After sustained attacks on offshore financial centres, Cayman Islands' financial services sector is in confident mood and expects to continue to dominate as the domicile of choice for hedge funds.

The dust may be settling on onshore regulation aimed at the hedge fund industry but the Cayman Islands is still in battle mode. Although the general consensus is that new laws, particularly from the European Union, are not as harmful to Cayman they still present challenges.

“This is not peacetime. The forces of darkness are gathering and actually gathering in a very problematic way,” declares former Cayman Finance chairman Anthony Travers, still in combatant mood. “The problem is most people look at things through the rear view mirror. They are not very predictive. There are very, very real threats out there from a number of different sources, all of which one can track back to the shortfall in onshore tax revenues,” he says.

The primary threat, says Travers, is from “blame deflecting politicians who mischaracterise lawful tax avoidance in some way relating to impropriety in offshore jurisdictions.” He points to continued statements being made in places like the UK House of Commons and the European Parliament as misguided and still dangerous for the future of Cayman.

Looking specifically at the hedge fund industry, Travers, who remains as chairman of the Cayman Islands Stock Exchange and is also an investor in hedge funds, says a number of disparate elements need to be examined and separated. For example, the EU Ucits market is a “quite separate market and isn’t a hedge fund market proper at all despite attempts by fringe jurisdictions, like Ireland and Luxembourg, to bolt a hedge fund strategy onto a Ucits structure.

“There is a lot of marketing puff. You can’t actually get a round peg into a square hole. A hedge fund strategy proper will not fit in a Ucits product and it’s intended not to,” states Travers, who plans to be involved in the launch of a hedge fund this year.

While this view is clearly not shared throughout the legal community, many secretly agree. Travers believes this will be clear when an analysis of the returns generated by the hedge funds versus Ucits hedge funds eventually is made. “We will see in years ahead that hedge funds proper will outperform EU Ucits products. What you have is a bifurcation in the marketplace,” he says.

Travers maintains his stance that Cayman needs to take action in order to build a substantial hedge fund jurisdiction but others are more confident the groundwork is being laid.

One area of contention concerns work permits and immigration. Travers says the government has failed to tackle these issues.

Premier and finance minister McKeeva Bush says he is addressing these issues. Currently over 20,000 people working in Cayman have permits. “There are challenges. We are ensuring we balance economic growth and the tremendous social and economic benefits that foreign workers bring to our shores with sound, sustainable policies that help maintain the best interests of our citizens,” states Bush.

To do this the government has passed directives to the immigration department that should make it easier for financial services companies to attract and retain talent. Some of these measures include a special subcommittee of the business staffing plan board focusing on financial services matters.

These directives instruct the immigration team to structure three to five-year work permits for the professional staff of accredited investors in the financial services industries.

A list of critical positions within the financial services industry has also been produced which the immigration board will designate as ‘key’ under certain specific conditions. These exemptions from standard term limits will apply to work permits of senior leaders of financial services companies such as CEOs, managing directors or other senior staff, known as ‘key employee designation’. This designation is available under new immigration directives relating to the financial services community for all accredited investors.

A 25-year direct investment certificate has been created aimed at investors with an employment-generating business with substantial management control. The certificate is available for investors with a net worth of $6 million and who have invested at least $2.4 million in Cayman or in a local business.

This certificate will entitle the holder to work in the business in which they has invested and will also allow a spouse and minor children to reside in the Cayman. “This certificate will be renewable or extendable at the end of 25 years. We are offering a guarantee to not increase work permit fees for a period of four years for permits granted under this programme,” explains Bush.

In addition the Cayman Islands Monetary Authority (Cima) is looking at how to expedite turnaround for time-sensitive applications.

“We are keen to create the most attractive environment possible to lure even more financial services firms to locate operations in the Cayman Islands,” states Bush. “We see great potential to welcome professionals from such areas as fund management, reinsurance and others disciplines to our financial services community.”

In addition the government has put in place an initial set of programmes to kick-start efforts to encourage financial services companies to consider Cayman. These include boosting the resources of existing departments such as the Department of Commerce and Investment to support, advise and act on behalf of potential investment management companies considering Cayman.

While issues surrounding immigration will not be easy to lay to rest, the jurisdiction has clearly been making some progress on other issues. Dax Basdeo, chief officer, financial services, ministry of finance, tourism and development, points to the increased co-operation and close working between government and the private sector. “The government is working more closer with the industry. There have been developments in policy, regulatory changes and the marketing and promotion efforts all aimed at helping to get things growing,” says Basdeo.

“We listen and work closely with the private sector on various issues, trying to understand their perspective. But this is only one position. While involved the private sector is not the only one at the table,” Basdeo notes. He believes the various government committees and councils as well as advisers to the government are ways the private sector, particularly financial services, can help and support the government.

This partnership is important in a “little island… with no manufacturing, no minerals and the world beating us down in financial services,” commented Bush in a January speech on Cayman’s business outlook for 2011. His answer is a government willing to partner “with good companies” and ­diversification.

“As we seek to further our close-knit relationship in the financial services sector, both government and private sector will participate in a 2011 roadshow organised by Cayman Finance,” Bush reported. The government, following in the footsteps of its financial services industry, is helping to support the hedge fund industry globally. It already has offices in the US and UK, plans to expand and include lobbying efforts with the EU as well as having a presence in Brazil this year. Hong Kong has already opened. Cayman is looking at establishing a presence in Brussels as well as in Dubai and to “secure accessibility in those markets” as Bush puts it.

Maintaining competitiveness includes revision of the Companies Law. Once the Companies (Amendment) Bill, 2011 is passed, Cayman will be on a par with competing jurisdictions such as British Virgin Islands, Bermuda and Jersey and possibly ahead of others, according to the government.

Cima is also committed to improving the quality and standards of the financial services sector and is working on a five-year strategic plan with the financial services council to ensure that Cayman remains a top ­regulatory jurisdiction.

The main objectives of the strategic directions document include enhancing the integrity and reputation of Cayman as a financial centre; attracting a more physical presence from international businesses in the financial industry operating from the Cayman Islands (including hedge fund management operations); seeking access to markets such as China, India and Brazil and enhancing the links between Cayman’s financial services industry and the educational system.

One area Cima will be discussing over the next few years will be its reaction to the EU’s alternative investment fund managers (AIFM) directive.

Mitchell Scott, head of policy and development at Cima, says the regulator will be “constantly reviewing our framework” and that “some changes are most likely” as a result of regulatory changes in the US and EU. This is likely to include looking at how Cayman’s registered funds regime fits into regulated onshore structures.

Heather Smith, deputy head of investments and securities, says Cima will be watching what comes out of the European Securities and Monetary Authority’s deliberations over the specific enactment of the directive. Cima has already sent Esma information as part of its call for evidence. “We need to see if there are any gaps in Cayman regulation,” she says.

“We will be following very closely what comes out of Esma,” confirms Justine Plenkiewicz, chief policy and development officer in the policy and development division. “While international co-operation agreements will resolve some issues we also need to create ties with the EU. Information exchange is needed and we mean to meet the aim of the directive’s work in that respect,” she adds.

Onshore regulation, she points out, is focused on the investment managers whereas Cayman’s rules concern the fund vehicles. “Our target market is the US and Europe. We are in the process of gathering the investment digest information for 2010. This will give a sense of the shift in fund activity, even with the time delay of publication in June 2011,” says Smith. “This ongoing review helps us to make determinations from the range of funds, size, number of investors but it is not always obvious about the strategy or investors,” she says, hinting that changes may be considered to the electronic reporting pioneered by Cima.

Another change being discussed could help the regulator take proactive action. At present the key people responsible for a fund’s operations, including the directors, trustees and general partners, are usually accountable to and sanctioned by other jurisdictions. However, Cima now has the ability to refuse individuals when approving a fund’s registration.

According to Heather Smith, deputy head of investments and securities, Cima takes into consideration the history of the person, any criminal acts and decide if the person is fit and proper to act on behalf of the fund. She is quick to point out that investigations into funds and the requests for them are “not very frequent” and “from time to time come to the attention” of Cima.

Looking at increased involvement by investors, Arnold Todd, legal counsel, says investors do sometimes request information on individuals but this is strictly confidential and the information is only given to the investor. Some information may be exchanged under Iosco rules with other regulators. “From our perspective we engage if it is warranted,” says Todd.

He confirms Cima looks at a variety of “complaints” by investors. “Some are more civil in nature and not under the remit of Cima,” he explains.

Some frustrated investors have been trying to find ways to lift suspensions of redemptions. Although some investors did not like the gates shutting before they had exited, Todd says such actions are allowed in the memorandum and articles. Most managers were trying to do the best they could at a time when prices of investments were volatile and also trying not to disadvantage remaining investors while favouring early leavers, he says. If the balance of investors, however, are unhappy with the action of the manager they can ask the regulator to step in. Todd says there have been cases of this happening but that Cima does not make these ­interventions public.

“Over 2010 there have been a lot more complaints received but this is not unusual comparing notes with regulators around the world. Investors are paying more attention. But there was not an increase of enforcement actions,” confirms Todd. Between July 2009 and June 2010 Cima handled only 11 formal complaints and not all of these dealt with registered hedge funds.

The problems arising from the financial crisis has made Cima aware of the lack of power it sometimes has. The identification of these shortcomings has helped “push the frontier to get approval and support from the government,” says Scott. “There are a number of things under consideration within our framework review. This is ongoing. Also in the aftermath of the AIFM directive we will look at possible changes that are necessary but we are in the early stages and are not ready to recommend anything yet,” he says, adding that Cima will also need formal consultation on some of the measures.

One area where Cima is reacting to demand is in fund administration. The regulator has two types of licences at present: full, under which an administrator does work for an unlimited number of funds; and a restricted license for no more than 10 funds. The idea is to introduce a new category of licence that reflects more niche services. Service providers have been asking for a licence that does not require such a high capital requirement (CI$400,0000) but allows a company to provide services to more than 10 funds.

“Based on representatives and review of the mutual fund administration sector, we are introducing a new category of licence,” confirms Smith. Cima hopes this flexibility will help grow the industry. The measure has to go through the full approval process but is expected to be introduced this year. The third category will apply to new companies coming to Cayman and could help accommodate companies working closely with fund investment managers but not offering full-scale fund administration.

Cima is also looking at introducing a new type of service licence aimed at broker dealers and investment managers. There has been an influx of both into the jurisdiction. Some are offshoots of North American managers who want someone based in Cayman in order to have a more direct link with the jurisdiction and to provide certain services.

The ongoing review of Cayman’s framework regulation will continue and Cima confirms it intends to “enhance” the rules but does not yet have details.

One change that has already been made allows Cima to issue rules and guidance for all regulated and licensed funds, says Scott. This means Cima can require funds to disclose information the regulator believes it needs in order to make a proper decision on the registration.

One area where the authority is being urged to look concerns the oversight of directors of hedge funds. Smith admits this is a tricky issue. “Numbers are not the only factors. One fund can be overwhelming while 100 have fairly low activity, running plain vanilla strategies. So the number is always in the discussion but there are other factors. Whether or not we as a regulator end up setting a number is not the main concern. We look at other factors.”

She points out that the funds are aimed at sophisticated investors who do their own due diligence and expect full disclosure in ­official documents.

Overall, Cima is in optimistic mood, reflecting the islands’ funds industry perceptions. Registration numbers are continuing to rise and Cima confirms there has not been any noticeable shift away from Cayman. Redomiciliations counted by Cima amount to four or six and not all of those were hedge funds.

While there are clearly some challenges ahead, Cima and Cayman’s hedge fund community believe 2011 could be a turning point for the industry. Most expect continued fund registrations and many hope that more substantial operations supporting investment managers will migrate to the islands. Together with the government’s plans for developing infrastructure and diversifying the economy, the scene could be set for a sustained growth period for the Cayman funds industry.

IFC Forum pushes for support of offshore financial centres

One Cayman lawyer decided international financial centres (IFCs) needed to defend themselves against unjust attacks and comments from politicians. The result was the founding of the IFC Forum, a non-profit organisation committed to informing the public debate on the role of IFCs.

The initiative came from Grant Stein, global managing partner at Walkers in Cayman and now director of the forum. The idea, he says, was formed after it was clear the IFC governments and other representative organisations in various offshore centres could not find a way to talk (or work) with each other to combat criticism and negative press.

“If not from government, so from the private sector. I emailed the magic circle of six individual law firms and asked them to share information at a high level and co-operate to promote the interests of all offshore jurisdictions,” says Stein. “They were very responsive.”

The first meeting was held in April 2009 by email and in London in June of that year the group agreed to fund the initiative.

“We wanted to give balance to the discussion and show the contribution of offshore centres to the global economy. We have been reasonably successful,” says Stein.

Since its inception Stein says the forum has met with modest success. The group has had meetings with representatives of G20 governments as well as with ambassadors and economic and finance counsellors from several of the G20 states.

The stated aims of the multi-jurisdictional forum is to promote better understanding of IFCs in four areas: the role of small IFCs in improving capital market efficiency, liquidity, investment and job creation in the centre with which they maintain trading relationships; the role of tax competition; the development of greater transparency and information exchange; and the link between small IFCs and developing economies.

The meetings have given the forum an understating of the key concerns of the G20 and also given IFC Forum the chance to explain how the offshore world fits into the global economy and the role played by IFCs in relationship to international regulatory reform.

“We have had some achievements in a short space of time with meetings of representatives of the G20, mostly with ambassadors and at trade commission level. We’ve had conference calls with some of the negotiators and people responsible for policy. It is difficult to know how much success we are having. The main thrust of all these initiatives is education, trying bring balance to the discussion of control of offshore and domestic economies of the G20,” explains Stein.

In addition to the G20, the forum focuses on a number of decision makers in OECD and the European Union parliament. Stein says the forum has also met with people from the Alternative Investment Management Association (Aima) as well as the US-based Managed Funds Association (MFA). “We have tried to reach out to organisations we think will have some alignment to us, offering to help share research,” adds Stein.

The forum also runs a research programme aimed at bringing together some of the world’s leading experts on international financial services. In July 2010 the forum released its first paper, produced by Prof Jason Sharman, in conjunction with the Commonwealth Secretariat. This considered how much IFCs provide support for economic growth and poverty alleviation among development countries using China as a specific example. Other research papers will look at the impact of IFCs on investment flows, economic growth and job creation. The group also organises events including roundtable discussions and parliamentary breakfasts.

The founding members of the forum, Appleby, Conyers Dill and Pearman, Mourant Ozannes, Ogier and Walkers, have been joined by Maples and Calder, Old Mutual and Rawlinson & Hunter. Stein expects more members to join.

Headquartered in Bermuda, Cayman, Guernsey and Jersey, these firms provide legal advice on financial transactions from those locations as well as from Anguilla, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Isle of Man, London, Jersey, Mauritius, Moscow, São Paulo, Seychelles, Singapore, Tokyo and Zurich.