If you could go anywhere, where would you go and why? Those questions always serve as a fun game to play among young professionals, newlyweds, and families. Large institutional investors play a similar version of that game, but much more seriously.
Institutional investors can take their capital anywhere in the world so those questions are not only very real to them but determining the best answer also can be the difference between success and failure. They are constantly evaluating which jurisdictions offer the best combination of benefits and minimised risk which often leads them to International Financial Centres. But with so many IFCs, what differentiates them and results in success in attracting that kind of investment?
Broadly put, what makes an IFC successful is a combination of jurisdictional market leadership and the highest levels of multilateral cooperation. This combination has come to be known as “The Cayman Model” and it includes six critical elements:
While various IFCs do share ideas and concepts, The Cayman Model sets a standard that is adaptable and can help other centres successfully grow their development.
Legal Framework & Regulatory Standards
When considering which elements contribute to the success of an IFC, the first and most critical is unquestionably a jurisdiction’s legal framework and regulatory standards. If leading global investors cannot have absolute confidence that a jurisdiction’s legal system is fair, honest and transparent then the rest of the attributes simply don’t matter.
The second assessment investors make is whether a jurisdiction has specialised laws that adequately address the complexity of global financial services, and judicial officials with the necessary knowledge and proficiency. Even for those jurisdictions who benefit from solid legal systems, building the necessary skill capacity among judicial, legislative and regulatory officials requires long-term focus and investment.
A strong legal framework is the foundation of The Cayman Model. The Cayman Islands maintains the use of UK common law and its judicial system’s ultimate appellate court is the UK Privy Council, which is true for a number of IFCs. However, after decades as a leading International Financial Centre, Cayman’s legal and judicial practitioners also have an exceptional level of expertise on complex financial services transactions, laws and regulations.
Pure Tax Neutral Regime
Tax policy is part of the calculation investors make when considering investment in an IFC, just not for the reason most people think. If institutional investors are going to use an intermediate jurisdiction like an IFC, they need certainty that their investments will not be undermined by double taxation. Some IFCs have chosen to try to provide that certainty through the use of Double Tax Treaties. The Cayman Model relies on a policy of pure Tax Neutrality to eliminate the threat of double taxation in the most transparent way possible.
This policy automatically alleviates double taxation by allocating all of the taxing rights to an investor’s or parent entity’s home jurisdiction which is free to impose its domestic tax policy on the cross-border transactions or subsidiary’s retained profits with Cayman as it sees fit, without the need for a Double Tax Treaty. Unlike a Double Tax Treaty, Cayman’s pure Tax Neutral regime – including a zero corporate income tax rate -- also transparently provides the same stated and effective tax rates.
This is an important differentiator and element of Cayman’s success. The Double Tax Treaty system is complex and frequently opaque, which can increase investors’ concerns about risks and certainty, as well as the administrative costs for compliance.
Industry Leadership In Diversification
Successful IFCs must offer global investors access to a diverse set of financial services sectors. Offering services almost exclusively within a single sector brings too much risk that a change in customer needs or international regulatory demands can practically wipe out the industry. But strong, long-term success for IFCs comes through going beyond simple diversification within industry sectors to leading in multiple sectors.
For example, Cayman is well-known as the world’s leading jurisdiction for international investment funds. However, it also runs at or near the front of the pack in other sectors, including as the second largest domicile in the world for captives and the number one domicile for healthcare captives and group captives. It is also a leading jurisdiction for banking, trusts, capital markets and governance services.
World Class Professionals And Credibility
The quality of the professionals working within an IFC’s financial services industry is an incredibly important factor in the jurisdiction’s ability to be successful. This is also among the most difficult factors to replicate because so many different elements go into creating it.
The industry opportunities must exist to attract talented professionals, which is another way in which a diversified industry pays off. But the jurisdiction itself must demonstrate a commitment to creating an environment in which smart, hard-working professionals want to work, live, and raise families. To attract and retain the highest quality professionals, Cayman invests in them to provide outstanding quality of life for them and their families through world-class infrastructure, health care, education and culture.
These investments pay off with a knowledgeable and committed workforce that shares the vision of The Cayman Model.
Neither a government nor an industry on its own can create a successful financial services industry and establish their jurisdiction as a premier IFC. Both must engage in a cooperative partnership that recognises the unique role both have to play, the benefits each provides the other, and the authority and rights each possess. Finding and maintaining the appropriate balance is very difficult but is also a requirement for success.
The Cayman Islands has created this kind of industry-government cooperation and works actively to maintain it. It has enabled the kind of innovation that can make IFCs successful by anticipating and responding to the needs of the market, as when it introduced a Cayman Islands LLC structure.
It also supports jurisdictional leadership and engagement on international political, regulatory and standard-setting efforts. The Cayman Islands Government, with active industry support, has updated its legislation to address evolving standards on tax, information sharing, and economic substance. By continuing to ensure our legal and regulatory regime meet these standards while supporting sound investment and business practices, both our government and our industry have worked together to preserve the foundation for our success as a jurisdiction.
Commitment To Global Standards
The previous elements can be considered jurisdictional market leadership – those things we do for our own jurisdiction that position the Cayman Islands for success as an IFC. The remaining element in The Cayman Model falls within the category of multilateral cooperation – those things we do with other jurisdictions that position us for continued success. That remaining element is an on-going commitment to global standards.
Institutional investors want to know that the jurisdiction in which they invest is meeting the standards the world and other leading jurisdictions set for financial services. Conducting the engagement necessary to keep abreast of these evolving standards, updating legislation and regulation to reflect their requirements in a way that also preserves the ability to do business, and sustaining a culture of compliance within practitioners is a long, difficult, and expensive effort. But it is among the elements that separate success from failure for IFCs.
The Cayman Model shows the process and the payoff for doing it. Just recently, through engagement with the European Union, the Cayman Islands Government – with industry collaboration and support – updated its legislation to meet OECD and EU economic substance requirements. The result was Cayman’s assessment by the EU as a cooperative jurisdiction on tax, good government principles and the recognition that the jurisdiction poses no risk of unfair tax competition.
Even though IFCs naturally compete with one another, there is still an opportunity to collaborate on areas of common benefit or concern. One area for collaboration is communications – providing policymakers, the media, and consumers with accurate information about the important role IFCs play in the global economy and how each of them benefits from it. We can and must work in partnership on our engagement about how our jurisdictions contribute to economic growth as a way of informing better standard-setting and re-shaping public opinion to a more accurate place.
The need for a combined effort will become even more critical as global trade patterns change. Neutral platforms like IFCs will actually become even more critical to efficient global investment flows as borders and barriers are re-erected. We provide the basis for those offering and seeking investment capital to come together in a neutral environment that doesn’t diminish the individual policy choices of various governments. However, if we fail to work together to improve the understanding of that role, we may not be given the opportunity to play it.
There are key elements that help to make an IFC successful. The Cayman Model outlines those elements and provides an illustration for how other IFCs can develop their own models to match it. Working together, successful IFCs can not only continue to benefit their own people but can also help enable the economic growth that can benefit people worldwide.
Jude is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media. He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Jude has extensive experience within the Cayman Islands financial services industry, having served on various Cayman Islands Government and private sector committees. He has served as the CEO of Cayman Finance since 2014.