Humphry Leue details the BVI’s financial sector’s legislative and regulatory framework.
THE BRITISH VIRGIN ISLANDS built its reputation as a leading international finance centre around the registration and domiciliation of International Business Companies (IBCs) and 2005 proved to be another fantastic year. Some 57,000 new IBCs registered in the British Virgin Islands last year, more than any other offshore jurisdiction and the third highest number of new incorporations in the BVI in 20 years.
The jurisdiction also witnessed significant growth in the registration of BVI Business Companies since the enactment of the BVI Business Companies Act (BVI BCA) in January 2005. The BVI BCA provides for the incorporation of both internationally operating companies and companies doing business in the BVI under one statute and, as such, replaces its predecessors – the IBC Act and the Companies Act. Over 1,100 Business Companies were registered under the new Act in 2005, and indications are that through the first three quarters of 2006 more than 51,000 companies were incorporated at the BVI Registry of Corporate Affairs. This means that the jurisdiction is on pace to surpass even the 2005 fi gures and take the total number of companies domiciled in the Territory to well over 750,000 since 1984.
The successful implementation of the BVI BCA is testament to the jurisdiction’s commitment to introducing new measures which meet the demands of the international business community. As a result, we are expecting further sustained growth this year – a permanent heat wave if you like!
Diversification of species
Founded upon success in company registrations, the BVI financial services industry has now blossomed to become one of the most diverse and successful habitats in the world. Just as in the rainforests of the Tropics, its favourable climate has encouraged a wealth of species to take residence in an ever-expanding and interdependent environment.
A recent survey by Advent Software ranked the BVI as second among hedge fund domiciles with 9 per cent of the global market, overtaking Bermuda (7 per cent). Funds with an estimated asset value of over
Diversity has accompanied maturity. Not surprisingly, research by Deloittes found that long/short equity funds are kings of the jungle with 32 per cent of the market, closely followed by fund of funds with 28%. There are, however, funds following seven different investment strategies in the BVI, with varying degrees of fund size, complexity and innovation.
The BVI has also attracted some of the biggest names in the sector in recent months, further endorsing the maturity and attraction of the domicile on the world stage. Fortis Prime Fund Solutions, one of the world’s foremost hedge fund administrators and an arm of Fortis Merchant Bank, has made a firm commitment to the British Virgin Islands through the acquisition of Hedge Funds Services (HFS), one of the largest funds administrators in the territory, with approximately €2bn in assets under administration.
The source of much of this growth has been the balanced and transparent legislative and regulatory environment in the BVI; our very own water of life. We have built a reputation for introducing timely, progressive regulatory changes which keep pace with the needs of and challenges faced by contemporary business. This approach has been most recently embodied in the issue of segregated portfolio companies regulations and the launch of the BVI Business Companies Act, increasing the range of potential remedies available to shareholders of BVI companies and making the jurisdiction particularly attractive for joint ventures, structured fi nance operations, and collective investment schemes.
€100bn now operate in or from within the jurisdiction, drawing upon the support of some 500 managers and administrators licensed to provide fund support services in the Territory. We have also welcomed International Financial Administration Group (IFA) to our shores and the BVI International Finance Centre is currently working with IFA on a strategic plan to jointly promote the jurisdiction in the United States and Europe. This form of symbiotic relationship with the private sector has been a key factor in the successful growth of the industry.
The British Virgin Islands is now the world’s third largest offshore domicile for captive insurance companies. It enjoyed a 10 per cent growth rate for 2005, a year in which the majority of onshore domiciles reported decreasing volumes and competitive offshore jurisdictions struggled to increase business. The global captive industry is looking to capitalise on the uncertainties associated with the commercial markets and in the British Virgin Islands, we are already seeing an increase of new formations and enquiries, as companies continue to turn to the alternative risk market to provide solutions to long-term problems. Company CFOs in particular are beginning to realise that the cyclical nature of the commercial insurance markets can have a potentially damaging effect on their business.
The BVI has long been established as a captive domicile and over the years has attracted a large number of small and medium-sized single-parent captives. The domicile certainly is not ready to slow down and continues to evolve. In 2005, the BVI set another record in terms of new formations, ending the year with nearly 400 active captives.
Successful species continually evolve. The Financial Services Commission (FSC),in conjunction with the captive managers in the territory, has worked diligently to enhance the domicile’s Insurance Act and strengthen the professional capacity available in the territory to ensure the BVI is in a position to branch out effectively in areas outside our traditional market niche of single-parent captives.
The resulting legislation offers policyholders a high level of protection, whilst remaining flexible and commercial. This gives captive managers the ability to form innovative, sophisticated captive structures on behalf of their clients and is one of the main reasons the BVI is seeing major changes to its business pattern.
During the last six months, a number of captives have been formed that are expecting to write a high volume of premium, such as agency and association captives. We are seeing a distinct shift in the trend of captivesformed here and it is encouraging to know that potential captive owners recognise the diverse range of solutions the BVI.
Another area of growth has been the healthcare industry, where interest in the BVI has grown significantly over the past 12 months. This sector of insurance is currently experiencing a number of challenges in the conventional market in terms of availability of cover, rates, reinsurance levels and therefore more groups are looking for an alternative solution. The conditions are set for this relatively new species to spread rapidly across the territory, adding to our already diverse insurance sector.
As we expand the services we provide, particularly those afforded to managing general agents and associations, the BVI captive industry has started to work far more closely with the commercial market, including a number Lloyd’s syndicates, international brokers and fronting insurers. As reputation is crucial in this industry, it is extremely pleasing to see that the larger players recognise the level of expertise and the opportunities that exist here.
Private wealth management, particularly in the areas of trust settlement and administration and estate planning, has long been a core pillar of the BVI international business habitat. The BVI boasts more than 100 licensed trust companies and professional trustees, and the local branch of STEP – the Society for Trust and Estate Practitioners – has grown to 65 members since it was chartered in 1997. It is now the fourth largest STEP branch in the Caribbean region and continues to grow with a constant migration of trust and estate professionals into the BVI’s professional environment.
The ground-breaking Virgin Islands Special Trust Act 2003 (VISTA), enacted in March 2004, permits shares in BVI companies (and the underlying assets of the companies) to be retained for so long as the directors think fit and disengages the trustee-shareholder from management responsibility, thereby allowing the directors to effectively manage the company’s business affairs whilst still enjoying the benefits and security of a trust for succession planning and business continuity purposes.
VISTA has been heralded as an innovative new alternative trust regime and the legislation has certainly attracted a great deal of positive interest. In the absence of registration requirements for trusts, it is not possible to give a precise figure for the present number of VISTA trusts but feedback from the legal and trust practitioner community suggests that a substantial proportion of their time is spent advising on matters related to VISTA trusts and the creation and administration of thetrusts themselves.
An interesting aspect of the VISTA trust is that, structured properly, it is compliant with the investment and heirship requirements and stipulations of Islamic Law (Shariah) prevalent in much of the Eastern hemisphere – from Europe to Asia – and we expect to continue to see a growing appetite for the product in those markets this year.
Other recent legislative enhancements in this area included the enactment of the Trustee (Amendment) Act and the Property (Miscellaneous Provisions) Act, both of which, like VISTA, were designed to provide entrepreneurs, family offices, wealth planners and trustees with the most modern and up-to-date platform from which to conduct their wealth management business.
Making it all possible
Great species can only thrive given the right supporting environment and the financial services industry is no different. In the BVI, our ‘Big Four’ of business companies, investment funds, captive insurers and trusts are prospering because we have been able to create the best habitat for them. A large part of this is the regulatory and legislative framework within which they operate, but no success would be possible without the wealth of support professionals now resident in the BVI.
The BVI is the only Caribbean jurisdiction to boast the presence of all five of the largest offshore law firms in the region and the legal profession in the territory continues to expand and strengthen with a steady influx of lawyers, barristers and solicitors. There is a wide variety of expertise in terms of practice areas and backgrounds recruited by onisland law firms. These firms are, in turn, working in partnership with some of the world’s largest legal practices – such as the UK’s ‘Magic Circle’ and the major players of the US East Coast.
The world’s top accounting and audit practices are also present in the BVI and have been for quite some time. Their professional service offerings have recently expanded to such areas as forensic accounting, corporate restructuring and insolvency management, following the enactment of the much anticipated Insolvency Act in 2004.
The forecast for 2007 looks set to bring bountiful growth to our blooming financial services environment. The British Virgin Islands has become a dominant force in global offshore business, following a path of sophisticated diversification. The territory boasts true quality across the financial services market and has an improved infrastructure, dynamic regulation, innovative products and a proven partnership approach between public and private sector. These factors have combined to solidify the BVI’s position of prominence and leadership in offshore finance.
Our evolution is, however, far from complete. As the needs of international business change, so must our offer. The BVI International Finance Centre remains dedicated to its support of the government of the British Virgin Islands, the Financial Services Commission and the private sector at large. By working together our habitat will continue to prosper and we will be preparedto adapt comfortably to all seasons.
Humphry Leue, Chief Operations Officer, BVI International Finace Centre,BVI