Part 1: The Early Years – 1960’s
Part 2: The freewheeling 1970’s
Part 3: The Transitionary 1980’s: The Cayman Islands: From obscurity to offshore giant
Part 5 The Cayman Islands: From obscurity to offshore giant
Part 6 The Cayman Islands: A decade of challenges
Major improvements in the quality of life had occurred from the mid-80s. The opening of the Hyatt Regency Hotel in 1986 raised the bar on accommodations and service, setting the trend others would follow.
Luxury condominium and housing developments also sprung up.
Grocery stores were transformed from basic shops to modern supermarkets that catered to the demands of customers of many nationalities.
New and better restaurants opened and a multi-cultural arts initiative took hold. Grand Cayman not only had everything in place for its financial services sector to explode with growth, it had become a much more attractive place for investors to visit and for industry professionals to live and work. All it needed was a spark.
The fund industry: A rising star
From the late 80s, the fund industry started to pick up steam in the Cayman Islands. Sean Flynn, a banker with Swiss Bank Corporation – which later became UBS – said a fundamental change in the type of investments began occurring in the early 90’s.
“Up until that time, we mostly saw the traditional offshore private banking and trust business,” he said. “In the beginning of the 90s, we started seeing more institutional business.”
The funds business, including hedge funds, started gaining popularity in the late 80s and early 90s, Flynn said.
The problem was there were no laws regulating the funds business in Cayman.
Recognising a growing trend, Cayman’s financial secretary at the time, George McCarthy, polled the private sector about whether the government should put in place a regulatory regime for the funds business.
The private sector was generally against any regulatory system for funds. McCarthy said there was one key exception, Ernst and Young’s Dan Scott.
“He took the view that [regulating funds] was something we really needed to be doing,” McCarthy said. “Daniel Scott thought it would be very good for the Cayman Islands and he had strong beliefs on the subject.”
Swayed by Scott’s arguments, McCarthy went back to the private sector and told them government wanted to pursue regulating the funds industry.
At that point, attorney Anthony Travers of the law firm Maples and Calder came on board.
“Tony was not a supporter of the idea initially, but he said ‘before you go and get it wrong, let me jump in and draft something,” McCarthy recalls. “Tony was one of those proactive individuals that helped shape what has happened in the Cayman Islands financial services industry.”
Travers drafted the law along with Clive Borrowman, whom he called one of Cayman’s unsung heroes. In doing so, Travers said he recognised that providing a client-friendly legislative regime for mutual funds could be used as a highly effective marketing tool in attracting new business.
“The key to the success of the legislation was my belief that the only effective regulatory mechanism with respect to the sophisticated institutional business that Cayman attracted… was a caveat emptor system, where full information would be filed with the Monetary Authority, but – provided investors were sophisticated – without the Monetary Authority needing to review the investors’ determination.”
Safeguards were included in the law that provided for full investigative powers by CIMA in the event of a problem with any particular fund.
“So to the responsibility of the Cayman government was managed by avoiding the concept of prudential regulation,” Travers said.
The formula worked.
McCarthy said the 1993 Mutual Funds Law caused the funds business in Cayman to mushroom immediately.
“The international community liked it very much,” he said. “They liked a jurisdiction that was innovative enough to come up with something that appealed.”
Flynn agreed the Mutual Funds Law helped Cayman become dominant in the hedge fund industry.
“We were at the cutting edge of introducing legislation to regulate the fund industry,” he said. “It gave a lot of comfort to people who were referring work to the Cayman Islands”
But Flynn believes the Mutual Funds Law was only one reason Cayman became the domicile of choice for hedge funds. He said people should not underestimate the value of the financial services foundation already in place in the jurisdiction.
“Cayman was already a major financial centre with over 500 banks,” he said. “We already had many major banking entities here that were able to use their operations for administrating hedge funds.”
In addition, Flynn noted that Cayman also had a very good infrastructure of law firms and accounting firms that not only supported the various legal and auditing needs of the fund industry, but also helped get fund business referrals from their international offices.
“The private sector went out and sold the jurisdiction,” he said. “They were very, very proactive in the 90s.”
The success of the fund industry caused several of Cayman’s financial institutions to shift their focus, his own bank included, Flynn pointed out. With his urging, Swiss Bank opened a fund administration division in Cayman and saw its staff numbers rise from about 40 people to as many as 190.
“Because of the growth in the hedge fund industry, many companies converted from the old private banking business and adapted themselves to the new institutional business,” he said.
The shift to institutional business also brought to the forefront some of the innovate products that started popping up in the 80s, like securitisation, debt and bond issues, and private equity funds.
The rapid growth of the fund industry led to an equally rapid population growth in the Cayman Islands in the 1990s.
A census conducted in 1989 showed a population of 25,355 in the Cayman Islands. Ten years later, the census showed a population of 39,410, an increase of 55 per cent in only a decade.
During the same time period, the number of work permits rose from 5,982 to 14,004, a 134 per cent increase.
Many of the new arrivals came to support the financial industry, Flynn said.
“In addition to fund administrators, more lawyers were needed to structure the funds and more auditors were needed to satisfy the regulators,” he said.
McCarthy agreed that the Mutual Funds Law itself, while very important, was only part of the reason Cayman flourished in the 90s and beyond.
“It’s not the buildings and the laws, it’s the expertise,” he said. “If you took the same expertise we have and put it in the Sahara Desert, we can replicate the success.”
Cayman’s expertise needed the support of the government as well, and during the 90s, it got just that, McCarthy says.
“Through the 90s, there was excellent co-operation between the government and the private sector,” he said. “The government acted as facilitators for the expertise out there.”
Travers called the partnership between the government and the private sector “possibly the most significant cornerstone of the development of the Cayman Islands”. He credited McCarthy’s efforts in establishing the Private Sector Consultative Committee, which actively sought input from the private sector on matters of legislative and regulatory development.
Mike Austin, an accountant by profession who played an important role in Cayman’s development as an offshore financial centre, said the co-operation between the government and the private sector was felt in tangible real ways.
“My personal view is that part of the reason for Cayman’s great success was the friendliness of the Cayman Islands, the ease of doing business here and the enthusiasm of the private sector,” he said.
McCarthy noted that the partnership went beyond just advice, with people like Travers and his fellow Maples and Calder partner Tim Ridley using their own money to travel and promote the Cayman Islands overseas.
Ridley said he and Travers promoted the Cayman Islands as the “can do” jurisdiction in the offshore world.
“We had excellent connections in the major onshore centres, like New York, London, Hong Kong and Tokyo,” Ridley said. “The key was we could show we could do complex deals well, quickly and at the right price.”
In many other offshore jurisdictions, clients were tired with telephone calls not being answered on Friday afternoons, weekends or public holidays, and huge bills for little value-added work, Ridley said.
“We targeted key business producers in the important onshore centres who had often been frustrated by a mañana, expensive and unthinking attitude in traditional established offshore centres.
“So they flocked to a place where the professionals understood the transactions and were willing and able to work the hours to get the deals done,” Ridley said.
The company rush
An example of the public-private partnership that existed in the 90s was Austin’s report that reviewed the Cayman Islands’ company fee structure. The 1994 report, which was prepared free of charge, suggested the Cayman Islands could attract more business and ultimately more revenue by lowering the government fee levels for company registration and maintenance.
“We wanted to do everything we could to attract business,” said Austin. “There was a general feeling that Cayman’s company fees were far too expensive.”
Offshore centres like the British Virgin Islands were incorporating companies for less than half the cost in the Cayman Islands at the time.
“There was a lot of competition out there and we were concerned that we were losing out because we were considered the expensive jurisdiction.” Austin proposed significantly reducing the registration and annual fees for most companies, especially exempted companies, the darling of overseas investors.
When bringing the bill to the Legislative Assembly, McCarthy noted that the proposal could lose some revenue initially, but in the long run it would pay dividends.
“The government decided to take the risk,” said McCarthy, “and it became the foundation of the taking off of company registration.”
Exempted company registration jumped 44 per cent in 1994, and rose continually through the end of the decade. There had been 2,697 new exempted companies registered in 1993; in 1999 that number had risen to 7,345. Just as importantly, the number of active exempt companies on register rose from 16,465 in 1993 to 35,188 at the end of 1999.
The birth of CIMA
As the 1990s began, regulation of Cayman’s financial services was conducted through two entities.
Shortly after McCarthy took over as financial secretary in 1992, he was sent to the UK for an orientation on his new position. He learned there that the UK had some concerns about Cayman’s disjointed regulatory regime.
“There were questions about the overall regulatory oversight of the financial sector,” he said. “At the time we had an Inspector of Banks and Trust Companies and a Superintendent of Insurance. We thought there would be great synergy if those two regulatory bodies were combined.”
The Financial Services Supervision Department was formed in 1993, with former Inspector of Banks and Trust Companies Jennifer Dilbert taking the helm as Inspector of Financial Services.
While the FSSD was considered an improvement, it had some limitations, McCarthy said.
“The view was by some that it could not be regarded as independent of government and something that could really develop the regulatory framework of the Cayman Islands,” he said.
Since the Cayman Islands Currency Board was still off on its own, the idea was proposed that the Financial Services Supervision Department be combined with the Currency Board to form the Cayman Islands Monetary Authority.
Ridley said international standard setters such as the International Monetary Fund required regulators to be separate and independent bodies to ensure they were free from political influence.
“The establishment of CIMA demonstrated Cayman’s effective commitment to meeting international standards and best practices in its regulatory and supervisory regimes,” he said. “This in turn enhanced Cayman’s credibility as a jurisdiction that was serious in encouraging legitimate business; in discouraging and deterring illicit business; and in enforcing its regulatory laws.”
With the UK Treasury Department and former Inspector of Banks and Trust Companies Richard Chalmers providing technical support, CIMA opened its doors on 1 January, 1997, with McCarthy serving as its first chairman of the board.
Austin also served on CIMA’s first board of directors, which included members from overseas, something that was unprecedented.
“There was the general feeling that it would be a brilliant idea,” Austin said. “We needed the expertise. It wasn’t controversial at all.”
McCarthy agreed that overseas directors were needed precisely for their expertise, especially since CIMA was to monitor some products with which its local directors had limited knowledge.
“We needed directors who could be responsible and responsive,” he said. “The banking side, for example, needed people with the required expertise, not just a group of people who were intelligent.” McCarthy said the establishment of CIMA has been a success for the Cayman Islands.
“It’s helped tremendously in attracting business here,” he said.
The UK’s Treasury Department was also supportive of the newly established Monetary Authority, helping ensure it was more than just an entity in name only and that it had the necessary resources and expertise to thrive, McCarthy said.
One reservation the UK did have was with McCarthy’s appointment as chairman of the board, since he was also a member of the government in his capacity as Financial Secretary.
“The UK wanted CIMA to become immediately autonomous of government, since it was going to be issuing licences and issuing fees and things like that,” McCarthy said. “That took time to achieve. But the process required we do what we did to get where we are now.”
Cayman gets a stock exchange
After the Mutual Funds Law passed, the number of funds in Cayman grew rapidly, almost doubling from 886 funds in 1994 to 1,685 in 1997. McCarthy said Cayman realised it was losing a potential avenue of revenue.
“About 90 per cent of the funds that were formed here, ended up being listed in Dublin,” he said. “We realised there was a need to put in place a stock exchange here.”
Travers, who had studied the Hong Kong Stock Exchange after Maples opened an office there in 1995, presented proposals to McCarthy for creating a stock exchange in Cayman.
There were some initial political concerns that a stock exchange would incur more costs than revenues, but in the end, both the government and the opposition supported the formation of a Cayman Islands Stock Exchange and voted the necessary funding for its establishment.
“We thought it could at least operate at a break-even position,” said McCarthy. “But I knew it would be very, very good for the country.”
Travers drafted the legislation after working along with then-Assistant Financial Secretary Deborah Drummond and various consultants to develop the rules and regulations for Cayman’s stock exchange. The legislation was finalised in 1996 and the Stock Exchange opened in 1997. By the end of the dec