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In a speech delivered at an Association of Bermuda Compliance Officers' event last month, Bermuda International Business Association chief executive Cheryl Packwood narrated an incident which, she and other industry members believe, shed light on the ongoing debate on standards of regulation and supervision in the offshore financial services industry.

At a recent hedge fund conference in a location she describes as 'one that identifies Bermuda as one of its major competitors,' Packwood was seated with one of the presenters, who worked as the compliance officer and corporate counsel of an unidentified firm. She pressed him on why he chose another jurisdiction over Bermuda to register his firm's funds.

The compliance officer said that was because this jurisdiction had no regulation, a claim that Packwood vigorously disputed. The other location, she said, had rules that were in fact more onerous and cumbersome than Bermuda's. He replied: 'Sorry, I know all about the differences in regulations, but I should have said, 'There is no enforcement of regulation where I am domiciled.'' For a glimpse of what some offshore jurisdictions have come to represent, Bermudian officials say one does not have to look too hard - which is why they do not want the territory to be identified as one. Says Packwood: 'We regard ourselves as an alternative financial jurisdiction, which happens to be located on an island.'

Bermuda is a tiny speck in the north Atlantic Ocean, more than 1,000 kilometres (about 670 miles) east of the nearest continental landmass, Cape Hatteras in North Carolina, and home to an estimated 66,100 people. Once best known as a rather genteel tourist destination for moneyed visitors from Europe and North America, the archipelago of 138 small islands has seen its economy transformed by international financial services over the past two or three
decades.

Bermuda is now the world's insurance and reinsurance capital with a total of 1,312 companies at the end of 2005, with gross premiums of USD100.7bn and total assets of USD329.8bn, as well as being a thriving hub for funds with more than 2,200 traditional and alternative vehicles domiciled in the jurisdiction and total net assets of some USD1210bn. Additionally, the Bermuda Stock Exchange has more than 420 listed securities with a total market capitalisation of USD350bn, and there are four home-grown banks, of which the best known is Bank of Bermuda, now part of HSBC, and Butterfield Bank.

While these numbers are impressive for a group of islands barely a third of the size of Washington DC, they are modest in comparison with those of rival domiciles such as the Cayman Islands, Dublin and Luxembourg. That, say industry insiders, is deliberate; Bermuda views itself as a somewhat exclusive club. The financial regulator, the Bermuda Monetary Authority, is extremely vigilant about whom it lets in and how business gets done from the island's pristine shores. Quality, not quantity, is its guiding philosophy.

At the same time officials such as deputy premier and finance minister Paula Cox increasingly have to defend Bermuda's reputation from charges of being costly and slow, and industry participants are embarking on an aggressive marketing approach to debunk such myths and instill a different image of a jurisdiction that is serious about regulation but welcomes innovation. They hope institutional investors, such as endowments and pension funds, will be reassured by Bermuda's commitment to policing its financial services companies, and are taking the message to leading onshore financial centres including New York, London, Paris and Geneva.

A company can have its registration application turned around in as little as 24 hours at a cost in fees of around USD3,900, comparable with if not less than what it would take in any competing jurisdiction. But Tim Calveley, chief financial officer of hedge fund administrator Fulcrum, hastens to add: 'Bermuda is trying to tell everyone it's not a brass-plate jurisdiction. The BMA is quite stringent about anti-money-laundering. It has positioned itself as a premier jurisdiction with high standards, and that's how it wants to known.'

Adds Pat Phillip-Bassett, the BMA's assistant director for corporate governance and communications: 'Maintaining that delicate balance supports Bermuda's success as a leading, quality financial services jurisdiction. A vast network of attorneys, auditors and administrators has helped solidify its place in the international financial services industry.'

Among measures to strengthen oversight of the insurance sector, the regulator has developed an audit programme for newcomers to complement its on-site reviews. It is also preparing a code of conduct for companies and has expanded the scope of audits it conducts on location. The BMA has carried out initial implementation of a programme governing its insurance captive market over the past three months, and it is close to completing work on a new risk-based capital adequacy model. Meanwhile, insurers and re-insurers continue to flock to Bermuda. During 2006, 82 new firms were established here, the largest number for three years and up nearly 10 per cent from 2005. The new wave of business coming to Bermuda began following the September 11, 2001 terrorist attacks in the US and gained further momentum after Hurricane Katrina in 2005 - events that cost the industry an estimated USD40bn but prompted the creation of new insurance companies to take advantage of soaring premium rates.

The Investment Funds Act 2006, which replaces the 1998 Collective Investment Scheme regulation, has created a three-tier classification. Administered funds must have a Bermuda administrator and be either listed on a recognised stock exchange or carry a minimum investment requirement of USD50,000. Institutional funds are targeted at qualified investors and must maintain a USD100,000 investment threshold. Funds that do not fall in either of these classes belong to the standard funds category. Given the sophisticated nature of its market, the regulator does not encourage retail participation in Bermudian alternative funds, although the sector also includes retail funds offered to local investors by the island's domestic financial services providers. Responsibility for creating or changing rules now rests with the BMA rather than the finance ministry. The new legislation introduces the licensing of new fund administrators, of which Citadel Solutions Bermuda became the first last month, and the regulator is drawing up guidelines governing their duties, requirements and
standards. However, the BMA says that that  its approach to regulation of the fund sector will remain unchanged as long as the industry follows market discipline and carries out proper disclosure.

The island is also tweaking a number of other measures including its regulations designed to prevent money laundering, and the BMA will have statutory authority to monitor fund administrators' anti-money laundering compliance. It also has authority to check legal and accounting professionals conducting financial transactions for clients and can order searches of business premises if required.

The measures to assure a regulated environment for fund services are encouraging continuing growth in the sector. Citadel Solutions, the fund administration offshoot of one of the largest US hedge fund managers, is joining a sector that already includes HSBC (through its acquisition of Bank of Bermuda), Bank of New York and Citigroup (which has just acquired Bisys, another administrator with a Bermuda presence).

The presence of these major players gives Bermuda a significant boost in terms of the island's hedge fund servicing capability. Says Jessel Mendes, who heads Ernst & Young Bermuda's asset management practice: 'In my opinion, Bermuda has done a good job regulating the local asset management industry. Our reputation for quality, flexibility and appropriate oversight has helped attract blue-chip names.'

While Bermuda's regulatory box is neatly checked off, it is contending with a host of other challenges. While it boasts an impressive telecommunications network, other parts of its infrastructure leave something to be desired. Skilled manpower is always at a premium, and the decline of the dollar against the euro and sterling is making it harder to attract offshore talent to its shores.

Several administrators including Citi,Dundee Leeds and HSBC are reportedly scaling back their Bermudian operations for reasons that are not completely clear but may reflect higher costs and skills shortages. Rents and purchase prices for higher-end residential properties are already among the highest in the world, which filters down to the salaries that firms must pay. The government is working with firms in the accounting, fund administration and insurance sectors, which are most likely to be affected by the manpower crunch. It has been flexible in granting extensions of visas to certain foreign employees that have been admitted on work permits, and has introduced various practical measures to ease living and working conditions, including car-sharing schemes and a faster ferry service for commuters.

To get around infrastructure issues, some administrators have been establishing offices in other countries including Canada and India. Both Butterfield Fund Services and Olympia Capital have opened facilities in Halifax, Nova Scotia, over the past year, while Fulcrum has an office in Waterloo, Ontario. Butterfield, which already has operations in Barbados, the Cayman Islands, Guernsey, Switzerland and the UK, is looking to add New York to its international network. Critics say that businesses moving operations overseas spell long-term trouble for Bermuda and say the government should offer incentives to staunch the outflow, although the more relaxed approach to recruitment abroad helps. Ernst & Young, for instance, now brings in people from countries such as India and the Philippines. 'We have gone much further afield to find qualified accountants,' says executive Chris Gauk. The recruits are also on the regulatory side, with the BMA having just lured Matthew Elderfield from the UK's Financial Services Authority, where he had been head of department for the major retail groups division since December 2004, to succeed Cheryl-Ann Lister as its chief executive. Elderfield was previously director of policy for the International Swaps and Derivatives Association and established its European operations.

It's a time of change, too, in the structure of the island's financial services industry, with increasing signs of convergence between its two largest sectors, insurance and hedge funds, according to Julie McLean, a partner in the corporate department at law firm Conyers, Dill & Pearman. Hedge funds have become significant investors in the area of property catastrophe insurance through vehicles known as sidecars, fixed-term bespoke reinsurance deals between reinsurance companies and investors such as hedge funds and private equity partnerships. 'Lines between private equity and hedge funds are slowly blurring as well,' says Ernst & Young executive Chad Critchley. 'They are both looking at similar investment opportunities.'

Meanwhile, the Bermuda Stock Exchange is targeting potential listings of debt derivatives and warrants as well as of hedge funds. It has teamed up with the BMA and BIBA to create 'Launch 'n' List,' an initiative that allows fund paperwork to be submitted simultaneously to the regulator and the exchange. In most instances, a listing on the exchange can take place within a two-week turnaround.

Bermuda's well-established fund administration sector is one of the beneficiaries of the growing trend for US hedge fund managers to engage third-party administrators, gradually falling into line with their counterparts in Europe and other regions where this is the norm. According to Douglas Lang, managing director of Butterfield Fund Services, as hedge funds accept increasing volumes of institutional money, they are being compelled to hire independent administrators to service their assets and calculate valuations, which should help steer business to Bermudian administrators, especially those that already
service offshore fund structures for US managers.

Other sectors of the financial industry also  seem to be benefiting from Bermuda's reputation for sound regulation and solid service providers, including private wealth management and fiduciary services. Officials and industry players hope that the jurisdiction can take advantage of a global shift toward greater scrutiny of the offshore world and demand on the part of investors for protection through the use of independent service providers and effective corporate governance structures, and that this will feed through to the bottom line for the island's businesses.

For now, Bermuda is on the upswing as it deploys its reputation as a well-policed financial centre to its advantage, McLean argues, saying the island can point to a much longer history of effective regulation and compliance requirements than some of its international rivals. Members of the industry are confident that the authorities will combine this with adjustments to the regime where necessary to make procedures as efficient and streamlined as possible.


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