Richard Coles, chairman of Cayman Finance, has called on the industry to give their full support to a recent initiative announced by the Cayman Islands Monetary Authority to enhance the industry’s corporate governance framework.
The monetary authority recently began formal consultation with the industry on corporate governance proposals that aim to enhance and clarify corporate governance standards and provide greater transparency in the Cayman Islands’ financial services industry. The initiative includes a survey which has already been sent out to industry. Mr. Coles is encouraging everyone to participate fully in the process.
“The financial services industry has always been extremely cooperative on regulatory initiatives, and we welcome the recent initiative by CIMA”, he said. “Cayman Finance encourages all stakeholders which have received the recent survey to participate fully as the information gathered is key to the CIMA exercise.”
Mr. Coles said Cayman Finance welcomes any efforts to enhance the corporate governance framework of the territory, adding that he was confident that with the full participation of industry and the usual productive relationship between public and private sector, he fully expected the initiative to result in a raising of corporate governance standards while preserving the competitiveness of the industry.
International media had picked up on the monetary authority’s corporate governance plans, which include among others a database of regulated entities, suggesting that Cayman was abandoning its status as a secrecy jurisdiction.
In a letter to the Financial Times, Mr. Coles said, a report in the financial newspaper completely mis-characterised the context of an otherwise worthy initiative of the Cayman Islands Monetary Authority to carry out a comprehensive review of the corporate governance framework for Cayman Islands hedge funds.
“The Cayman Islands is domicile to the majority of the world’s hedge funds and has always taken its global role very seriously in terms of regulation and transparency,” Mr. Coles wrote. “Your suggestion that our jurisdiction is ‘finally opening up’ flies in the face of many years of both international regulatory co-operation and tax information exchange initiatives carried out by this country over the past decade and a half. It also fails to recognise that the funds in question are private placement vehicles that already disclose all service providers, including directors, in their offering memorandums. In other words, investors have full access to the necessary information required for their own due diligence.”
He added, as one of the primary industry bodies representing the financial services sector in the Cayman Islands, Cayman Finance can confirm that the industry welcomes all efforts by the financial services regulator to enhance the corporate governance framework wherever it deems possible.
“At the same time we fail to understand why after many years of enhancing our regulatory and transparency regime, in particular over the past 15 years, articles such as the one published by the FT continue to perpetuate an outdated image of the global regulation of the offshore financial services market and, in particular, the Cayman Islands,” he noted.
Director firms weigh in
Firms offering director services in the Cayman Islands, meanwhile, expressed their support for the monetary authority’s industry consultation on corporate governance reforms.
HighWater said it supports the initiative and it has previously engaged with CIMA to promote stakeholder transparency, including information held by the monetary authority on its database. Gary Linford, managing director of HighWater, said he believes that the monetary authority is conducting this exercise in an appropriate manner, and the inclusion of global stakeholders, particularly investors, is the best way to obtain a view of what is relevant and important to the industry. “In the end, Cayman, as a jurisdiction will be a major beneficiary if the current ‘disclosure based’ regime can be maintained, thereby providing investors with access to even more information that helps their own due diligence process, rather than a regulator attempting to prescribe what is or is not acceptable to sophisticated investors.”
However, Mr. Linford sounded a word of caution, noting that the proposed transparency initiative does not go far enough. “It should cover more of a fund’s service providers rather than just a particular focus on directors, for example, disclosure of the auditor, administrator and legal counsel,” he said.
He also noted it was positive that CIMA resisted calls for prescriptive regulation or to force our private funds regime to conform to standards more appropriate to a retail funds regime.
John Lewis, a director and principal at HighWater, added that institutional investors have for a number of years sought greater transparency in respect to fund directorships and other related information pertaining to the funds in which they invest. He noted that positive changes in the industry are often driven by investor demand. “CIMA’s consultation should result in significant feedback, and is a desirable process and starting point,” Mr. Lewis said.
DMS said it also supports the monetary authority’s efforts to improve corporate governance in the Cayman Islands.
However, while the current proposal broadly addresses governance concerns for financial entities, the CIMA proposal does not go far enough in addressing the root of the governance problem in the hedge funds sector, DMS said.
At the moment, there are no qualifications, residency or performance requirements for any director of a Cayman Islands hedge fund and anyone, anywhere in the world can serve as a director of one of the 10,000 funds registered in Cayman. Only 215 directors are subject to the Code of Conduct Code of Conduct of the Cayman Islands Director Association, DMS said.
“This complete lack of standards leaves numerous investors vulnerable to unsophisticated fund governance providers struggling to cope with the demands of sophisticated hedge funds and ultimately results in disastrous governance failures like Weavering.”
All other service providers to a CIMA regulated hedge fund are required to be licensed and regulated to operate under strict professional and regulatory standards, the fund governance services provider noted.
“Fund stakeholders deserve the certainty of the same mandatory standards from their fund governance providers.”
DMS also said that at the request of the Cayman Islands government in 2012, CIDA delivered a comprehensive legislative proposal to improve fund governance in the Cayman Islands with requirements for the registration of all hedge fund directors, continuing obligations for all hedge fund directors, director disqualification for non-performance and one resident director responsible for Cayman-specific compliance obligations.
CIDA is actively working with the monetary authority and other industry stakeholders to conclude this legislative proposal and expects to deliver the final legislative proposal to the Cayman Islands government in the next few weeks. If approved by government, the director association’s legislative proposal will provide CIMA with an effective foundational framework to harmonise implementation of its survey findings to further enhance fund governance standards in the Cayman Islands, DMS’ statement continued.
“DMS believes that CIMA’s research will reveal that industry stakeholders are not seeking arbitrary and symbolic measures that merely give the perception of effective governance, but are seeking substantive governance measures that define clear performance expectations and hold directors accountable for their performance for every hedge fund, every time, no exceptions, no excuses.”