As chairman of Cayman Finance, Anthony Travers speaks for the financial services industry in one of the largest financial centres in the world. Like other financial centres, offshore or onshore, Cayman has experienced its share of depression after the financial crisis.
The former senior partner of Cayman’s largest law firm says that there is no doubt that the financial services industry is undergoing a period of challenge, both as the result of internal and external issues.
Internally, there has been the issue of fund administration migrating out of Cayman, “as a result of immigration difficulties and very aggressive marketing by other jurisdictions”, says Travers, citing Canada, Ireland and Switzerland as examples of jurisdictions that are actively seeking to undertake a range of administrative activities for Cayman vehicles.
Externally, the general deleveraging of the debt market, with less available credit and less borrowing, has affected fund structures in terms of assets under management.
“And we certainly see a decline in fund numbers and a decline of some 38 per cent in the company incorporation numbers,” he adds.
Other parts of the financial services business, such as collateralised debt obligations for which Cayman was a world leader, have also declined. Travers believes it is unrealistic to contemplate that the volume of transactions in asset securitisation and securitised debt generally would in the foreseeable future return to the levels seen between 2000 and 2007.
As fewer transactions are occurring the solution for both the Cayman Islands Government and the private sector has to be to increase the revenue that is obtained out of each transaction. This would require, says Travers, an increased range and quality of financial services provided in Cayman.
“Those aspects of the financial engineering have to be undertaken in the Cayman Islands to a greater extent than is currently the case, where we find that 70, 80 or 90 per cent of the transaction is undertaken in New York, Chicago or London and documented there.”
The future of the financial services industry will therefore have to rely on the ability to derive revenues from new and different functions. Travers thinks specifically about attracting market-makers, broker-dealers, investment bankers or reinsurance experts as well as fund managers to the Islands.
“That range of activity has to be brought here.”
Cayman’s internal and external issues can be tackled in one specific area, he argues.
“The answer to fund administrators leaving Cayman and the issue of fewer transactions and how to derive greater revenue converges on the point of immigration,” says Travers. “We must have more and better financial professionals here in the long term.”
One aspect of Cayman’s immigration policy that is particular contentious and an emotionally charged issue is the policy of limiting the potential stay of foreign workers to seven consecutive years or nine years, if they are deemed to be key employees.
Some would argue it is a system to promote Caymanian integration into the workplace, but Travers disagrees. “If you look at the top four accounting firms, you will find that the senior partners at all of those firms are Caymanians, so that one has to say that Caymanian integration had been very successful.”
However, it is debatable whether this integration has been successful across the board, he states. “Clearly there were transgressions with respect to Caymanian integration in certain industries. Clearly there were abuses. But our view at Cayman Finance is that it was never a response to difficulties with Caymanian integration to introduce a roll-over policy, because the results of that policy had been that there are now 7,000 fewer work permits.”
These 7,000 fewer permits may translate into 12,000 to 15,000 fewer people living in Cayman with all the negative implications that this entails for the local economy.
While the financial services industry has to adapt, “it can only adapt if it receives suitable, sympathetic support with regard to matters of immigration,” says Travers.
He asserts that there is not so much an issue with the costs of work permits for the financial services industry, but rather with the certainty of obtaining them for as long as they are required.
“I personally don’t think that there is any difficulty with the cost of a work permit, providing employers in the Cayman Islands can obtain as many of them as they want and for as long as they want.”
However, for the types of financial professionals that Travers has in mind to diversify and advance Cayman’s financial services the current rollover regulations are a “non-starter”, he says.
“You cannot actually expect those people to take a seven year view. They are not going to be subject to that kind of restriction. So you have a dysfunctional system.”
The problem continues to be that the issue of work permits and long-term security of tenure has not been separated from the issue of voting. “That needs to be separated out and I don’t think the current proposals go far enough to do that.”
Simply granting expatriates the right to vote after a certain number of years is not regarded as a solution that is politically acceptable and Travers understands the concerns.
“One has got to be realistic and understand that is not a viable way forward in the context of the current views of the voting population of the Cayman Islands. And I don’t think it is a necessary solution. I think there ought to be a way that takes into account the concerns of the Caymanian people and enables the financial services industry to operate in a way that provides historic benefits, that provides the employment opportunities for Caymanian professionals and [so] that its participants are not regarded as a threat by the Caymanian population.”
As a result Travers is adamant that immigration is more than just one of many important things to address: “Immigration is the first thing, it is the second thing and it’s the third thing. That’s three important things.”
“But if it were the case that every employer could obtain as many work permits as they wanted for as long as they wanted,” he says, ”the golden age for the financial services industry in the Cayman Islands will most certainly not be over. And $20,000 for a work permit would not be considered problematic.”
With $275 million a year or 55 per cent of government revenue being produced directly by the financial services industry, growth of the industry, economic growth and government growth have been inextricably linked.
Against the backdrop of falling revenues in the financial sector the civil service and the public continued to expand in recent years causing a government budget deficit that has resulted in the necessity to increase fees and to borrow.
While the relationship between the Cayman Islands Government and the newly-formed UK Government, which has to approve additional borrowing when certain economic targets such as a budget surplus have not been met, has apparently improved, the question remains, says Travers, as to what is the extent of these borrowings and how are they paid back?
“The total amount of borrowing together with contingent government liability in respect of unfunded civil service pension and medical benefits is well over a billion dollars. Now that is a worrying statistic.”
If declining revenues from the financial services industry cannot be reversed, this is therefore something that will have to be very carefully managed. Cayman Finance anticipates that while the current borrowing has brought a respite from the short-term funding pressures, it does not avoid the necessity to consider cutting government expenditure.
Asked how realistic these cuts are, given the massive decline in revenues, he states: “There are things that you can do and things that you can’t do, but you can certainly start to bring the line of government expenditure pointing downwards rather than pointing upwards.”
“It may take five or 10 or 15 years, but if you know that at some point the assessment of your revenue transpires to have been accurate, and you can say that in 15 years we have the problem solved, that is a sound fiscal basis for proceeding.”
The Cayman Finance chairman does not believe the pressure from the G20 and the OECD on offshore financial centres under the guise of a battle against tax evasion is eroding Cayman’s economic model as such.
“The Cayman financial model is very distinct from the Swiss banking model or the Liechtenstein banking model and has been based in recent years effectively on the policy of complete transparency.”
Pointing out that Cayman has effected anti-money laundering measures 20 years ago and tax transparency treaties for the past for the past five or six years, he does not see the increased demand for transparency as being problematic in the Cayman context.
“In the market place the understanding amongst users is that the Cayman Islands is a transparent jurisdiction, so that to the extent that private banking is a euphemism for tax evasion, that has not been part of the Cayman model for a great many years. In fact if you look at the requests of the IRS, they have made 45,000 requests of UBS and the Swiss banks and the most they have made under US-Cayman tax treaty since it was executed in 2001 is 20 requests.”
Tax avoidance, on the other hand, is by definition a function of domestic, that is to say onshore, law, not Cayman law, he says and argues that it has always been perfectly acceptable for domestic countries, as a matter of their own domestic law, to change the availability of tax deferral or tax avoidance strategies, which are a function of their own domestic legislation.
“So whilst that may be occurring it is not something that involves action and certainly not wrongdoing on the part of the Cayman Islands, however, it may be mischaracterised in the onshore press. But the fact of the matter is that is we are perfectly entitled in Cayman to provide structures that legitimately provide tax deferral or other avoidance benefits that comply fully with domestic, onshore legislation.”
Still, the negative publicity is something that affects Cayman and Travers has broken down the areas from which Cayman receives negative publicity in a recent speech at the Cayman Finance Summit.
He argues that the negativity has nothing to do with the issue of tax evasion or tax avoidance, but that it is driven by the OECD agenda to attack tax competition.
“Now tax competition is a perfectly legitimate expedient. Every jurisdiction has the right to fix its own rate of taxation. The OECD regards it as illegitimate and it regards every jurisdiction that is competitive as a threat.” At the same time the terminology the OECD uses to attack jurisdictions is that of “tax evasion” and “tax haven”, he says.
“The truth of the matter is that there is not any wrongdoing if you have a jurisdiction where tax evasion has been off the table for well over a decade.”
Travers believes the OECD is heading for a cul-de-sac with this approach, as independent reviews and reviews of the implementation of tax information exchange agreements will reveal that Cayman is a highly effective jurisdiction, where there is no issue with tax evasion.
“The OECD very soon will have to come out and tell the truth and the truth is that what they are really worried about is not tax evasion but tax competition.”
The EU AIFM Directive threat
Travers does not see the EU Alternative Investment Managers Directive’s treatment of non-EU based funds as a threat to Cayman, for on an objective analysis Cayman complies with both the EU Council version and the EU Parliament version of the directive.
“I agree, if the approach is political, not technical, then there will be issues, but on an objective analysis we have tax information exchange agreements, we have fully regulated disclosure under IOSCO, we have a first class anti-money laundering legislation, we do not discriminate against EU funds being established here and we are a party to the 1958 New York Convention on (the recognition and enforcement of foreign) arbitral awards,” he says, referring to the list of judiciary compliance in the EU Parliament version of the directive.
Even if the intention of the directive is to block the access of Cayman funds to European investors, Travers says, the impact on Cayman may well not be significant in that only 25 per cent of Cayman funds assets are invested with fund managers that are located in London or Europe, with the result that 75 per cent of Cayman’s hedge fund industry would be unaffected by the directive.
Moreover, Travers argues that fund managers operating under the directive are going to be significantly less competitive, illustrated by the fact that a number of fund managers have already moved from London to Switzerland to operate outside of the directive whatever it may say. These fund managers will maintain their relationship with Cayman funds.
“So it is a great mistake to say that the EU directive is a necessary negative for Cayman. I think in the short term if it were introduced and Cayman did not comply, there would be short-term losses. But I think in the long term there would be long-term gains as fund managers who are subject to the directive find they cannot compete in terms of investment return with fund managers who are not subject to the directive.”
Correcting Cayman’s image
Cayman Finance constantly rebuts any statements about the Cayman Islands that, if ever, may have been accurate 20 or 30 years ago, but have very little to do with Cayman’s financial sector today.
Whether it is writing a letter to the editor of major newspaper, to a US Senator or to an EU parliamentarian, Cayman Finance is very busy correcting inaccurate statements and false perceptions regarding the Cayman Islands in the press.
Travers concedes that it is impossible to reverse mischaracterisations or negative perceptions overnight.
“I think for 10, 20 or 30 years business here was so positive that no one thought public relations was important. That was a mistake.”
By not sufficiently investing in getting the story out and better identifying and characterising the function of the Cayman Islands financial sector in the past, Travers says, the financial services industry has left a vacuum, which has since been filled with negative characterisations.
Cayman Finance has therefore taken an active role in dealing head on with these mischaracterisations in a way that has never been done before, including open letters in the press telling US Senators when they are irrefutably wrong, he says.
Despite all these efforts, Cayman cannot control external exogenous factors, says Travers. “We have got to be realistic about that.”
Cayman can however control its internal environment, he argues.
“And clearly if you are in a beauty parade, and you cannot get on the podium as Miss one, two or three, you have got to win Miss Congeniality.”
This would require the recreation of a very sympathetic environment for people to come to Cayman or invest.
“I think the premier [McKeeva Bush] is on the right track, and I want to fully endorse his initiatives here, but I don’t think the implementation of the premier’s vision has yet been achieved in a way that would give us the Miss Congeniality crown.”
However, that is going to be crucial to creating an environment in which the financial services industry can flourish, he concludes.
“And that is crucial because that is where the job opportunities for young Caymanian professionals are.”