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Diversification in financial services

Diversification in financial services

Bahamas looks to alternative areas of growth and reforms to stay competitive in a new era of transparency

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The Bahamas Investor Magazine
August 21, 2017
August 21, 2017
Tanya McCartney

The financial services sector in The Bahamas currently faces three main challenges.

Firstly, the impact of international transparency and cooperation initiatives is forcing the business model for financial services to change. Pressure from global organizations such as the Organisation for Economic Co-operation and Development (OECD) and the introduction of the US Foreign Accounting Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) means that international financial centres will have to respond intelligently and immediately. The Bahamas is not alone in facing this challenge, but it is one we must tackle as a matter of survival.

Secondly, de-risking not only threatens the ability to provide banking services, but also has wider economic implications for the country. De-risking is the intentional rejection or termination of financial relationships with clients or groups of clients considered “high risk” to avoid, rather than manage, risks–chiefly, the risk of money- laundering and terrorist financing. One form of de-risking is the withdrawal or ending of correspondent banking relationships. With this in mind, we need to develop contingencies to safeguard the industry, as well as improve our risk profile.

Thirdly, The Bahamas needs to improve its ease of doing business ratings. There are direct measures we need to implement to improve the operating environment so that we can better deliver products in a timely manner. This can be resolved by addressing issues such as our business licensing process; the processing of applications by the Department of Immigration and more automation of government services. Efforts are already underway to tackle some of these issues.

We also need to look at the consolidation of the processes for cross licensees–government agencies and regulators need to align themselves better to create a streamlined flow-through.

Areas of growth
Looking at the financial services industry as a whole, we expect to see growth from three main areas: family offices, investment funds and private wealth management.

One of the main attractions of investing and wealth management in The Bahamas for foreign high-net-worth individuals is the lifestyle that the jurisdiction affords and its relative ease of obtaining residency. As more wealthy investors look to relocate to The Bahamas, there is a strong cadre of family offices and other service providers located here to facilitate that movement.

The recent effort to enhance the legislative framework affecting investment funds should enable significant growth in this area. The number of licensed investment funds has increased by an annual average of 10.8 per cent over years 2013 through 2015. Furthermore, after a few years of stagnation, the number of investment fund administrators has seen an uptick, showing an annual increase of 6.5 per cent to 66 administrators at the end of 2015.

To realize The Bahamas’ potential, the legislative framework will have to expand the reach and scope of regulation to provide effective oversight for funds in a private wealth supporting role, and also, for market share in the institutional funds space as well. The Securities Commission of The Bahamas is in the process of developing a new regulatory framework that does just that, having embarked on a project in July 2016 to repeal and replace the existing investment funds legislation.

The final area where we expect to see significant growth is in private wealth management. The Bahamas offers a comprehensive range of private wealth management options and expert service providers are available to design an effective individual solution for financial affairs. We definitely have the expertise to support growth in this area.

Strengthen and diversify

In an effort to strengthen and diversify the financial services sector, The Bahamas Financial Services Board (BFSB) and other industry stakeholders are advocating for the following:

A review of The Bahamas’ tax structure: Ensuring improved tax administration and implementation of a taxation system that attracts business is critical to the way forward. Also, we need the enhancements to our existing tax structure that encourage financial institutions to headquarter the mind and management of their operations here in The Bahamas.

  • The introduction of progressive residency and immigration policy and process reform: We must enhance immigration policy and process through measures such as the introduction of a tax residency certificate, based on a substantial connection. There has been a stated commitment to this concept. Expanded grounds for permanent residence beyond the purchase of residential property should also be considered; focusing on giving permanent residency subject to job creation stipulations focused on financial services firms. Further, consideration of the controlled liberalization of The Bahamas Bar in specific areas and under prescribed stipulations is required.
  • Improved ease of doing business and public sector reform: Innovation with respect to the process for starting a business would increase competitiveness, while encouraging entrepreneurship and more Bahamian ownership in the financial services sector. It will also support continued foreign direct investment (FDI) to support the sector in specific areas such as the technology and energy sectors.
  • Leverage linkages: We are exploring opportunities to leverage linkages between commercial development/ activities and financial services. The availability of resources throughout our archipelago makes The Bahamas attractive for FDI. We need to focus on creating incentives for real international business to make The Bahamas their home, in the same way that we give incentives to the tourism sector. This will benefit financial services.

Opportunities for growth
In terms of market opportunities, we see the greatest opportunities in the short and long term through the Latin American market, trust and fiduciary services, investment funds, and captives.

There is also potential growth in the innovation of existing products, such as the ICON, and to expand this offering to additional markets.

In a wider sense, one of our key strategies to increase growth is through enhanced jurisdictional branding; defining and communicating The Bahamas’ value proposition; to position ourselves as a premier private wealth management centre; and completing the procedural steps required for the creation of a Trust Arbitration Centre.

Moreover, we intend to work towards creating an environment for stand-alone Bahamian international banks to grow and for new entities to emerge.

Through these combined initiatives we are looking to create a strong, well- diversified financial services offering that will help protect The Bahamas’ position in the marketplace and build for the future.

Bahamas looks to alternative areas of growth and reforms to stay competitive in a new era of transparency

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