In recent years Bermuda has made significant efforts to shake its reputation for over-legislation, with numerous initiatives designed to make the island a more attractive option for the fund industry
Every international offshore financial centre has developed its own specialist areas, and in Bermuda's case it is insurance that stands out. However, while mutual fund management also continues to grow, assisted by the establishment of the Bermuda Stock Exchange (BSX).
Shaun Morris, managing partner for the Bermuda office of Appleby Spurling Hunter, explains: "Bermuda's financial sector is in substance no different from the financial sectors that exist in other offshore financial jurisdictions.
"Typically, in offshore jurisdictions the financial services sector is segmented into the following areas: banking, insurance/reinsurance, securities/investment and trusts. And I do not view Bermuda as having any distinct advantages over other offshore centres in general terms.
"Each jurisdiction is well-known for offering different kinds of products. Bermuda is the leading offshore insurance and reinsurance market, while the British Virgin Islands and the Cayman Islands, as well as Jersey, have other advantages over Bermuda, in terms of their ability to attract different types of businesses that Bermuda is unable to.
However, the expansion of mutual funds and private equity funds in Bermuda is unrivalled in any other offshore finance centre, he says. Morris puts most of this growth down to the establishment of a dedicated stock exchange in Bermuda.
taking the initiative
He says: "The BSX has evolved significantly over the past decade and has been instrumental in promoting the fund industry in Bermuda, by allowing offshore funds to launch primary and secondary listings on it as well as being recognised by other onshore financial regulators as a designated exchange for the listing of different fund vehicles."
This growth is reflected in statistics from the Bermuda Monetary Authority (BMA), which reports total assets under management for mutual funds to be $846bn in quarter four of 2005, compared with $809bn for the same period in 2004.
According to Greg Wojciechowski, president and chief executive of the BSX, almost half of the funds listed on the exchange are domiciled in other locations.
"We have more than 300 funds listed, with approximately 100 of these having hedge fund attributes," he explains. "The growth of the funds industry is partly in recognition of the longevity of BSX as well as the level of support it offers for their listing."
Wojciechowski says Bermuda continues to look at ways to improve service to enhance its proposition in the global market place. As a result of this, in May this year, the Launch 'n List product was launched. This allows a fund to be simultaneously approved by the BMA and listed on the BSX within two weeks.
Susan Stirling, acting chief executive of the Bermuda International Business Association (Biba), says the development of Launch 'n List would not have been possible without a close working relationship between its members, the BMA and the BSX. Following the success of its launch, she says the working party will continue to devise new products that appeal to global investors.
Commenting on the service, Wojciechowski adds: "This was a logical extension to offer our clients a one-stop solution. This product will not only support the funds industry but we believe it will also be important for other products such as private equity and debt transactions."
change for the better
Alongside initiatives such as Launch 'n List, Stirling also attributes much of the rapid growth in the funds industry to Bermuda's high regulatory standards.
Stirling says: "Bermuda prides itself on its balanced, practical approach to regulation. We have a track record of establishing tailored regulatory regimes appropriate to the risks in each business based in the jurisdiction, to encourage prudent business conduct without stifling innovation and business development.
"At the same time we keep pace with the changes in global regulatory practices, ensuring our frameworks meet international standards. Bermuda's legislative framework actively encourages dialogue with its business community. This interaction has yielded fundamental reforms to Bermuda's body of financial services and company law."
However, despite this, Stirling says it is not unusual to find major market participants unaware of the fundamental reforms enacted in Bermuda in recent years.
"This is much to the detriment of Bermuda's reputation, which has been unjustifiably portrayed as unnecessarily wedded to regulation at the expense of pragmatic change," she adds.
She argues that in the last five years there have been numerous changes to its regulatory set-up, all designed to move away from this stigma. These include the removal of requirements to have:
Bermuda resident directors.
Qualifying shares in a Bermuda company.
Prior ministerial consent for the formation of a mutual fund.
Mutual funds to receive regulatory classification coincident to incorporation.
A Bermuda-approved mutual fund to have a licensed investment adviser.
The prospectus to be filed prior to the commencement of a public offering of shares of a Bermuda company.
The BMA to give prior consent for the issue and transfer of non-voting securities.
The BMA to give prior consent for the transfer of any securities to an affiliate.
The BMA to give prior consent for security arrangements whereby the shares of a Bermuda company may, pursuant to security arrangements, be transferred to a licensed bank incorporated in certain approved jurisdictions.
The minimum capital of a mutual fund has been reduced to $1.
She also highlights significant regulatory developments relating to collective investment schemes, as another step forward for Bermuda. The Investment Funds Bill, which is due to be tabled in parliament in coming weeks, will allow certain non-retail funds offered exclusively to sophisticated investors to be exempt from classification under the regulations.
These funds must, however, be registered by the BMA and meet certain criteria, including appointing an auditor as well as recognised fund administration and retaining a local representative in Bermuda.
"Preparatory work and consultation with industry continued during 2005 with respect to proposed new CIS legislation," says Stirling. "Last year, the BMA completed first stage consultations and began drafting the provisions for new legislation."
In conjunction with this, Stirling says the BMA is looking at additional changes to regulation, which it intends to circulate to industry for consultation in the fall.
Morris says these changes have been welcomed by the industry: "The entire supervisory framework by the BMA is changing and moving towards a risk-based model, whereby decisions as to whether to impose limitations or requirements on a licensed financial services entity would be based on prior assessment of the inherent risk associated with the particular business."
Another core area of focus for Biba is the development of trusts, according to Stirling. She says the trust sector in Bermuda remains steady, with the number of trusts under trusteeship and total assets under administration experiencing growth in 2005.
"Last year was the first full year of application of the Trustee Amendment Act 2004 and the Trust (Special Provisions) Act 2004 and proved to be a period of settled adjustment to the legislation." she explains. "The Trust (Regulation of Trust Business) Amendment Act 2005 was enacted at the end of the year, in tandem with similar legislation applying to deposit taking institutions and investment businesses.
"The new legislation, for which applicable regulations are currently being developed, provides for the minister of finance to prescribe by regulations the facts and matters that auditors and reporting accountants must report to the BMA.
"The BMA continues to conduct its routine supervisory responsibilities under the Act, as well as to provide guidance on the Act and the supervisory approach under it.
"This year is the third year of implementation of the BMA onsite compliance programme for trust companies, which is proceeding smoothly with positive feedback received from the industry, confirming the process has had added value from their own perspective."
Unlike centres such as Jersey, Isle of Man and other offshore centres in the Caribbean, international banks have been conspicuous by their absence due to the government's policy of excluding non-domestic banks. However, this changed in 2003, when HSBC was allowed to buy the Bank of Bermuda.
Morris comments: "The financial sector continues to evolve. Recently we have seen a relaxation of the prohibition on foreign banks establishing a presence in Bermuda. With the merger of the Bank of Bermuda by HSBC, it is arguable that, in terms of the banking sector, there are opportunities for foreign banks to operate out of Bermuda."
Stirling also believes the banking sector will grow as Biba continues to promote Bermuda to a large cross-section of investors. Currently, there are a total of four licensed banks with combined total assets of $22.4bn.
While Bermuda is arguably one of most well-known financial centres off the coast of America, it does also compete head on with other jurisdictions in the Caribbean such as the Cayman Islands, British Virgin Islands and St Vincent.
However, this competition is welcomed by both those in Bermuda and the rest of the Caribbean.
Wojciechowski adds: "Location is critical. The US is one of our largest trading partners and we sit right off its doorstep in a jurisdiction that provides a recognised framework of regulatory operational infrastructure, while supporting product innovation. In addition, Bermuda's charm is a draw for those visiting for business or pleasure."
Humphry Leu, chief operations officers of the BVI International Finance Centre, concludes: "There is a healthy competition between finance centres but an even healthier feeling of co-operation and collaboration. The Caribbean finance centres have had to work hand in hand to ensure that the region is well represented at the macro-level with the OECD, IMF, IOSCO and similar supra-national organisations. Together we have helped push for a sensible approach to international regulatory issues and a 'level playing field' amongst financial centres."
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