|The Bahamas Investor Magazine
January 1, 2016
January 1, 2016
The Bahamas Investor magazine is ten years old this issue and what a decade it has been for financial services and investment in the jurisdiction. A period of unprecedented change, as global compliance efforts continued apace and banking and financial services practices came under intense scrutiny. It has also proved to be a period of unrivalled opportunity.
In 2006, the world of financial services and global investment looked very different than it does today. It was still an era of growth for many segments of the sector and hedge fund managers and stock brokers still swaggered Wall Street like financial titans. Growth was the order of the day in mature and emerging economies around the world. Investor confidence soared and things, surely, could only get better.
Not so. The collapse of the US housing market ushered in the global financial crisis and a period of unprecedented fiscal reform as economies reeled from the catastrophic failure of monetary systems. Like everywhere else, The Bahamas was hit hard by the global economic slowdown as both tourists and investors tightened their purse strings and hunkered down for the long cold winter of austerity that was about to set in.
Automatic exchange of information
The global financial crisis spurred a relentless and determined effort by major developed economies to pursue tax avoidance and expose banking secrecy practices. Desperate to reclaim lost tax dollars, wealthy nations drew up proposed regulation that would demand, under certain circumstances, disclosure of banking and tax information of their citizens with interests overseas.
The Bahamas had to some extent already positioned itself as compliant jurisdiction, but the increased regulation meant that even greater types and amounts of client information would have to be ceded to those nations with just cause to ask for it. To its credit, The Bahamas was quick to react.
As reported by The Bahamas Investor at the time, the then Minister of State in the Ministry of Finance Zhivargo Laing quickly engaged with a range of countries in order to put in place the requisite number of international Tax Information Exchange Agreements (TIEAs) to keep the jurisdiction compliant. “It became very clear that if a jurisdiction does not act quickly and put all the required agreements in place, it is going to get left behind,” Laing said at the time. “Offshore financial centres like ourselves are under a lot of pressure to increase transparency and demonstrate best practice. It is obvious that there is a concerted move for increased information exchange.”
Flexibility and opportunity
As a consequence, The Bahamas has now signed more than 30 TIEAs and continued to revamp legislation to keep pace with the changing regulatory environment. What The Bahamas has proved through all of this, however, is its apparent adaptability under pressure. Being an independent sovereign nation allows it to quickly enact necessary legislation and create new product offerings to keep ahead of the curve and remain competitive.
Paradoxically, although volume may have decreased, the recent global climate for greater transparency and accountability has spurred a period of innovation within the financial services industry. Speak to any practitioner and the talk is all about the creation of new products and seeking out new and emerging markets. Necessity it seems has indeed been the mother of invention in this case.
To mark the magazine’s 10th anniversary, The Bahamas Investor asked four industry leaders that have been at the forefront of the sector’s development over recent years to give their views on the state of financial services today and what we can expect from the future.
The next 10 years: We have what it takes to succeed
By Aliya Allen (pictured, above), immediate past CEO and managing director, Bahamas Financial Services Board (BFSB)
It is almost a well-worn trope to start any conversation about financial services with some phrase indicating the challenging paradigm under which we now operate. The increasing cost of compliance, the pressure on revenues, the counter- party challenges as uncooperative blacklists are resurrected like spectres, the death of privacy–it can all seem overwhelmingly bleak. Yet, in spite of all of this, we remain hopeful and confident about the resilience and sustainability of the financial services industry.
This optimism is well founded when you consider the many concerted and coordinated initiatives that the BFSB with government, regulatory and industry partners have undertaken to keep The Bahamas a vibrant, formidable financial centre.
SMART funds, ICON, the Bahamas Executive Entity, ground- breaking foundation legislation, a rejuvenated insurance sector and trust law enhancements–all accomplished in the past decade–point to the innovative character of the industry and its will and determination to succeed.
Our even-handed approach to the Organisation for Economic Co-operation and Development (OECD) and other international organizations and initiatives on complex matters such as transparency and information exchange has ensured The Bahamas is an engaged player on the global financial landscape, while at the same time preserving the integrity and competitiveness of the country’s financial services industry.
In other words, complacency has not been part of the industry vocabulary, nor must it be as we look to the future. We must continue to lobby for big actions (as opposed to Band-aids) that can have meaningful impact on this industry. These actions include:
• Focusing on consistent and informed interaction with multilateral bodies so that we are able to defend the sector with a clear understanding of the business impact. The private sector must remain fully engaged with policymakers.
• Forming strategic alliances through a combination of trade and investor protection agreements that enable free movement of services and people and encourage new business flows.
• Removing protectionist policies, replacing them with policies designed to allow Bahamians to flourish in the context of an international environment.
• Introducing clarity and efficiency in the business environment and supporting the closer connections clients are forging with The Bahamas through residence and substantive business operations.
• Investing in attracting international talent in order to help develop local talent. We should not be afraid of seeking out the best and brightest of the global talent pool. This knowledge transfer and connection forming is important for sector sustainability, visibility and growth.
Some of these actions will require a steely commitment to make them happen. Others will require the courage to forego the status quo. The industry has shown time and again in recent history that it is unafraid to meet the challenges it faces. My time and experience with BFSB tells me the catalytic partnership between government and industry will take the bold and necessary steps to ensure the vitality and success of the financial services sector for many years to come.
Offshore banking in The Bahamas: ten years of change
By James Smith, CBE, former Finance Minister of The Bahamas
From the beginning of the century up until a decade ago, banking legislation in The Bahamas was designed to attract foreign financial institutions by emphasizing confidentiality and secrecy as key elements of the banking system. Indeed, the confidentiality provisions were embedded in the banking laws, government policies and light regulation by The Central Bank of The Bahamas.
The offshore financial services sector, which consisted of more than 700 licensed banks and trust companies in the past, was very lightly regulated and for the most part, those institutions were only required to submit year-end financial statements of their affairs and the principals would usually pay a courtesy call on the governor of the Central Bank once a year. Indeed, the Central Bank was the chief promoter for the expansion and development of the offshore centre.
In the years following 2000, a number of events occurred that revolutionized the way in which the Central Bank conducted its affairs; forcing it to become more outward- looking and more engaged with other international banking regulators. That move was a part of a larger movement by the global banking community that was collectively adopting more rigorous standards and practices with respect to governance, transparency and information exchange.
Early in the decade, the Organisation for Economic Co-operation and Development (OECD) introduced a programme aimed at plugging tax avoidance and evasion activities by residents of the developed countries and at the same time, controlling or in some cases, attempting to eliminate activities in offshore financial centres. Centres such as The Bahamas were targeted and “blacklisted” and threatened with international sanctions unless they passed appropriate laws to remove secrecy, improve transparency and participate in international exchange of banking information.
Shortly after this move, the attack on the World Trade Center in New York by terrorists compelled the OECD to expand the list of requirements by banks to include antiterrorist provisions in their laws and practices. Much later in the decade, the global banking crisis which had its origins in the collapse of the US housing market, gave rise to a new set of international banking requirements to regulate the extension of credit and to ensure adequate capital levels throughout banking systems everywhere in the world.
The global banking system had finally acknowledged that the inter- connectivity of financial markets provided the means to rapidly transmit a monetary crisis from one country to another. In short, the smooth operation of the global banking system required that financial institutions everywhere, in developing as well as in developed countries, adopt similar operating standards and procedures to mitigate or prevent financial crises. The modern global banking system not only demanded change; it insisted on full and unwavering compliance by all participants, including The Bahamas.
In an effort to adapt to the requirements of a modern banking system, the Central Bank had to transform itself both qualitatively and quantitatively. The strong adherence to bank secrecy and confidentiality and the light-handed approach to bank supervision, particularly with regard to the offshore financial institutions, had to give way to a more robust and rigorous oversight of the local banking system. Over time and accordance with new empowering legislation, the Central Bank expanded and intensified its oversight capabilities over the entire banking system and transformed its role from that of promoting the banking system in The Bahamas to one of policing all activities in that sector, with the unintended effect of dampening the growth prospects for the country’s second largest economic sector.
Investment funds-Forward, upward, onward together!
By Michelle Neville-Clarke, partner, Lennox Paton
The Bahamas prides itself on being a sovereign nation. The benefits are clear: independence in decision-making and the resultant speed with which new legislation can be passed. Twenty years ago The Bahamas recognized a market in the world of mutual funds and jumped at the opportunity to establish a foothold with the introduction of the Mutual Funds Act, 1995, which provided a mechanism for the establishment and regulation of mutual funds in The Bahamas. The introduction of the Securities Industry Act was soon to follow in 1999 strengthening the funds regulatory environment and further enhancing The Bahamas’ position. Many financial institutions took advantage of the local offering of locally licensed and regulated mutual funds and produced near cookie cutter-like documents for the creation and governance of the same.
In December 2003, the Mutual Funds Act 1995 was repealed and the Investment Funds Act came into effect. The primary objective being to provide legislation that was sufficiently flexible to accommodate the needs and growing demands of the financial sector.
The 2003 Act has looked promising in achieving these goals. The Bahamas, recognizing the need to have investment funds that were flexible and could adapt to the changing needs of private industry, introduced perhaps the most ingenious investment fund structure, the Specific Mandate Alternative Regulatory Test (SMART) Fund.
A SMART Fund is an investment fund that satisfies certain prescribed parameters and requirements of a category, class or type of investment fund previously approved by the Securities Commission of The Bahamas. This investment fund structure allows the regulatory environment to be tailored to the risk that a certain investment fund type would present.
With the introduction of the SMART Fund, an investment fund established for only a few sophisticated investors for example would not be subject to the same regulatory requirements as an investment fund that could be offered more broadly enabling varying degrees of disclosure and regulatory oversight saving investors time and money. In addition, to keep pace with the evolving landscape of the investment funds industry, anyone, most importantly financial institutions or professional advisers who constantly interface with clients, can submit written proposals to the Securities Commission for the approval of additional templates giving The Bahamas the platform to ensure modern and sophisticated products.
The ability to understand a client’s needs and to adapt to these changing needs is what sets one jurisdiction apart from another and The Bahamas’ introduction of legislation that allows for this has kept it as a valid option. The introduction of the SMART Fund, however, was not the only tool that has maintained The Bahamas’ attractiveness. The Segregated Accounts Companies Act, introduced in 2004, enables one investment fund to have separate accounts (or cells), with assets and liabilities that are legally separated and the more recent introduction of the Investment Condominium Act (ICON) also evidences not only the in-depth knowledge The Bahamas has of the market but also the proactive manner in which it responds.
The financial services industry in The Bahamas works in a united manner to ensure progress. The commitment of all parties, private industry, the government and the regulators to ensure growth of the financial services industry, the recognition of the need to balance client’s needs and interests with a sound regulatory environment and being a sovereign country, has aided The Bahamas in becoming a sought after destination and will continue to aid in its ability to remain one.
Harnassing the power of productive partnerships
By Wendy Warren, founder and managing director, Caystone Solutions
The financial services industry has provided fertile ground for the middle class to develop and flourish, providing a key ingredient for the strength of our young democracy. Further, the industry now provides increasing room for strong indigenous financial institutions while maintaining the red carpet for international organizations.
This force for national development– notwithstanding a fiercely competitive global sector–was only made possible through the power of productive partnerships, or “PPP”. It is this PPP that must be protected and promoted to secure success in the future.
The Bahamas has many core and compelling attributes that, when evaluated together, provide a unique value proposition for the industry. Location cannot be ignored. The country provides its residents with direct access to many of the world’s top cities and ready global access through key hubs such as Miami, London, Atlanta, New York and Panama. It also provides for idyllic lifestyles and work environments. The contribution of these attributes would remain underdeployed in the absence of PPP.
Serving as a foundation to the PPP, consensus building between the government and private sector is critical. Business operations such as asset management and logistics for trading companies are not often associated with The Bahamas but, through the PPP, consensus was secured at the Cabinet level to widen the scope to international business and finance. With the engagement of all stakeholders, both leading national parties during their most recent periods of national governance have echoed similar sentiments for the way forward. This ability to agree at the “big picture” level cannot be overstated. It has been critical to the stability the sector has enjoyed over the last 80 years and gives rise to the continued confidence in The Bahamas.
Regulation and adherence with international standards by fiercely independent agencies is the spark in the PPP. As in all major finance centres tension exists between the regulator and industry. While the industry seeks to secure optimal implementation, it recognizes that the regulator has the veto power. Being an honest broker in dialogue with the regulators and government therefore becomes critical.
Recognition that reputation matters is also critical. The Bahamas is an island nation delivering a global service that is adjudicated by potential clients and counterparties based on reputation and experience. The reputation of the sector, one that should be evaluated through formal researched-based studies, brings the realism to the partnership and demands that stakeholders call upon each other for accountability in reputation management.
Communication is an art. It also is the lifeblood of the PPP. Crafting opportunities for communication that is frank yet not disruptive was essential to emerging from the crisis of 2000. All parties–government, regulators, and industry–must have the confidence that the fellow participants will be forth- coming in their contribution regarding industry dynamics whether it be policy or productivity.
Trust is the fuel that enables communication. Trust that all parties agree to a core principal that fosters mutual respect essential to making communication work. Trust that each party driven by different mandates to regulate or generate profit nonetheless ascribes to a common definition of success: a sustainable business proposition and sector. Greater appreciation of the valuable contribution to be made by each participant can be afforded rather than judgment according to pre- conceptions and traditional stereotype.
For such as the Bahamas Financial Services Board’s retreat, to the quarterly meetings between industry and regulators, or to the readiness of policymakers to be available to members of the PPP fuel hope that the industry can indeed find a path forward, even upstream.
Our path is likely to not only be upstream but also unpredictable. We do know that national and commercial interests in a globalized environment will provide both opportunities for growth and risks to be mitigated. We must therefore continue to invest in our PPP to have the wherewithal to continue to thrive.