CIMA’s role in Cayman’s Financial Services Industry

Sidebar:Agencies & Associations

Sidebar:Explanations of licensing

Here in the Cayman Islands, it is the Cayman Islands Monetary Authority that has been charged with establishing and overseeing the regulatory foundation and framework on which the country’s financial services industry has been constructed. The industry’s impressive growth since CIMA’s inception in 1997 – and even prior to that under CIMA’s predecessor organisation – is indicative of how the regulatory framework has helped the industry to flourish; yet developing and maintaining international best practices at all times.

What CIMA strives for and the benefits it aims to achieve for both industry and the country as a whole are summed up in its mission statement:

“As the primary financial services regulator, the mission of the Cayman Islands Monetary Authority is to enhance the economic wealth and reputation of the Cayman Islands by fostering a thriving and growing, competitive, and internationally recognised financial services industry, through appropriate, responsive, cost-effective and efficient supervision and a stable currency.”

CIMA has four core functions around which it operates. These are as follows:

Monetary – The issue and redemption of Cayman Islands currency and the management of currency reserves.

Regulatory – The regulation and supervision of financial services, the monitoring of compliance with the money laundering regulations, the issuance of a regulatory handbook on policies and procedures and the issuance of rules and statements of principle and guidance.

Cooperative – The provision of assistance to overseas regulatory authorities, including the execution of memoranda of understanding to assist with consolidated supervision.

Advisory – The provision of advice to the Government on monetary, regulatory and cooperative matters.

Not surprisingly, the regulatory aspect of CIMA’s mandate garners the most attention. This function is carried out by the Authority’s four supervisory divisions: Banking, Fiduciary, Insurance and Investments and Securities. Additionally, there are seven non-supervisory divisions (Compliance, Currency, Finance, Human Resources, Information Systems, Legal and Policy and Development) which perform important support roles.

The parameters within which CIMA regulates, the types of activities, businesses and persons that must be regulated by CIMA and the type of approval to be given (whether licensing or registration) are set out in the Monetary Authority Law and the regulatory laws governing each sector.

Under these laws, CIMA regulates the following businesses and persons: banks, credit unions, building societies, development banks and money services businesses (this includes money transmission services, cheque cashing services, currency exchange, and the issuance, sale or redemption of money orders or traveller’s cheques); insurance companies, insurance managers, agents, sub-agents, brokers and principal representatives; company managers; trust companies, trust services providers; investment funds (this includes mutual funds, hedge funds, etc.), fund administrators, and securities investment businesses (this includes broker-dealers, market-makers, securities arrangers, securities advisors and securities managers).

There are some financial services and persons that CIMA does not regulate.

For example, it does not regulate entities that provide loans to the public unless they are deposits-taking institutions. Neither does it regulate mutual funds that have 15 or fewer investors, the majority of whom can appoint or remove the fund operator.

There are three primary ways in which CIMA carries out its regulatory functions. The first is by determining who becomes licensed or registered to operate in or from the Cayman Islands. The second is by monitoring them after they are authorised, to ensure that they operate according to the terms of their licence/registration and in line with the relevant regulatory laws, the anti-money laundering and anti-terrorism laws and the rules and guidelines issued by CIMA. The third is by taking certain compliance and enforcement actions if licensees or registrants fail to operate as required.

CIMA combines risk-based and rules-based approaches to supervision; a method that is used by a number of other leading jurisdictions and has gained acceptance by the Financial Action Task Force. This enables CIMA to maximise its human and other resources.

In the wake of the global financial crisis, world leaders have identified the need for enhanced regulation and international cooperation as crucial parts of a permanent solution. Even without the meltdown, CIMA’s mission has always been to ensure that Cayman is regulated in accordance with international best practices while having consideration for the competitiveness and innovation that are required for the country to remain among the leading jurisdictions.

CIMA combines risk-based and rules-based approaches to supervision; a method that is used by a number of other leading jurisdictions and has gained acceptance by the Financial Action Task Force. This enables CIM A to maximise its human and other resources.

 

Cayman’s high level of compliance and cooperation has been acknowledged by the International Monetary Fund, the Caribbean Financial Action Task Force and, most recently, the US Government Accountability Office following their respective reviews. The country’s reputation was underlined by the favourable findings of the GAO Report on Cayman, released in July 2008. That document – titled Cayman Islands: Business and Tax Advantages Attract US Persons and Enforcement Challenges Exist – highlighted the jurisdiction as one known for its “stability and compliance with international standards” and affirmed that “multiple (US) agencies said that the Cayman Government had been cooperative in responding to requests and shared useful information.”

In December 2007, the CFATF carried out its third-round assessment of Cayman’s compliance with the Financial Action Task Force’s 40 Anti-Money Laundering Recommendations and nine Special Recommendations to Counter the Financing of Terrorism. Cayman was rated as ‘compliant’ in 14 areas, ‘largely compliant’ in 24 and ‘partially complaint’ in 10 areas. The only non-compliant rating related to correspondent banking and this has since been addressed through revisions to Cayman’s Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing. This CFATF rating was better than those that other CFATF members received in the third round of Mutual Evaluation reviews and compares favourably with most FATF member jurisdictions reviewed recently by the FATF and/or the IMF in relation to AML/CFT matters.

In its 2005 assessment of regulation within Cayman’s banking, insurance and securities industries and Cayman’s anti-money laundering regime, the IMF noted: “An extensive programme of legislative, rule and guideline development has introduced an increasingly effective system of regulation, both formalising earlier practices and introducing enhanced procedures.”

Its report further stated that “the supervisory system benefits from a well-developed banking infrastructure with an internationally experienced and qualified workforce as well as experienced lawyers, accountants and auditors,” and added that “the overall compliance culture within Cayman is very strong, including the compliance culture related to AML (anti money-laundering) obligations…”

CIMA is preparing for the IMF’s follow-up assessment of the regulation and supervision of Cayman’s financial sector from 2-13 March, 2009. We are now liaising with the IMF to finalise the scope of the assessment. The Cayman Islands Government accepted most of the recommendations contained in the IMF’s 2005 Cayman Islands assessment report – to the extent that they were considered appropriate for the Cayman Islands. There are a few outstanding recommendations that need to be addressed, for example issues relating to the independence of CIMA as regards the approval of MOUs with overseas regulatory authorities and issuing Rules, Statements of Guidance and Statements of Principle to regulated persons. CIMA is working with the Government to find appropriate solutions to these matters in a manner consistent with the IMF recommendations.

As CIMA carries out its regulatory and governmental-advisory roles there is continued monitoring and, where necessary, enhancement of the laws, regulations, rules and guidance under which the industry operates to ensure Cayman remains apace with evolving standards. The ongoing crisis makes such monitoring and enhancement even more imperative. Measures recently introduced by CIMA, and those in the pipeline, have been aimed not only at bringing Cayman further in line with new standards but also at strengthening the resilience of entities that operate in or from this jurisdiction. Such measures include: amendments to the AML/CFT Guidance Notes; the codifying of regulatory policies outlining criteria and procedures for approval of exemptions of audit for regulated funds; the licensing of banks, and major acquisitions or investments by banks; a rule on risk management for insurers; and a rule and statement of guidance on market conduct for insurers, agents and brokers.

In the area of international cooperation, CIMA has had the legal authority to assist overseas regulators since 2000 when the Monetary Authority Law was amended. Several other revisions since that time have expanded CIMA’s powers in this regard. The most recent changes were in January 2008 and gave CIMA the ability to consent to the use of information provided to overseas regulatory authorities in relevant criminal investigations. Between 2000 and 2008, CIMA processed over 950 requests for assistance from overseas regulatory authorities. CIMA also has in place several memoranda of understanding and information-exchange agreements with other jurisdictions.

CIMA continues to solidify ties with other regulators to increase coordination and information exchange for the supervision of regulated entities, particularly during financial crises. For example, the Authority is reviewing its home-host relationship with overseas regulators of parent institutions, which have significant financial business in the Cayman Islands. Multi-laterally, it is seeking to further increase our presence and involvement with regulatory organisations such as the International Association of Insurance Supervisors and the International Organisation of Securities Commissions. The aim is to keep abreast of and, as far as possible, contribute to discussions and decisions and to reinforce Cayman’s position as a well regulated and cooperative jurisdiction within the international financial community.

The Authority has submitted its formal application for accession to the IAIS Multilateral Memorandum of Understanding, which establishes a formal basis for cooperation and information exchange between signatory authorities regarding the supervision of insurance companies where cross-border issues arise. CIMA representatives have recently participated in the same IAIS validation process for other jurisdictions. CIMA is also a member of the IAIS Task Force which is reviewing the Insurance Core Principles with the aim of ensuring they remain appropriate, comprehensive and current.

Finally, as CIMA continually adapts to the circumstances in the international marketplace, our efforts to keep abreast of developments regarding the ongoing crisis have necessitated an even more proactive response. As such, the Authority has increased its interaction with licensees and other stakeholders in the financial industry to share and discuss information. In addition, retail banks have been mandated to submit reports to CIMA on a more frequent basis.

CIMA will monitor developments locally, regionally and globally and take necessary action to ensure that Cayman remains a well-regulated domicile, adhering to the highest international standards.

Explanations of licensing; supervision; and compliance/enforcement

Licensing

Factors that CIMA considers when deciding whether to approve an application for a licence include whether the directors and management are fit and proper to carry out the responsibilities entrusted to them, who will have ownership and control, financial resources, internal systems and controls, the entity’s record keeping and know-your-customer policy (KYC is an important part of the fight against financial crime), compliance with industry standards, track record and viability. In the case of entities that are part of larger, international entities, another factor it takes into account when deciding on a licence application is whether the applicant is in good standing with the home country supervisor and whether the entity will be included in the consolidated supervision of the home country supervisor.

Supervision

Once entities are licensed, CIMA’s role becomes one of supervision.

On-site monitoring involves carrying out inspections at a licensee’s offices. CIMA teams go in and examine the licensee’s documentation, reviews procedures, etc. and provides a report to the licensee regarding any issues, with recommendations for any corrective action. It then monitors the institution to ensure the recommendations are implemented.

Off-site monitoring involves analysing documents that licensees/registrants must submit (e.g. audited financial statements and statutory filings), as well as holding meetings with licensees/registrants to discuss developments and plans (which it refers to as prudential meetings).

CIMA will do a risk-assessment of the entity and will attach a risk rating to the entity. This is a classification that CIMA uses to decide how much monitoring the entity needs. The risk rating will determine how often CIMA carries out inspections and meetings for each licensee/registrant. This system is known as the risk-based approach to supervision and is used by many regulators around the world.

CIMA provides further ongoing supervision by requiring licensees and registrants to notify CIMA of any significant changes to the business. The regulatory laws specify that licensees must get CIMA’s approval before making changes, for example, to business plans, shareholdings or directors. They also are required to notify CIMA about certain other changes. In the case of funds, the fund operators are to notify CIMA of any material changes to the fund offering documents/private placement memorandums within 21 days of those changes.

Compliance and enforcement

The general issues that may result in CIMA taking action include: if a licensee is, or appears to be, unable to meet its obligations as they fall due; if it is carrying on business that is, or is likely be detrimental to the interests of the public, stakeholders or any other third party; if it contravenes regulatory laws, regulations, a condition of its licence or CIMA rules, if the direction and management of the company is not being carried out in a fit and proper manner or a person holding a position as a director, manager or officer of a regulated entity’s business is not a fit and proper person to hold the respective position.

Where appropriate, CIMA will work with the entity in an attempt to resolve the issue before taking formal enforcement action. The range of enforcement actions include: the revocation of an entity’s licence or registration; requiring the entity to substitute a director, manager, or officer; imposing or adding conditions on a license; appointing a person to advise the entity on the conduct of its affairs; appointing a person to assume control of the affairs of the entity; or applying to the Grand Court of the C ayman Islands for the entity to be wound-up.

 

CIMA January 5 Photo

Cayman Islands Monetary Authority