General framework and conduct of
What legislation governs the authorization and
regulation of banking activities in the Cayman Islands? What
has been the most significant regulatory
The Monetary Authority Law, which established the Cayman
Islands Monetary Authority (CIMA) in 1997, was amended in 2002
to divide CIMA's principal functions into four categories:
monetary, regulatory, cooperative and advisory. CIMA is
responsible for the licensing and regulation of banks and other
financial services businesses conducted in or from the Cayman
Islands. The Monetary Authority Law prescribes CIMA's general
duties in the exercise of its regulatory functions, its
specific powers in relation to any financial services business
being contained in the relevant regulatory law. The regulatory
law governing the licensing and regulation of banks is the
Banks and Trust Companies Law.
The 2002 amendments to the Monetary Authority Law required
the board of CIMA to publish a regulatory handbook setting out
the policies and procedures to be followed by CIMA in
performing its regulatory and cooperative functions. The
handbook is also specifically required to include policies and
procedures for giving warning notices to persons affected
adversely by the proposed actions of CIMA, giving reasons for
its decisions and dealing with complaints against its actions
and decisions. The regulatory handbook was published in interim
form in October 2003.
At the same time, a number of statements of guidance were
published, some of general application to all financial
services business, others of specific application to licensed
banks. The latter were developed using corresponding papers
published by the Basel Committee on Banking Supervision, to
which licensees are referred for further guidance.
Another regulatory development has been the introduction of
regulations under the Securities Investment Business Law which
came fully into force on July 29 2003. Two sets of regulations
deal respectively with Financial Requirements and Standards and
the Conduct of Securities Investment Business. The latter are
referred to in more detail below.
What are the key activities for which
authorization is required in the Cayman
CIMA's licensing and regulatory responsibilities extend to
all financial services businesses under the regulatory laws.
These include, in addition to banking business, trust business,
insurance business (including acting as an insurance broker,
manager, agent, sub-agent or principal representative),
companies management, mutual fund administration, money
services and, most recently, securities investment
What sanctions are available to the regulator in
the Cayman Islands when taking action against regulated
Statutory sanctions are available to CIMA if it believes
that: (i) a bank is or appears likely to be unable to meet its
obligations as they fall due; is carrying on business in a
manner detrimental to the public interest, the interests of its
depositors or other creditors; has contravened the Banks and
Trust Companies Law or has failed to comply with a condition of
its licence; (ii) the direction and control of a bank's
business has not been conducted in a fit and proper manner, or
a director, manager or officer of the bank is not a fit and
proper person to hold that position; or (iii) a person
acquiring ownership or control of a bank is not a fit and
proper person to have that control or ownership.
In those circumstances, CIMA has various possible courses of
action. It may: (i) revoke the bank's licence, impose
conditions or further conditions on that licence, or vary or
revoke any such conditions; (ii) require the substitution of
any director or officer of the bank; (iii) appoint a person to
advise the bank on the proper conduct of its affairs and to
report to CIMA, or to assume control of the bank's affairs (any
such appointment being at the expense of the bank); and (iv)
require the bank to take such other action as CIMA considers
CIMA's approach to, and its procedures for, the exercise of
these powers are set out in its policy statement, The Ladder of
Compliance. This sets out the considerations that CIMA will
take into account in determining what action to take in the
event of any concern as to the matters referred to above (a
contravention), and the stages of action by CIMA, which depend
on the seriousness of the contravention and whether any
remedial required action is satisfactorily undertaken.
Does the regulatory regime in the Cayman Islands
include regulatory conduct of business rules governing the
obligations of a bank to its customers?
There are no comprehensive regulations covering obligations
of a bank to its customers, although any concerns will be taken
into account by CIMA in its ongoing review of licensees.
As indicated above, specific regulations apply to banks that
are licensed to conduct securities investment business: The
Securities Investment Business (Conduct of Business)
Regulations. Among other things, these regulations prescribe
advertising standards, standards for dealing with clients and
requirements relating to dealing with client assets and money.
They also require the establishment of effective complaints
handling systems and procedures. The standards for dealing with
clients contain provision for classification of clients (as
private clients, professional clients or market
counterparties), the contents of agreements with clients
(including discretionary management agreements and contingent
liability investment agreements), lending to clients, reports,
disclosure and client access to records.
Does the regulatory regime for banking business
in the Cayman Islands include regulatory capital requirements?
If so, are these based on the Basel Accord and are there
significant variations from the core Basel
Licensed banks (other than those holding restricted
licences) are subject to a statutory net worth requirement
imposed by CIMA (subject to a minimum of $500,000): they are
also required to risk asset ratios in accordance with CIMA's
policies. These policies do not have statutory force, though it
is likely that they will in the future, and the requirements
are imposed by CIMA as conditions of licences. CIMA's stated
policy is to adhere closely to the Basel Core Principles.
What effect will Basel II have on banking
transactions in the Cayman Islands?
The effect of Basel II on banks licensed in the Cayman
Islands is uncertain, and is likely to differ between
international banks and local banks. To the extent that, as
part of the regulatory process, CIMA looks to the capital
adequacy requirements of a bank's primary regulator (as is the
case with Cayman Islands branches of foreign banks), that will
be affected by the adoption of Basel II by the jurisdiction of
the primary regulator.
More generally, a working group of the Caribbean Group of
Bank Supervisors has been working on a framework for a
quantitative impact survey, in which a number of banks from the
different regional jurisdictions will be asked to participate
in obtaining data on the impact of Basel II. It is also
expected to provide information to facilitate a regional
approach to Basel II which is both harmonized and appropriate
to each jurisdiction.
Does the regime in the Cayman Islands include
rules and operational and organizational requirements relating
to internal controls and operational risk?
Among the guidelines published by CIMA at the time of
publication of its regulatory handbook were guidelines on
Operational Risk Management and Internal Controls for banks.
Both are based on publications of the Basel Committee on
Banking Supervision. The Operational Risk Management guidelines
deal with the respective roles of a bank's board of directors
and senior management in establishing, implementing and
monitoring operational risk management procedures, including
identifying and measuring operational risks, their control and
mitigation. The Internal Controls guidelines deal more
generally with the roles of the board of directors and senior
management and apportionment of responsibilities, risk
recognition and assessment, controls and internal audit (itself
the subject of a separate statement of guidance).
Does the regime in the Cayman Islands include a
requirement for controllers and major shareholders of regulated
banking institutions to be approved by the supervisory
A person acquiring control or ownership of a licensed bank
must be a fit and proper person to have such control or
ownership, which is determined by CIMA by reference to
published guidelines and in accordance with published
Consequently, the issue or transfer of shares of a licensed
bank (and of most other licensees under the regulatory laws) is
prohibited without CIMA's prior approval, and this prohibition
extends to beneficial as well as legal interests in shares. The
transfer of shares in a bank's parent company will be regarded,
for this purpose, as a transfer of a beneficial interest in the
shares of the bank itself.
However, a bank may be exempted from this requirement for
prior consent if its shares are publicly traded on a stock
exchange approved by CIMA. Any such exemption is subject to the
conditions that the bank must, as soon as reasonably
practicable: (i) notify CIMA of any change of control of the
bank, any acquisition by a person or group of persons of more
than 10% of the issued share capital or total voting rights of
the bank or its parent company; and (ii) provide CIMA with such
information, within such period of time, as it may require to
assess whether each of the transferees of the shares is a fit
and proper person to have control of the bank, or ownership of
Investor protection scheme
Have there been any recent significant changes
to the insolvency legislation in the Cayman Islands or are any
such changes proposed?
The Cayman Islands has no comprehensive insolvency statute.
The principal provisions relating to insolvency of individuals
and partnerships are contained in the Bankruptcy Law and those
relating to the insolvency of companies are contained in the
Companies Law. There has been no recent amendment to either law
in this regard. Amendments to the Companies Law are imminent,
following a recent review, but no significant amendments to the
insolvency provisions are expected.
Does the Cayman Islands operate a deposit
protection of guarantee scheme protecting retail depositors
from loss in the event of insolvency of an authorized
There is no deposit insurance or guarantee scheme in the
Cayman Islands, but deposits with a Class A licensed bank
incorporated in the Cayman Islands (that is, a bank that
carries on local retail business) constitute, up to a
prescribed limit and subject to certain exclusions,
preferential debts on the winding up of the bank.
The first CI$20,000 ($24,000) of such deposits are repayable
in priority to other debts of the bank (other than certain
taxes and wages, with which they rank equally). This is
essentially a measure to protect individual depositors, and
does not apply to deposits in the name of another financial
institution, any director, controller or manager of the bank
(or anyone exercising those functions), any person holding 5%
or more of the shares of the bank, or any parent, subsidiary or
company under common ownership with the bank.
Does the Cayman Islands have an ombudsman
scheme, arbitration scheme or similar scheme for the resolution
of disputes between a bank and its retail customers other than
through formal legal proceedings?
Although a Complaints Commissioner has recently been
appointed to deal with complaints about administrative actions
of government departments, there is no equivalent official to
deal with disputes with private institutions.
EU Savings Directive
The Council of the EU's Directive 2003/48/EC on taxation of
income in the form of interest payments is part of a package of
tax measures, designed to tackle harmful tax competition, and
agreed by the finance ministers of the member states of the EU
in June 2003.
The Directive does not contemplate that it will apply until
a number of specified countries that are not EU member states
have applied measures that are equivalent to, or the same as,
those provided for by the Directive. Those countries include
the Cayman Islands, as a dependent territory of the UK.
On February 24 2004, the Cayman Islands government announced
that it had agreed to implement with EU member states
exchange-of-information measures consistent with the EU Savings
Directive with effect from January 1 2005. That agreement is
conditional on all EU member states, all named third countries
(Switzerland, San Marino, Monaco, Andorra and Liechtenstein)
and associated and dependent territories of those member states
(Jersey, Guernsey, the Isle of Man and the dependent or
associated territories in the Caribbean) implementing the EU
Savings Directive as well.
The EU member states have postponed the implementation of
the Directive until July 1 2005. The implementation by the
Cayman Islands of exchange of information measures has been
similarly postponed, and the Bill for the necessary enabling
legislation has not yet been published. However, on the basis
of the government announcement, it is expected that the
legislation will apply to a paying agent in the Cayman Islands
that makes an interest payment to an individual who is tax
resident in an EU member state, and will require that paying
agent to provide information to the tax authority in that EU
member state as to the amount of the payment and details of the
Cayman Islands Stock Exchange
In March 2004, the Board of the Inland Revenue in the UK
granted the CSX status as a recognized stock exchange under
section 841 of the UK Income and Corporation Taxes Act, putting
the CSX on the same footing as the Dublin and Luxembourg stock
This enables companies whose securities are listed on the
CSX to take advantage of the quoted eurobond exemption, with
the result that interest on such securities can be paid without
deduction of UK tax. Further advantages are that securities
listed on the CSX:
- will be qualifying investments for the purposes of
personal equity plan and individual savings accounts;
- may be held by UK pension schemes.
James Bagnall (partner) leads the banking and finance team
at Ogier & Boxalls. He advises on the establishment,
regulation and operation of banks and insurance companies, and
on asset finance, securitizations and other structured finance
products. James also advises on corporate and commercial law.
He was admitted as a solicitor in England in 1983 and as an
attorney in the Cayman Islands in 1985. Before joining Ogier
& Boxalls in 1993, he practised with Clifford Chance and
Ashursts in London and with Walkers in the Cayman Islands. He
became a partner in Ogier & Boxalls in 1995.
Matthew Swan (senior counsel and partner of the Ogier Group)
is a member of the banking and finance team at Ogier &
Boxalls. He acts for a number of global organizations in
respect of securitization and structured finance transactions
and for international banks in respect of lending and security,
particularly with regard to property-related transactions. He
has extensive experience of advising financial services
businesses on the legal and regulatory framework offshore, and
on general corporate and commercial matters.
Ogier & Boxalls
PO Box 1234 GT
South Church Street
Tel: +1 345 949 9876
Fax: +1 345 949 9877