Cayman Islands

Author: | Published: 30 Sep 2004
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General framework and conduct of business

What legislation governs the authorization and regulation of banking activities in the Cayman Islands? What has been the most significant regulatory issue?

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 Islands?

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 business.

What sanctions are available to the regulator in the Cayman Islands when taking action against regulated bodies?

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 necessary.

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.

Supervisory requirements

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 recommendations?

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 authorities?

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 procedures.

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 the shares.

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 bank?

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.

Other developments

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 recipient.

Cayman Islands Stock Exchange (CSX)

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 exchanges.

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; and
  • may be held by UK pension schemes.

Author biographies

James Bagnall

Ogier & Boxalls

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

Ogier & Boxalls

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
Queensgate House
South Church Street
Grand Cayman
Cayman Islands
Tel: +1 345 949 9876
Fax: +1 345 949 9877