Opportunity knocks

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In July 2010, legend has it, a dangerous man arrived at Owen Roberts International Airport. He was dressed smartly but modestly and his accent, though foreign, was far from out of place on Grand Cayman. For all the danger he posed to the country, he was perfectly relaxed as he strolled through immigration and customs, for he carried no weapons; in fact no contraband of any kind. He had not committed any crime and he did not intend to.

It would seem ironic in retrospect that the officers of Immigration and Customs smiled at the man and processed his arrival documents efficiently and politely, as they have been coached to do of late. If anyone was worthy of inordinate delay and rudeness it was he.

Though this may read like a scene from the latest Grisham thriller, it is unfortunately more grounded in fact than fiction.

You see, the mysterious visitor is from Nova Scotia Business Inc, the provincial agency that promotes Nova Scotia as a place to establish and conduct business. For all his qualifications and polish, the man is little more than a salesman. Truth be told, it is not the man himself that would do us harm, but rather what he is selling: economic freedom. If he is lucky enough to find a buyer, it could cost the Cayman Islands millions in government revenue, tens of millions in GDP and scores of jobs for Caymanians and expatriates alike.

It’s no great secret that the Cayman Islands has lost ground to competitors in fund administration. Anyone in the islands’ financial services industry will have followed the domino rally of big name financial services companies that have deserted the jurisdiction in recent years. Though the global recession has not helped, it belies both the extent and the cause of Cayman’s decline as a leading jurisdiction for fund admin.

For several years the politicians and the public of the Cayman Islands watched as the number of local fund registrations soared. This was all the evidence needed that things were going great. The future seemed bright.

In fact, things were so great, that few in the halls of power seemed to notice, or care about, the growing frustration among fund administrators that had begun scouting for office space in competing jurisdictions. And why should anyone have cared? At a time of virtually full employment, the mantra was “if it ain’t broke, don’t fix it”.

First to jump ship was UBS in March 2006, opening an office in Toronto. Butterfield Fund Services (as it was then known) opened in Halifax January 2007 with Citco following shortly after. Goldman Sachs set up in Toronto in early 2008. Many other new fund administrators didn’t even have the courtesy to set up in Cayman before heading to the greener pastures of our friends to the north.

It was no coincidence when, in May 2008, Goldman Sachs announced the downsizing of its Cayman Islands office, publicly citing concerns over “business continuity”. Although many would have interpreted this as a reference to hurricanes, few in the industry were in any doubt that the real threat to their business was entirely man made.

There was no mincing of words when in 2009 CitiGroup left hook, line and sinker, citing a need to “cut costs and improve operating efficiency”.

While scores of jobs at Goldman and Citi walked right out the front door of Cayman Inc., others had been slipping out the back for years. Cayman operations had plateaued. Most new fund business was being directed to Canada where operating costs were significantly lower.

By 2009, the third party fund administration sector in Toronto alone employed an estimated 5,000 people, nearly three times the level in Cayman. Consider local fund administrator Citco which opened their Cayman and Toronto offices the same year. Citco Toronto now employs more than 500 staff; Cayman, less than 100.

Flash forward to July 2010 and our mysterious Canadian friend, who by now is climbing the steps at the grand entryway to one of the few remaining fund administrators with an office in Cayman and none in Canada. This is not their first meeting, far from it. In fact, they greet each other as old acquaintances. Like any good salesman, he knows that persistence usually pays off… eventually.

He also knows the best time to strike out at the customer of a competitor is when the competitor is weak. If fund administrators were so visibly unhappy in 2007, how much less happy must they be now after recent work permit fee hikes and immigration tightening caused by a fiscal crisis and unprecedented local unemployment? For a wily competitor, the iron could hardly be hotter.

But in spite of its recent loss of momentum, the Cayman Islands still has a lot going for it in the battle for new fund administration business. Several new fund administrators that have established a small presence here in the last few years seem to agree (including Trinity, HedgeServ, Meridian and Advanced Fund Administration). This gives us some hope that, in the battle for fund admin supremacy, the Cayman Islands may be badly bruised, but it’s more of a standing eight count than a TKO. What’s abundantly clear is that the industry badly needs a shot in the arm.

There are three ways the Cayman Islands government could prevent long-standing fund administrators flying the nest and nurture the fledgling newcomers.

First, it could reform the overly-restrictive, overly-cumbersome and overly-expensive immigration regime that has been an arm around the industry’s throat for years. That doesn’t necessarily mean abolishing the unpopular rollover policy (that I have long argued has a bark worse than its bite), it means abandoning anachronistic, discriminatory and extra-legal immigration rules that dictate whom fund administrators may and may not hire for certain roles.

Above all, the decision-making boards and officers must come to accept that refusing or frustrating a work permit for a local fund administrator is more likely to create a job for a Canadian than a Caymanian.

Second, the government could introduce and publicise standard incentives for fund administrators to establish and grow in the Cayman Islands which would compete with the likes of Nova Scotia where, rather than charging 15-20 per cent of salary in work permit fees, the government rebates 5-10 per cent of the company’s payroll.

For instance, the Cayman Islands government could offer free and unfettered work permits for all incremental headcount for the next three years. With little chance of growth under current conditions, the government has absolutely nothing to lose. Such a step would be guaranteed to stop the rot and would at least benefit Caymanians indirectly through increased spending in the wider economy (rent, food, import duty etc). And with a date certain for unilateral concessions to end, the sooner a company acted, the more it would save.

The temptation will be for the government to set conditions on such concessions (you must add X staff in X years) and/or negotiate them on a case-by-case basis. This should be resisted. Unilateral concessions would be more effective and more expedient. Word would spread faster and go farther to dispel the narrative that the Cayman Islands is an obstructive and expensive environment for financial firms. Besides, the alternative, a drawn-out poker game with civil servants, is the last thing industry heads would want.

Third, the government should invest in promoting the Cayman Islands as a jurisdiction of choice for international financial services.

The Cayman Islands is the only serious offshore financial centre in the world without an official business development agency. Although the recently re-constituted Cayman Finance has done an admirable job countering disinformation and lobbying key foreign governments, the organisation was never intended as a channel for inward investment; moreover, it lacks the government mandate and financial backing required to play that role. Lamentably, the exact same could be said of the Department of Commerce and Industry (formerly the Investment Bureau), the government department concerned with inward investment, which has long been focused primarily on small business incubation.

The Cayman Islands government spends US$24 million promoting tourism, a further US$12 million on academic scholarships and, until recently, practically nothing promoting financial services. Even the amounts being spent now (primarily on representation in Hong Kong and Dubai) must be a rounding error in comparison to the US$240 million directly contributed to government coffers by the financial industry (according to the economic impact study carried out by Oxford Economics in 2007). One wonders where the 700 government scholarship recipients will find work at this rate.

Consider for comparison the 18-strong team at public-private partnership Jersey Finance, the four-strong team at Business Bermuda or the six-strong team at Nova Scotia Business Inc to name but three. If the Cayman Islands were to round up every full-time employee concerned with attracting inward investment in financial services, it couldn’t field a beach volleyball team against them, let alone go toe to toe attracting new financial services providers.

I can’t fault Nova Scotia Business Inc or their interloping emissary who is undoubtedly a fine fellow. They have obviously learned a valuable lesson that we have yet to learn: You have no control over what the other guy does; you only have control over what you do.

Let us hope that one day soon Cayman will be sending someone to tout for business in Nova Scotia, and that he or she is made as welcome there, as our Canadian friend was here.