Is the funds sector pricing itself out of the competition?

A government-private sector panel at the Campbells Fund Focus raised once again questions about the competitiveness of parts of Cayman’s funds sector. 

The Cayman Islands funds industry has borne the brunt of fee increases in recent years. At the same time, the industry has changed significantly, with investors and regulators calling for more corporate governance and transparency. The demands have not only added to the costs of setting up and operating a fund, but have also made the provision of supporting fund services more expensive.  

In combination, this means that parts of the Cayman Islands funds industry are not or no longer will be competitive, panelists at the Campbells Fund Focus conference said. 

Canover Watson, managing director of Admiral Administration, noted government’s revenue measures, including increased fees for the industry – initially characterized as temporary – are not sustainable. The work permit for an accountant, for instance, went from $3,000 to $15,000 over the past years. “In the long term it will price Cayman out of the competition,” he said. 

Fund administrators are particularly cost-sensitive, and in the past have outsourced operations and moved jobs from Cayman overseas. Other support functions have stayed put so far.  

Graeme Sunley, partner at PwC and president of the Cayman Islands Society of Professional Accountants, said accounting firms have not made use of outsourcing to the same extent as the fund administration industry, but the firms are cost conscious and aware that these solutions are available across their international networks.  

While firms in Cayman will always maintain senior positions here as a center of excellence, one should not underestimate how important less senior positions are in terms of job creation and contributions to the economy.  

At the same time, Sunley believes, it is unrealistic to expect that fees will be rolled back, because finding alternative revenue sources would simply represent another set of challenges. 

“But I do think that we do have a ceiling in terms of the level of fees that service providers can sustain,” he said, adding that the industry wants to see a period of stability and if possible consolidation of fees.  

This would also support clients such as start-up fund managers who are facing an increasing number of hurdles. While fees may not be their main problem, fee stability over the next years would certainly help, Sunley noted.  


Employing Caymanians 

Linburgh Martin, deputy chairman of CIMA and chairman of Intertrust, agreed that it is probably not realistic to roll back fees. “However, here is my proposition to the private sector in terms of reducing your cost base: Employ more Caymanians. Caymanians are, if you look at it, probably 25 percent less costly and 100 percent more loyal.” 

Describing Caymanians as an untapped resource, he said employers should “challenge their HR department to try harder.” 

Watson disagreed, stating that Cayman as a country does not have the numbers to hire and cannot develop Caymanians fast enough to compete against the likes of the United States or Canada. 

“It is not a question of not having qualified Caymanians. Those Caymanians will be given an opportunity. I hear the rhetoric, there are all these Caymanians unemployed, but we never talk about what jobs are available and what skill set do Caymanians need to have to fill those jobs,” Watson said. 

Following the financial crisis and increasing calls for more transparency and more regular and detailed fund reporting, the industry has changed, requiring different types of services at different price levels, he said. 

The typical cost of an accountant with four years’ post-qualification experience in Cayman of US$100,000 cannot compare to the $45,000 it costs to employ a CPA with a postgraduate degree in Canada. 

Speaking about his own fund administration business, Watson said. “We had 110 people on the ground in Cayman five years ago. Today we have 30. That’s not because I don’t want to hire Caymanians. The realities of the market mean that we have to reorganize our business.” 


Industry has changed 

Minister of Financial Services Wayne Panton said the government does “not have the luxury to be so negative about it” and would need to know from the industry what policies can be put in place to fundamentally change the business climate. With regard to jobs that Cayman lost to Halifax, Canada, he joked that given the winters in Canada, these positions might ultimately be won back.  

Watson retorted that the notion that people will start to come back is flawed. “The problem is the industry itself has changed, the demands of the industry have changed. What an administrator does today is very different from what we did five years ago.” 

As a result, Cayman is not well positioned to deliver some of the services because it does not stack up to other jurisdictions in terms of what is best for the business.  

“We have to sit back and look at what is it that we still do well and how we retain this talent, because we are going to lose that part of the market as well if we are losing the people,” Watson said. 

“I try to be a realist and if that is negative, then unfortunately it is negative. This whole idea that people are going to come back is not going to happen.” 


Regulation and transparency 

New regulation, such as the registration and licensing of fund directors, and transparency initiatives were seen as another competitive issue by the panelists, who agreed that Cayman should not necessarily take the lead but adopt internationally accepted standards. 

Martin emphasized that CIMA was trying to strike a regulatory balance with the proposed regulation of fund directors. Minister Panton in turn noted that the government saw the proposal, which is still at the drafting stage, as a necessary regulatory measure, demanded by the market and investors, and not as another revenue stream. 

In terms of the government-private sector consultation on the proposed centralized and potentially public registry of beneficial owners of companies, Cayman should not be a first mover and wait for a level playing field, said Gonzalo Jalles, CEO of Cayman Finance. “I expect the industry to say we support a global standard but we should not do it ahead of other competitors.” 


New legislation 

Government intends to support the competitive position of Cayman’s financial services industry by paying closer attention to the sector, making more internal resources available and establishing a closer dialogue with Cayman Finance. To this end, government and Cayman Finance signed a memorandum of understanding that will govern the consultation with the private sector on new legislation, new products and fee levels.  

Panton also announced forthcoming legislative initiatives which should bolster Cayman’s financial services.  

“We have been working very closely with industry in the Financial Services Legislative Committee, which has a number of very good legislative proposals, which represent products which I think will be very beneficial to the industry.” 

The proposed legislation will bring new features to exempted limited partnerships; a third party contract rights bill; and a new type of company called exempted limited liability company.  

Panton had hoped to present the bills before the end of the year but now expects to table the proposed legislation in January.  

Wayne Panton Linburgh Martin Canover Watson

Wayne Panton, Linburgh Martin and Canover Watson