The Cayman Islands Financial Services Industry: Resilience And Innovation

For wealth managers around the world, that kind of uncertainty presents significant risks but potential opportunities. It also has cast a very bright spotlight on jurisdictions and industries that have demonstrated the strength and flexibility to not only survive during the crisis but to grow. The Cayman Islands is one of those places.

A leader in global financial services for decades, the Cayman Islands financial services industry has proven its resiliency during the COVID challenge. In doing so, it has helped protect the Cayman Islands from the financial ravages the pandemic has imposed on similarly small jurisdictions. It has also further enhanced its foundational role in the global financial services market. As the global economy continues to evolve, the Cayman Islands and its financial services industry are committed to enhancing that resilience with the kind of innovation that has kept it at the forefront of the global industry.

Resilience

The resilience of the Cayman Islands during the COVID pandemic is directly related to the resilience of its financial services industry. The industry drives the Cayman economy. The financial services sector is the largest contributor to domestic economic activity, and directly accounted for 40.2 per cent of GDP in 2019. In just one year – 2015 – the Financial and Insurance Services sector and the related Professional Activities sector accounted for 72 per cent of total exports at KY$1.8 billion.

While Cayman is often criticised for having a taxation regime that does not include direct taxes, fees from the financial services industry provide a very responsible and stable flow of revenue to support government functions. Over the 15 years prior to the pandemic, Financial Services Licensing Revenues totalled KY$2.7 billion for the government, equivalent to 30 per cent of total government revenue. From 2013 to 2019, Financial Services Licence Fees alone were sufficient to pay 92 per cent of the civil service wage bill. And in the year the pandemic began, 2020, the financial services sector generated a net inflow or ‘surplus’ of revenue for the government of KY$253.8 million.

When the pandemic struck, the economies of jurisdictions around the world crumpled – and those similar in size to the Cayman Islands, whose economies are more significantly built around tourism alone, verged on collapse. By contrast, the Cayman Islands stood strong due to the strength of its financial services industry and its fundamental role in the economy.

But the Cayman Islands financial services industry did much more than just hold its position in the face of an historic threat to the global economy. It actually expanded. Preliminary estimates for 2021 indicate that GDP for financial services sector would end that year nearly 7 per cent above its 2019, pre-pandemic level. During the same period, non-financial services activity was expected to be around 14 per cent below its 2019 level. The Legal, Accounting & Auditing services that provide a core to the Cayman financial services industry fuelled that growth, increasing by around 17 per cent. Finance & Insurance was expected to be roughly 3.2 per cent larger than it was in 2019.

A key element in the resilience of Cayman’s financial services sector – its ability to stabilise and grow during a global pandemic – has been diversification. Any jurisdiction or industry that has developed around a single function in the market run the risk that an unexpected shock like COVID is devastating. Many IFCs have focused on specialisation and paid a harsh cost as the pandemic took hold. By contrast, the Cayman Islands financial services industry is a highly diversified marketplace.

Cayman is well-known as the world’s leading jurisdiction for interna­tional collective investment funds. However, it also runs at or near the front of the pack in other sectors, including as the second larg­est domicile in the world for captives and the number one domicile for healthcare captives and group captives.  It is also a lead­ing jurisdiction for banking, trusts, cap­ital markets and governance services.

The numbers show the breadth of the industry. As of September 2021, Cayman’s Financial Services sector comprised 108 banks (10 licensed to operate onshore and 98 offshore), 142 active Trusts, 12,676 mutual funds, 14,305 private funds, and 772 insurance licensees, among other financial services providers. Inseparable from these are the supporting ancillary services such as Accounting, Audit, Legal and other related professional and administrative services that are critical to the Financial Services sector’s operations.

While the diversity of Cayman’s financial services industry played a key role in its resilience during COVID, so did the fact that its financial products and services are in demand all around the world. Cayman truly is a premier global financial hub and the ability to generate business worldwide supported growth when it was needed most.

The groundwork for Cayman’s leadership in the global financial services marketplace was laid long before COVID created a need for business on that scale to survive. Starting with the passage of the Companies Law in 1960, Cayman has spent the last nearly six decades developing laws and regulations that enabled it to attract capital and talent from anywhere in the world. The result is that it is now considered among the world’s foremost specialist international financial centres.

As noted above, Cayman’s financial services industry includes a wide variety of products and services. But the one that is among the most widely-recognised around the world as exemplifying the industry is Cayman-domiciled Collective Investment Vehicles (CIVs). Cayman CIVs benefit investors, the businesses in which they invest, the wider economy, and the governments of the jurisdictions in which those investors and businesses are domiciled. Cayman-domiciled CIVs enable investors to deploy novel structures and strategies that either would not be possible in the investors’ home jurisdictions, or do so in a way that more cost-effectively achieves tax neutrality. As a result, they enable investors to achieve a greater return on their capital invested, which in turn leads to an increase in investment, leading to an increase in the rate of innovation and growth.

Cayman-domiciled CIVs are one of many products and services offered by the Cayman Islands financial services industry to clients around the world that grew in importance during COVID. The ability of the industry to continue serving those clients despite the challenges posed by the pandemic strengthened investors’ trust in the industry and helped to protect the jurisdiction from a destabilising economic shock.

Innovation

COVID demonstrated the industry’s resilience and its importance to the jurisdiction, but that has only amplified the need to continue to innovate in order to maintain it. Cayman’s growth as a premier global financial hub has included many examples of government and industry collaborating to anticipate market demands and develop the laws and regulations to meet them while adhering to good governance standards. That collaboration is growing stronger to support further innovations that can strengthen the diversification and international leadership of the Cayman Islands financial services industry. 

Some of Cayman’s most notable innovations are occurring in one of the most innovative sectors in financial services: FinTech. FinTech is revolutionising financial services through the rise of cryptocurrencies, blockchain and similar technologies. At the same time, the new technologies present potential problems for both investors and authorities: how to permit an appropriate degree of transparency to allow people to know who they’re doing business with – and allowing law enforcement and tax authorities to prevent crime and collect revenue. Providing the benefits of innovation and the protections of an appropriate regulatory structure requires Smart FinTech Regulation that can strike the right balance.

Achieving this kind of balance between privacy and transparency will be a game changer for the use of FinTech around the world, and especially within the funds industry and among larger institutional investors. For example, high quality digital tokens could then be issued by funds and could be listed on digital exchanges and traded by investors with globally certified digital IDs, thereby creating liquidity and stickier capital for fund managers.

Attracting FinTech companies and keeping current with FinTech changes in existing sectors will be an enormous challenge that neither government nor industry can achieve alone. Cayman’s government and industry are working together to create a legal and regulatory regime that supports innovation to fuel successful FinTech development, while incorporating the commitment to transparency and cross-border sharing of information with tax and law enforcement authorities into the legal and regulatory regime.

Recently, the Cayman Islands established new legislation and regulation to enable the use of digital assets. Effective October 2020, the Virtual Asset Service Providers Act requires entities wishing to provide related services to be registered with CIMA (Cayman Islands Monetary Authority). According to CIMA, this regulatory framework will be implemented in two phases: a registration and notification process, which ended on 31 January 2021, and a licensing and approval process that will begin once the appropriate aspects of the Act come into effect.

The Cayman Islands also will expand its commitment to innovation in the global financial services market by developing a virtual asset framework that captures coin issuances, trading platforms, exchanges and sandboxes. CIMA will lead this effort in collaboration with industry and will include new definitions for how this new framework fits into the existing regulatory regime and implementation of the necessary support infrastructure.

FinTech is only one example of Cayman’s focus on innovation. Work continues across the industry’s diverse sectors, with activity on: CIVs; trusts; foundations; insurance/reinsurance; and arbitration, just to name a few.  Global financial services is a highly competitive market and maintaining a leadership position – especially across so many sectors – remains as challenging as ever. But COVID has taught us that it is more important than ever before.

The resilience of the Cayman Islands financial services industry – and, therefore, of the Cayman Islands itself – has been built on providing products and services across diverse parts of the global market. It has been enhanced by providing those products and services as well or better than almost any other industry anywhere. Investment professionals around the world can rely on that resilience and look forward to continued innovation to earn their business for years to come.

Travis Webster
Communication & Public Relations Support