|The Bahamas Investor Magazine
January 1, 2017
January 1, 2017
The financial services sector is of such importance to The Bahamas’ overall economy that it requires great ingenuity and determination to remain competitive, whilst mitigating against the pressures that it faces. The Bahamas has always been resilient and it has core assets that it can leverage to reposition the sector.
A vibrant financial services industry is vital to the economic growth and stability of the country and impacts thousands of Bahamians. It is not a sector that should ever be taken for granted. Between 15 to 20 per cent the nation’s gross domestic product derived from financial services. The reality is that financial services, to a extent, underpins the Bahamian middle class. The human capital which drives the sector is predominantly Bahamian.
Admittedly, recent years have been challenging for international financial services, an industry which serves as the second pillar to the Bahamian economy and in which it has a long-established and distinguished history. New competitive threats have emerged; large traditional onshore players bare their teeth to protect their turf; and international bodies whose constituents consist primarily of the world’s largest economies successfully seek to impose tighter control over their tax bases.
It is against this backdrop that The Bahamas must now chart a new course to buttress the economy, secure the future of those who work directly in the sector or benefit indirectly from financial services. This requires the sector to build upon its strong foundation, using innovation to reposition itself for long-term growth and sustainability in this transparent world in which it now operates.
Strategizing for sustainability
After the legislative changes introduced in 2000 where the focus was anti-money laundering and the counter-financing of terrorism, the industry recognized that there was a need for a holistic strategy for the sector in order to remain competitive. The Bahamas chose to engage Deloitte to prepare a strategy for the sector in collaboration with industry. The project work commenced in 2008 and the strategy was eventually rolled out in 2010 at the International Business and Finance Summit hosted by the Bahamas Financial Services Board (BFSB).
The 2010 strategy focused on market opportunities and the enablers that had to be in place to realize the identified prospects for growth for the sector. In 2010, the BFSB identified several market opportunities that focused on:
• Brazil and broader Latin America
• Hong Kong and the wider Asian market
• US trust and fiduciary services, funds, insurance and shipping
Early in 2016, the BFSB, with the technical support of EY, undertook to update the 2010 strategy and develop a Future State Roadmap for Financial Services, to facilitate the strategic positioning of the financial services sector with regard to the systemic challenges affecting growth and long-term sustainability of the industry.
The updated 2016 strategy consolidated existing market opportunities into the following five areas: Latin America, Asia, US trust and fiduciary, funds, and innovation. It specifies the source of the data required to measure each individual target. In addition all action plans will be assigned an owner and target completion date, providing a roadmap for the medium term.
Growing the financial services sector cannot be achieved by being reactionary. It is critical, therefore, that the sector addresses those things that are within its control in a focused manner. These include being more responsive to global change, enhancing the immigration policy to leverage the country’s expertise and location, and improving ease of doing business to create a business- friendly environment that allows us to create linkages between commercial investments and financial services.
The Bahamas value proposition
Emerging from the 2016 Roadmap is an evolving Bahamas value proposition based on four vital features that are at the heart of what distinguishes The Bahamas as an international financial centre of significance: regulation, expertise, innovation and location.
The Bahamas brand for financial services is defined by these distinguishing features. And everything that comprises The Bahamas value proposition and continued success as a leading international financial services centre is to be guided by these factors.
The strong regulatory regime that characterizes the financial services sector ensures that the integrity of The Bahamas as an international financial centre is maintained. A well-regulated regime is critical to long-term sustainability.
Successive governments have consistently demonstrated the country’s commitment to international best practices, cooperation in the administration of justice, international tax transparency, anti-money laundering and the countering of financial terrorism initiatives. Bahamian regulators are well- regarded and active partners with international peer groups and agencies.
The regulatory framework is characterized by the following:
• In 2000, The Bahamas eliminated bearer shares;
• Since 2001, there is the filing of a register of directors and officers;
• The law mandates that financial institutions have Know Your Client/client due diligence processes, as well as counter-financing of terrorism. Furthermore, regulators have issued guidelines to the industry outlining best practices for verifying customer identity and for developing anti-money laundering procedures and measures to prevent terrorist financing;
• There is a regulatory framework for the reporting and investigation of suspicious transactions;
• Independent inspections and regulatory examinations of financial service providers including corporate service providers for compliance with AML/CFT laws;
• The 2000 legislative restructuring included the Evidence (Proceedings in Other Jurisdictions) Act and the Criminal Justice (International Cooperation) Act. The former regulates cooperation by Bahamian courts in civil matters while the latter regulates such cooperation in criminal matters;
• The Bahamas has entered into over 33 Tax Exchange of Information Agreements. On March 20, 2010, The Bahamas achieved the G20 standard on Transparency and Cooperation in Tax Matters;
• TheBahamas is Foreign Account Tax Compliance Act (FATCA) compliant. On November 3, 2014, The Bahamas and the US signed an Agreement to Improve International Tax Compliance and to Implement FATCA based on the Model I IGA. To accommodate the non-direct tax system in The Bahamas, the IGA is a model 1B (non-reciprocal) IGA; and
• The Bahamas is committed to the Automatic Exchange of Information/Common Reporting Standard and the government has restated commitment to the bi- lateral approach. Industry and government are collaborating on the implementation strategy.
With a more than 80-year track record in financial services, few jurisdictions offer the wealth management experience that The Bahamas has to offer.
This heritage is the basis for the strong legal framework that has been cultivated for financial services, an investment climate that has been nurtured through years of maturity and a stable and predictable business environment anchored by the thousands of Bahamian wealth management professionals who work side-by-side with expatriate colleagues in more than 250 financial institutions.
Market responsiveness has long been a part of The Bahamas’ DNA as a forward-thinking IFC, and has been the basis of legislation creating innovative, client-centric products and services in a modern, compliant regulatory regime.
Such innovation can be seen in the country’s evolving and often ground-breaking trust legislation. It led The Bahamas to become the first common law jurisdiction to introduce foundations. It sparked the Bahamas Executive Entity and has thrust The Bahamas into the forefront of the investment funds industry with the introduction of SMART funds and the Investment Condominium (ICON) fund.
And with this innovative spirit it should come as no surprise that the country’s once dormant insurance business has re-emerged as a sought-after destination for captives.
The unique geographical location of The Bahamas, just 50 miles off the coast of Florida, has strategically positioned it in relation to the wider Americas. This is an undeniable advantage.
Its proximity to the US, Central and South America places The Bahamas in an enviable position to serve both its traditional and emerging markets and presents an opportunity to link commercial and financial interests.
In recent years, individuals have chosen to “follow their money” with respect to where they live and work. Individuals, family offices and institutions will find a welcoming environment when they come to The Bahamas, which is committed to utilizing its natural resources and cultivated assets to provide an international financial centre that is attractive to business, as well as for the enjoyment of life.
As The Bahamas looks to differentiating itself as an international financial centre, there are some innovations that are required in order to respond to the changing environment which require the support of industry stakeholders and the active support of policymakers. These include:
1. Use of technology to transform channels of delivery for financial service must characterize the way that the sector does business and offers financial services. The industry must integrate technological advances to improve service delivery, to provide client data protection, create new products and services and generally improve the overall client experience. If The Bahamas is successful at doing that, financial services can more than survive, it can grow and thrive. This will require concessions and incentives being given to encourage innovation in this sphere. It will require a dynamic and responsive supervisory regime.
2. Progressive residency and immigration policy and process reform: The Bahamas must enhance immigration policy and process through measures such as the introduction of a tax residency certificate based on a substantial connection. Expanded grounds for permanent residence beyond the purchase of residential property should also be considered.
3. Improved ease of doing business/public sector reform: Innovation with respect to the process for starting a business would increase competitiveness whilst 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.
4. Commerce and financial services: Leveraging linkages between commercial development/activities and financial services for real international business is an opportunity that The Bahamas must embrace as it looks to the future. The availability of resources throughout the archipelago makes The Bahamas attractive for FDI. It needs to focus on creating incentives for real international business to make The Bahamas its home, in the same way that it gives incentives to the tourism sector.
5. 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, the enhancements to the existing tax structure that encourages financial institutions to headquarter the mind and management of their operations here in The Bahamas.
Regulation, expertise, innovation and location are the pillars of financial services in The Bahamas. In combination, they form a compelling reason to consider The Bahamas as the destination of choice to do business and will continue to guide the jurisdiction’s pathway to be a provider of superior financial products and a world-class client experience. BFSB will continue to work with the policy directorate to chart a viable course for the long-term growth of the sector.