Bermuda: Strengthening its Regulatory Tools

This article provides an update on Bermuda’s legislative and regulatory developments from 2012, with a particular focus on changes in the insurance, investments funds, and trust and private client spheres.

Insurance

In 2012, 53 new insurance companies were incorporated in Bermuda; of these, 27 were registered as ‘special purpose insurers’, nine as ‘long-term insurers’ and 17 as ‘general business insurers’.

The Bermuda Monetary Authority (BMA) significantly reduced the annual licence fees for special purpose insurers from US$11,600 to US$6,000. Additionally, the Insurance Amendment Act 2012 introduced provisions that further enhance the BMA’s power to regulate the industry effectively by strengthening its disciplinary ‘tools’. The new powers provide for the imposition of civil penalties, the making of prohibition orders, the ability to order injunctive relief and the capacity to censure registered persons publicly.

As the Island seeks to secure Solvency II equivalence, the BMA published the Insurance (Eligible Capital) Rules 2012 (Rules) in August 2012, which became effective on 1 January 2013 and apply to Class 3A, 3B, 4 and E insurers for year-end 2012 filings. The Rules define tiers of capital that are eligible for inclusion in an insurer’s available statutory capital and surplus, and enhanced capital requirements. Capital elements with lower loss absorbency characteristics will generally only be available to cover capital requirements in limited circumstances.

During the year, the BMA also published new group solvency and supervision rules that apply wherever the BMA is acting as group supervisor of an insurance group headed by a Bermuda insurer. Beginning in 2013, all insurance groups are required to submit annual group financial statements (prepared on a GAAP or IRFS basis), an annual group statutory financial return, an annual group capital and solvency return, quarterly unaudited group financial returns and an annual group solvency self-assessment.

While new enhanced capital requirements were originally due to come into effect for commercial long-term insurers and insurance groups in 2013, in November 2012, the BMA published a number of amendments to the individual company and group rules, the most significant of which involved the suspension of these enhanced capital requirements until 2014.

While now required to submit a risk self-assessment return and file annual statutory returns electronically, Class 1, Class 2 and Class 3 general business insurers and Class A and Class B long-term insurers are not otherwise subject to Bermuda’s new regulations that impose enhanced reporting, governance and solvency requirements on Bermuda’s commercial insurers.

The BMA has also recently published proposals in relation to the Insurance Economic Balance Sheet Framework for General Business Insurers as well as for Long-Term Insurers and continues to consider the minimum margin of solvency (MSM). Based on responses received to its consultation paper, the BMA now proposes to implement an MSM that would be equal to 25 per cent of the enhanced capital requirement.

A number of further amendments to the Insurance Act 1978 were enacted by the Insurance Amendment (No.2) Act 2012. These changes, which came into effect on January 2013, include: 

•   a revision of the material changes notification requirements (the definition of material changes was expanded);

•   the introduction of a new prohibition against registered insurers carrying on ‘non-insurance business’ (although existing insurers will be grandfathered through year-end 2016); and

•   an amendment of the definition of ‘long-term business’, which now allows long-term insurers to write accident and disability contracts of any duration and general business insurers to write such contracts with terms of up to five years.

Finally, it has emerged that the timing of Solvency II implementation has been delayed until at least 2015, in order for the European Insurance and Occupational Pensions Authority to conduct an impact assessment. Assessing the impact of the Solvency II delay and discussions with the market on its implications are in progress, however, it is clear that the BMA will continue its strategy of regulatory and supervisory enhancements for Bermuda’s commercial insurers.

Trust & Private Client

Bermuda remains committed to maintaining its position as one of the world’s leading international financial centres, providing effective, practical and diverse wealth management and planning solutions for the international private client. This section provides an update of Bermuda’s legislative and regulatory developments in the trust and private client sphere in 2012 and looks forward to some of the changes on the horizon for 2013.

As part of Bermuda’s commitment to upholding the highest international standards in anti-money laundering legislation; the regulation of trustees, professional legal advisors and other related service providers; and tax information exchange and co-operation, there have been a number of legislative developments in 2012. These include the Specified Business Legislation Amendment Act 2012, which became operative on 13 July 2012. It amended seven pieces of specified business legislation in pursuance of Bermuda’s commitment to implement the Organisation for Economic Co-operation and Development (OECD) Internationally Agreed Tax Standard and to address some of the recommendations that were made in the two-part Peer Review Assessment, which was undertaken to determine if Bermuda’s legislative and regulatory framework could support an efficient and effective exchange of information network for tax purposes. This included amendments to Bermuda’s Trustee Act 1975 regarding accounting records kept by trustees and identification information on trustees, settlors and beneficiaries required to be kept by exempted trustees. The Trusts (Regulation of Trust Business) Amendment Act 2012, which became operative on 19 September 2012, amended the Trusts (Regulation of Trust Business) Act 2001 to enhance the powers of the BMA to effectively regulate the trust industry in Bermuda and meet appropriate international standards, including provision for the imposition of civil penalties, the making of prohibition orders and other disciplinary measures. Through the Corporate Service Provider Act 2012, which was enacted on 8 August 2012 and became effective on 1 January 2013, corporate service providers as AML/ATF regulated institutions are made subject to essentially the same regulatory regime that currently applies to banks and trust companies in Bermuda, further demonstrating Bermuda’s commitment to preventing the misuse of its financial system and ensuring it is compliant with the relevant international standards.

Continuing Bermuda’s commitment to regular and innovative reforms of its trust laws, there are a number of legislative reforms under consideration for 2013, including new legislation which will establish a common law equivalent to the civil law foundation. Bermuda would be the first common law jurisdiction to introduce such an entity, which will be known as a ‘Bermuda Private Corporation’.

In what will be welcome news for the international private client potentially interested in establishing a base in Bermuda, the 2013/2014 Budget Statement introduced tax incentives for non-Bermudians wishing to invest in Bermuda real estate by reducing the cost of licences required by foreigners from 25 per cent of the value of the property to eight per cent for houses and six per cent for condominiums, increasing to 12.5 per cent and eight per cent respectively after 18 months.

The BMA recently announced a refinement to its policy in respect of the information it will require from the underlying beneficial owners of Bermuda companies or partnerships including Bermuda Private Trust Companies (PTCs). Previously, all beneficial owners of five per cent or more interest in a PTC were subject to Bermuda’s know-your-customer vetting procedure, however under the new policy only the holders of 10 per cent or more of the interest in the entity will need to be verified and made known to the BMA.

Investment Funds

In late 2012, Bermuda introduced regulatory rules aimed at facilitating investment by Japanese retail investors in Bermuda funds and unit trusts. The Investment Funds Act 2006 (the ‘Act’), the legislation which provides the regulatory framework for the creation and operation of investment funds in Bermuda, was amended to create a new class of investment fund to be known as the ‘Specified Jurisdiction Fund’. The purpose of the Specified Jurisdiction Fund classification is to permit the Ministry of Business Development and Tourism (the ‘Ministry’), in co-operation with the Authority and industry, to develop and issue, from time to time, ‘orders’ that specifically recognise the regulatory requirements of foreign financial markets in which securities of a Bermuda-domiciled fund will be marketed. Through this co-operative approach, foreign promoters, distributors and fund sponsors who use Bermuda-domiciled funds can specifically tailor their products to fit the regulatory requirements of their target markets.

On 8 June 2012, the Ministry, acting on the advice of the Authority, issued its first order under the amended Act designed for the Japanese retail market. The order, entitled the Investment Funds (Specified Jurisdiction Fund) (Japan) Order 2012 (the ‘Order’), together with the Investment Funds (Specified Jurisdiction Fund) Japan Rules 2012 (the ‘Rules’), is designed to permit Bermuda-domiciled funds established pursuant to the Order to be marketed to the Japanese public (each, a ‘Japan Fund’).

Bermuda investment funds (and in particular, Bermuda unit trusts) have for many years been eligible for offer in Japan. However, under Article 15 of the Fair Business Practice Rule #4 (Regulations Concerning Foreign Securities Transactions) of the Japanese Securities Dealers Association (the JSDA Regulations) currently in force, Japanese investment dealers may only solicit customers (excluding Qualified Institutional Investors as defined in the JSDA Regulations) to subscribe to securities of any foreign investment trust that is established in a jurisdiction, the laws and regulations and disclosure system of which are ‘well-provided’.

While the Japanese Securities Dealer Association (the JSDA) has never objected to the distribution of Bermuda-domiciled funds in Japan, the rather vague standards for foreign regulatory regimes set out in the JSDA Regulations created some uncertainty in the industry. The Order has been drafted to ensure that the rules applicable to Japan Funds domiciled in Bermuda will meet the requirements of the JSDA Regulations. This will result in Japanese distributors and promoters having a greater degree of certainty and comfort in offering securities of a Japan Fund to retail clients in Japan, thus making Bermuda an even more attractive jurisdiction for the Japanese retail market.

While the above amendment to the Act was primarily aimed at enabling Japan Funds, this regulatory mechanism by which Specified Jurisdiction Funds may now be created should prove useful in providing the requisite flexibility to help Bermuda’s preparation for the introduction of a passporting regime to be introduced by 2015, pursuant to the European Union’s Alternative Investment Fund Managers Directive (AIFMD).

The AIFMD is being transposed into the national laws of all EU member states by July 2013. Thus, the early months of 2013 will see the Bermuda government and regulatory authority taking action to prepare their response to the implementation of the AIFMD in order to enable compliance with the AIFMD by EU investment managers of Bermuda funds and non-EU investment managers of Bermuda funds that market in the EU.