Paul Byles is owner and director of FTS, which provides regulatory, economic and management consulting services. He is an experienced economist and finance professional having worked in the financial services industry for 25 years. He is author of the book Inside Offshore and Offshore Financial Services: a BVI text. He serves as an independent director on a number of financial services and local operating firms. He is currently President Elect of the Cayman Islands Chamber of Commerce, having served on its council since 2014. IFC Caribbean spoke to Paul about the problems currently facing the financial services sector in the Caribbean and how IFCs in the region can move forward to a stronger position on the world’s financial stage.
IFC: How important are Caribbean financial centres within the global financial structure and what is their potential going forward?
Paul Byles: Caribbean centres vary in their level of importance as they offer different services and some centres are considered substantial while others are fairly new. But generally, offshore centres offer value by providing an efficient means for international companies to invest onshore and to remain competitive.
Going forward, I expect offshore centres to remain highly relevant to the way in which international business is carried out and for some to continue to thrive. But the extent to which each offshore centre remains successful depends on certain key individual traits. The extent to which they have diversified service offerings, the magnitude of their existing regulatory infrastructure, their willingness or ability to negotiate global changes, and their wider infrastructure (technology, access to staff, etc.) are some of the key factors to be considered.
IFC: How important is the financial services sector to the economy of the Cayman Islands and how does the government support this sector?
PB: The financial services industry contributes around 50 per cent of the Cayman Islands GDP and a similar percentage of all government revenues, so it is critical to the country’s economy. The government supports the sector primarily by ensuring the regulatory infrastructure is in place and is responsible for the jurisdiction’s adherence to various global standards on regulation or cross border cooperation.
IFC: What areas of the sector in Cayman are seeing growth and which less so?
PB: The Cayman Islands is still experiencing continued growth in the investment funds and captive insurance areas. While Cayman remains a leading banking centre, the number of banks has declined over the years although the size of the banking sector’s balance sheet continues to grow.
IFC: Do you think Caribbean IFCs have suffered from their reputations as ‘tax havens’ particularly in the wake of the Panama papers, and have they done enough to eradicate this image?
PB: Caribbean centres continue to suffer negatively from the traditional perception as tax havens. I don’t believe the Panama papers have had a significant impact outside Panama, although there was some general fallout.
The challenge that the Caribbean faces is that this perception is perpetuated in the media. It’s actually a brand that ‘works’ purely from an entertainment perspective and for that reason it’s difficult to eradicate the perception. There is no point saying in a movie, for example, that the bad guy has deposited his money in a bank account in Idaho. It just doesn’t ‘sound’ right (even though money laundering is occurring in the United States and other OECD centres far more than it occurs offshore). For that reason references to ‘Switzerland’, ‘Cayman Islands’, ‘Bahamas’ and so on, will very likely continue to appear in Hollywood and in media for their entertainment value.
Caribbean IFCs can only continue to educate the onshore media on the facts of how the offshore world operates. There is some small evidence that reporters are realising that this idea that ‘only countries with beaches and palm trees do bad stuff’ is very far from the reality.
IFC: What impact has global regulation had on Cayman’s financial services sector – eg, FACTA, the CRS, the BEPS project etc?
PB: The Cayman Islands has responded very well to FATCA and CRS. I would say we have put the necessary infrastructure in place and all the firms are very informed on what they need to do to incorporate FATCA and CRS into their risk management systems. The Government has also been very proactive in ensuring that the jurisdiction complies with these two initiatives. Having carried out all the ground work to prepare for FATCA, it was relatively smooth for the Cayman Islands to incorporate CRS in terms of legislation and policy infrastructure. The FATCA preparations also helped businesses to adjust to CRS.
The larger concern, in my opinion, relates to the OECD BEPS initiative, which targets the legitimate structuring that is utilised to help make multinational firms globally competitive. This initiative is far more serious than any regulatory enhancements of the past. This is not a new regulatory standard that simply requires changes to local legislation and millions in resources. Its not a blacklist that we can either ridicule or respond to with new measures to get de-listed. It is targeted at the very product offering, attempting to remove the tax efficiency of typical offshore structures. It doesn’t simply aim to change the rules or move the goalposts. It threatens to end the ‘game’ entirely. But BEPS also has a potential positive side. It does focus on the question of whether firms have a substantial presence in the jurisdiction as part of the test of whether they are tax havens. From that perspective it may serve as an opportunity for centres such as the Cayman Islands to encourage more physical presence and staff from their clients, which in turn would lead to significant positive economic impact and job creation in IFCs.
IFC: Some commentators believe that the very viability of the financial services sector in the Caribbean is being challenged due to global pressures IFCs are facing – do you think this is a legitimate concern?
PB: It is a legitimate concern and the viability is being challenged but as mentioned earlier, the extent to which each centre survives will depend on its own individual traits and existing infrastructure. Setting up a new IFC in the current climate is extremely costly so I would say the cost for new entrants is prohibitive at this stage.
IFC: Are you concerned about the removal of correspondent banking services in the region?
PB: This is one of the most significant regional developments and is very damaging. If this challenge continues to gain traction, it essentially means that the only banks that would remain in the region are international banks that have a parent in the United States to enable them to clear US dollars. That means a sharp decline in so called ‘indigenous banks’ in the region as they continue to lose their accounts with US based banks. Some banks are finding various second tier solutions outside of the United States, but those solutions are short term and pose other risks as well.
The Caribbean has talked a lot about the issue but very little has surfaced as a result of these talks. Unfortunately, most of these discussions can be summarised in one sentence: ‘It’s not fair’; and they have led to almost no true coordinated efforts to advocate on the region’s behalf. The most pragmatic solution that exists now is for individual institutions in the IFCs to present their case to the individual bank in the US and hope to convince them that the IFC jurisdiction’s regulatory regime and the individual bank’s risk management systems do not pose a risk to the US bank. I believe this latter approach can reap rewards and I have some more detailed ideas on how it should be done.
IFC: We have discussed in this magazine previously the need for Caribbean IFCs to work together to protect and grow the financial services sector in the region – do you believe this is a feasible option and what more can the Caribbean governments do to facilitate this?
PB: They do need to work together. Unfortunately, most of the previous efforts tend to end up as whining sessions rather than pragmatic regional collaboration. The efforts need to be focused squarely in the area of policy advocacy. The region has a lot to offer and together the various IFCs are valuable to the world financial system. I believe this can be demonstrated very clearly and with impact. A financial services secretariat staffed specifically with personnel with IFC work and research experience and knowledge would be a great start.
IFC: How can governments in the region protect and grow the financial services sector in the Caribbean?
PB: IFC governments can protect their sectors best by first ensuring that they have adequate regulatory infrastructure. That means not only legislation, but also policies, institutions and the necessary staff to ensure effective implementation.
Second, they can better protect their sectors by collaborating on a regional educational project to help remove the widespread misperceptions on how business is actually carried out in these centres.
To grow their industries further they need to look to diversify their product offerings wherever possible.
Diversification is also needed in terms of the geographical location of the client base. Wealth is being generated in nearly all corners of the globe now as many emerging markets are breaking into the view often reserved only for mainstream developed economies. Fifteen years ago, some IFCs and their institutions would not encourage clients from certain countries. But the reality is that legitimate wealth has been generated in those countries now and there are clients seeking IFC based solutions.
Paul Byles is director of FTS which provides regulatory and management consulting services. He is an experienced economist and finance professional having worked in the financial services industry for 22 years. He is a former director of a big four consulting firm and a former Head of Policy at the Cayman Islands Monetary Authority. He is author of two books focused on offshore financial services. He serves as a director on a number of financial services and local operating firms. He is a past Chairman of the Financial Services Council and a current board member of the Special Economic Zone Authority in the Cayman Islands and is a former President of the Cayman Islands Chamber of Commerce.