a more concrete form. As with most legislative and regulatory initiatives over the coming months we anticipate that there will be some delays as the country focuses on the general elections. 

The local economy has held up relatively well since the 2008 global crisis but there are clear challenges as evidenced by unemployment and a strain on government finances. These challenges have not impeded the industry significantly and we are hopeful that the economy will start to recover later this year as the general elections usually provide an impetus for positive changes. There is no doubt that the incoming government will be faced with a challenging situation and Cayman Finance stands ready to assist with both support and in bringing new ideas to the table.  

As the recently introduced fee increases on the financial sector kick in during the early part of the year, Cayman Finance will be assessing their implications based on concerns from our members. We will work with the government on making any adjustments we deem necessary to maintain a successful and competitive industry. We will continue to encourage government to examine all available ways of reducing public expenditure.  

We are expecting 2013 to be a somewhat challenging year in the short term but hope that the latter half of the year will see the jurisdiction more settled as the general elections end and the local economy starts to recover.