Karen Corless, Dawn Griffiths, David Doyle & Kent Smith provide an update on legislative and regulatory developments over the past year in Bermuda.
This article provides an update of Bermuda’s legislative and regulatory developments during 2011, with particular focus on developments in the trust, insurance and investment funds spheres.
Bermuda continues to maintain its position as an attractive, sophisticated and secure jurisdiction for the international high net worth private client. With an independent, stable legal and judicial system and regular and innovative reforms of its trust laws continuing over the last 20 years, Bermuda’s trust legislation is both modern and facilitative of succession planning and asset protection. It offers a sophisticated and well established infrastructure, which has made it one of the largest and most successful offshore jurisdictions in the world.
Bermuda has robust anti-money laundering legislation and Tax Information Exchange Agreements. This has led to the OECD including Bermuda on its ‘white list’ of co-operative and compliant jurisdictions. This legislation, along with the regulatory enforcement provided by the Bermuda Monetary Authority, has ensured that Bermuda is a leader in international anti-money laundering measures, and reinforces the jurisdiction's status as a premier offshore jurisdiction.
During 2011, there were a number of significant developments on the insurance regulatory front in Bermuda as detailed below.
Bermuda has also continued to build on its reputation as a major centre in the offshore investment fund industry, offering an abundance of opportunities for funds and their associated service providers. Bermuda has long been a major centre in the international offshore investment fund industry with over 2,000 investment products registered in and operating from Bermuda. There is also a significant number of unregulated investment funds, being primarily closed-end investment companies and limited partnerships, in Bermuda.
Major Amendments to Bermuda’s Companies Act 1981
On Friday 25 November 2011, The Companies Amendment (No. 2) Bill 2011 (the ‘Bill’) was filed in Bermuda’s House of Assembly by the Ministry of Business Development and Tourism. The Bill proposes significant amendments to the Companies Act 1981, the principal statute governing the formation and operation of Bermuda companies.
The Bill is the result of the Bermuda Government’s open communication with the private sector, which continues to encourage the promotion and maintenance of Bermuda as a leading international finance centre. This co-operative approach demonstrates the willingness and ability of Bermuda to adapt to the changing product needs of clients and corporations around the world.
It is not yet known when the amendments to the Companies Act will come into effect, however additional information will be made available when they become effective.
Trust & Private Client
For many private clients affected by the current volatile economic climate, the events of the past year may have resulted in increased pressure on the client personally and on the particular trust structure used by the client. Bermuda's courts are well-equipped to deal expeditiously and cost-effectively with both contentious and non-contentious trust related court applications with robust judicial support for the quick resolution of such applications. Recent examples of applications include complex trust re-organisations under the Court's enhanced jurisdiction over trust management and administration (Section 47 of the Trustee Act 1975), which affords trustees and beneficiaries of Bermuda trusts a unique procedure for amending trusts that are not available in other offshore jurisdictions, the variation of default trusts, determination as to validity and the granting of letters rogatory from a foreign court in relation to a Bermuda trust. Bermuda has strong laws protecting Bermuda trusts from being varied or set aside pursuant to an order of a foreign court relating to heirship rights, personal relationships or matters of insolvency.
Bermuda was the first offshore jurisdiction to introduce legislation permitting non-charitable purpose trusts 21 years ago under the Trusts (Special Provisions) Act 1989 providing creative solutions for philanthropic structures where a client's objectives reach beyond the fairly narrow scope of the traditional definition of ‘charity’ and extend to more philanthropic, benevolent and socially useful purposes. Purpose trusts can be created by clients for any purpose that is sufficiently certain, lawful and not contrary to public policy.
Private Trust Companies (‘PTCs’) have become increasingly popular in offshore jurisdictions in recent times. Bermuda was also one of the first offshore jurisdictions to introduce modern and flexible legislation on PTCs, with over 40 years of experience establishing and administering PTCs. Unlike some other jurisdictions, Bermuda PTCs have never been required to be licensed, and so the incorporation and conduct of their affairs has been straightforward, private and efficient. This exemption from licensing was confirmed and updated in the Trusts (Regulation of Trust Business) Act 2001.
PTCs have many advantages for private clients and their families, including allowing greater involvement in trust administration through board representation and also providing a trust structure through which to hold more non-traditional assets considered onerous by institutional trustees, such as family trading companies, high risk portfolios, and unusual assets. Bermuda has also recently amended its perpetuities legislation so that it is possible to establish perpetual trusts, whether for beneficiaries or purposes and to apply to the Bermuda Court to extend the perpetuity period of existing trusts.
There were a number of significant developments during the year on the insurance regulatory front in Bermuda.
Insurance Code of Conduct
The Insurance Code of Conduct (the ‘Code’) came into force on 1 July 2011. The Bermuda Monetary Authority (BMA) developed the Code, taking into account core principles developed by the International Association of Insurance Supervisors. The Code does not set forth a definitive set of rules of procedure and conduct applicable to all insurers, but rather contains general statements on the duties and standards to be complied with by all Bermuda insurers.
The BMA now includes evaluation of an insurer’s compliance with the Code as part of its regular supervision and on-site reviews of insurance companies. In addition, beginning in 2012, every insurer will be required to submit, as part of its annual statutory return, a statutory declaration confirming that it complies with the requirements of the Code. Failure to comply will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner.
A new classification scheme and solvency framework was introduced earlier this year whereby all long-term (life) insurers are now required to be registered as either a Class A, Class B, Class C, Class D or Class E insurers. Long-term insurers must now meet a new prescribed minimum solvency margin, which will vary depending on the category of their registration and their net premiums written and loss reserves (minimum solvency margin). The new minimum solvency margins will be phased in over a period of three years.
Class E insurers are also required to determine two additional levels of regulatory capital, an enhanced capital requirement (ECR) and a target capital level (TCL). The ECR and TCL requirements are expected to be extended to Class D and Class C insurers beginning in 2012. The ECR will be established by reference to either the Bermuda Solvency Capital Requirement (BSCR) model for long-term insurers (which is a standard mathematical model used to determine an insurer’s capital adequacy) or an approved internal capital model. The ECR cannot be less than the relevant minimum solvency margin.
The TCL, which is not a capital requirement but rather an early warning indicator, is expected to be set at 120 per cent of the ECR. Failure to maintain statutory capital and surplus in accordance with the TCL will likely result in increased regulatory oversight.
Solvency II Update
Bermuda has achieved significant progress with its insurance regulation enhancements over the past several years. The European Insurance and Occupational Pensions Authority (EIOPA) has recently published a report on its preliminary Solvency II equivalence assessment of Bermuda. The report concludes that Bermuda’s regime for commercial general insurers (ie, its Class 3A, 3B and 4 insurers) meets the criteria for Solvency II equivalence, with certain qualifications.
The report notes the alignment of Bermuda’s regime with Solvency II principles in key areas such as the scope of group supervision and the solvency regime for groups. In terms of EIOPA’s qualifications, these cover supervisory enhancements that are now in progress or are planned to come into effect by the end of 2012.
Bermuda offers demonstrable political and demographic stability, an excellent supply of professional service providers, including experienced fund administrators. Bermuda is also the jurisdiction of choice for many reinsurance companies, as evidenced by the number of start-ups following 11 September 2001 and the major hurricanes of 2004 and 2005. Bermuda is considered the centre of catastrophe reinsurance expertise, and is one of the largest reinsurance markets in the world, estimated to provide over 50 per cent of the worldwide property catastrophe capacity.
All this positions Bermuda at the heart of the increasing convergence of the capital markets and the reinsurance industry making Bermuda a natural jurisdiction for the establishment of Insurance-Linked Securities (‘ILS’) funds. Over the last year, Bermuda has seen growing interest in new start-ups of funds investing in ILS instruments. Given recent market uncertainty, large institutional and pension fund investors are increasingly attracted to the prospect of returns not correlated with the equity markets. ILS funds are also being formed covering areas beyond the typical natural catastrophe risk type to life insurance and man-made events such as terrorism.
ILS funds may invest in a variety of insurance related instruments but typically there is a mechanism to ‘transform’ the reinsurance instruments into securities which can be invested in by the Fund without exposing the Fund to the need to itself license as an insurer under applicable insurance regulations. This is typically through the use of a third party or dedicated transformer entity, often a Bermuda-based Class 3 reinsurer or Special Purpose Insurer.
Investment funds may be structured and organised in several ways but the most common is as an open-ended exempted company. The BMA is the integrated regulator of the financial services sector in Bermuda, which includes the investment funds and insurance industries.
There are different categories of authorisation that apply under the Investment Funds Act 2006 (the ‘IFA’), but given the investor profile of the vast majority of funds choosing to set up in Bermuda, most funds will either look to qualify as ‘institutional funds’ or seek to be exempted from authorisation under the Investment Funds Act entirely. Some start-up funds looking to establish a track record before opening up to the public may set up as private funds, which are specifically excluded from the scope of the IFA. A fund is a private fund if the number of participants in the fund is not more than 20 and the fund does not promote itself to the public generally.
A fund may be classified as an institutional fund if (i) it is only open to qualified participants (which include high net worth or high income investors) or if it requires each participant to invest a minimum amount of US$100,000 in the fund; and (ii) it has an officer, trustee, or representative resident in Bermuda who has access to the books and records of the investment fund. Application to the BMA for the authorisation and classification of an investment fund generally takes two to five business days to be processed.
A Bermuda fund is required to have an administrator, custodian, investment manager, auditor and a registrar unless it is exempt under the IFA. Exemptions from the custodian requirement may be available in certain cases. The BMA will look to be satisfied that the operator and its proposed service providers are fit and proper persons to act as such and the combination of their experience and expertise must be appropriate for the purposes of the fund. The prospectus or offering memorandum is also required to include certain specified disclaimers and any other material information which investors would reasonably require for the purpose of making an informed judgement about the merits of investing in the fund.
Institutional funds are subject to light ongoing regulation by the Bermuda Monetary Authority under the IFA at a level considered reasonable and suitable for funds with sophisticated, institutional investors. Such regulation primarily consists of quarterly and annual reporting requirements, certain prospectus content requirements and the obligation to seek BMA approval for the issue of a prospectus and for material changes that may be made to the fund over time.
A fund that fulfils the qualifying criteria of an institutional fund would generally also be eligible to opt instead to be exempted from the IFA. Such a fund would be registered by the BMA but will not be subject to ongoing regulation under the IFA. Such funds could always apply to be authorised at any time thereafter. Some promoters see cost efficiencies in operating an unregulated exempted fund at least in the early years of operation while others find authorisation as an institutional fund under the IFA attractive for marketing purposes because Bermuda’s regulatory framework can provide valuable assurance to prospective investors.
In recent months, we have seen a surge of interest from investment managers looking to establish a physical base of operations in Bermuda and the island appears poised to encourage such growth. For example, the recently established Bermuda Investment Managers Association has proposed the development of a concierge service to attract new managers to set up in Bermuda. Services would include advice and support in navigating the administrative and legal requirements, assistance in building relationships with local service providers, as well as offering practical advice on working and living in Bermuda.
The Government is eager to respond to the needs of funds and fund managers. Work permit policies have recently come under review as regards term limits and permanent residency options. The Government is emphasising a new ‘less red tape, more red carpet approach’. For example, it recently highlighted the fast-track work permit assistance it provided to a new investment management company which plans on creating at least 15 new jobs and attracting US$500 million in assets to Bermuda.
The expertise in Bermuda's private client market is well recognised; it has been administering trusts since the 1950s. The quality of service remains high with many service providers, including law firm trust companies, offering a sophisticated global perspective, with branches and subsidiaries around the world; this is enhanced by excellent telecommunications and computer systems and large networks of correspondent relationships at both the administrative and legal professional level.
In the insurance area, Bermuda has made impressive progress in terms of its Solvency II equivalence but it is also recognised that as regulatory changes continue abroad, more work may be required to keep pace with these developments. Bermuda must, however, continue as it has to carefully consider any further regulatory changes in the context of Bermuda’s overall ‘book of business’ to ensure that any such changes are consistent with the risk-based supervisory model that Bermuda has adopted for its insurance market.
As a sophisticated offshore financial centre, Bermuda has long offered its clients demonstrable political and demographic stability, quality professional resources and tax efficient arrangements. It remains committed to offering a strong yet flexible regulatory environment, sensitive to the needs of the commercial world, while acknowledging the importance of international transparency.
Karen Corless Director
Dawn Griffiths Director
David Doyle David Doyle is a director in the Bermuda office of Conyers Dill & Pearman. David joined Conyers in 1996. David's practice includes all aspects of Bermuda corporate and commercial law. He specialises in insurance and reinsurance matters, and has extensive experience in the area of Segregated Accounts Insurance Companies.
Kent Smith Associate
Conyers Dill & Pearman Bermuda, British Virgin Islands and Cayman Islands.