Here's a prediction. If you take a look at macro-economic trends since the 1980s, the distinctive pattern favours stronger and increasingly freer capital markets.
It's an overarching trend that has its first great expression in the fall of communism but that has continued to reshape global markets and global thinking ever since. Even in areas of the world such as the Middle East (and especially Dubai) it is now abundantly clear that the intersection of the rule of law and capitalism produces positive results for all concerned.
One of the great challenges of this decade is to develop regulatory systems that will define and enforce standards for control and compliance in a way that assures investors that the game is fair, but it must be done in a way that supports capital growth too.
It certainly appears that the regulatory environment of the Cayman Islands is well on its way toward being a global model of collaboration and balance. With so much tradition, the Cayman culture can embrace virtually every variety of financial instrument as well as apprehend and deter abuse. For example, anti-money laundering standards in the Cayman Islands predate those of most leading onshore jurisdictions, including the United States.
The mutual funds legislation is effective but not intrusive and it is geared toward sophisticated investors and the institutional funds market. Cayman's success as a hedge fund jurisdiction likewise owes much to the spirit of cooperation and partnership between the financial industry and successive governments.
The most recent example of this private/public partnership is especially important. Earlier this year, the newly elected government listened keenly to suggestions
by hedge fund industry representatives for fine-tuning the statutory framework.
Government officials and industry representatives were equally motivated to underscore the probity and trustworthiness of this particular financial sector. Among the most important proposals discussed:
- Foreign funds administered in Cayman should no longer be required to be regulated by the Cayman Islands Monetary Authority (CIMA), since they are already regulated in the jurisdiction where they are domiciled, while the Cayman administrators that service them are already closely regulated by CIMA. This change would enhance the inflow of business to administrators here.
- Categories such as public funds and professional funds would be introduced, a cosmetic but descriptive change that should allow people to understand more easily
what kind of funds they are dealing with. The government has also demonstrated its willingness to help the industry in recruitment from abroad.
Here, the Cayman government is showing particular wisdom and flexibility. The regulations governing work permits are flexible enough to allow firms to recruit the professionals they need to service the work coming in. Obviously the government is keen to promote and make the most of the talent available locally. However, there is also recognition that local resources are not sufficient to service the market. Some fund administrators are becoming more global in their outlook, which offers them a way to solve the kind of problems with recruitment that they might experience anywhere.
The Cayman regulatory system may be a model for other financial markets on paper. Increasingly sophisticated administrative staffs will come here to learn and, sooner or later, disseminate what they've learned to all major capital markets.
By Jonathan Tonge and Mark P. Lewis - Walkers