Lawmakers approved amendments to the Securities Investment Business Licensing Law that will introduce a regulatory and supervisory framework for ‘excluded persons’, which are until now exempt from requiring a license to conduct securities investment business and being regulated by the Cayman Islands Monetary Authority.

The exempted persons regime is designed to impose a lesser regulatory burden for financial service providers who exclusively serve sophisticated or high-net-worth investors, because those investors can carry out the necessary due diligence that is otherwise undertaken by CIMA for licensed entities.

The bill debated in the Legislative Assembly on Wednesday will require most excluded persons to register with the authority and will subject them to more stringent reporting requirements.

The changes come in response to the Caribbean Financial Action Task Force’s evaluation of Cayman’s anti-money laundering framework and a CIMA review of the excluded persons regime.

“The [CIMA] review identified a number of weaknesses and challenges that may pose regulatory and reputational risks to the authority and the islands,” Tara Rivers, minister for financial services, said. The CFATF assessment, published in March 2019, in turn recommended that the Cayman Islands should carry out a comprehensive analysis of sectors that are currently subject to limited supervision, such as excluded persons. In addition, CIMA should gather more information on the size of client assets, business activities, client base and geographic exposure of these securities businesses.

The authority should also implement a comprehensive mechanism to conduct fit and proper assessments of shareholders and beneficial owners of the 55% of excluded persons that are not otherwise subject to CIMA’s full supervisory regime.

The CFATF further noted that excluded persons not licensed by CIMA should implement appropriate anti-money laundering policies, procedures and internal controls, the minister outlined.

The bill will therefore eliminate the notion of excluded persons, Rivers said, and instead separate these entities into two groups – registered persons, who are subject to CIMA’s regulatory oversight, and non-registerable persons, who remain exempt from registration and licensing but still fall under CIMA oversight for anti-money laundering purposes.

Single family offices are explicitly exempt from registration given that they manage only one family’s wealth rather than third-party funds. Single family offices are also carved out of financial regulation in other jurisdictions like the United States, Switzerland or Jersey, Minister Rivers noted.

Other non-registerable persons include entities for which securities business is incidental to their main activities and those who do not conduct securities business.

“In a nutshell,” Rivers said, “the bill seeks to remedy the recognised shortcomings of SIBL, namely to deal with the pejorative connotation associated with the term ‘excluded person.’”

The amendments address the lack of supervisory powers over excluded persons, require these entities to file more information in their annual declaration and allows the authority to wind up entities that are found in contravention of the law.

They also deal with the lack of penalties for the non-payment of fees, give CIMA more powers to correct non-compliance with legislation, and make it an offence to operate without being registered.

In addition, the bill introduces governance requirements for excluded persons, such as the appointment of at least two directors that are natural persons, and the registration of natural persons as a corporate vehicle before conducting security investment business.

Rivers said, “These amendments were felt to be necessary to ensure that the registered person has an effective corporate governance structure in place, which includes accurate and accessible information and accountable management.”

The bill is supported by the Opposition, MLA Chris Saunders said on Wednesday.

However, the ministry said it had received a number of comments since the bill was gazetted on 16 April. As a result, a number of changes to the bill were made at the committee stage, and the bill was passed.

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