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A bespoke, risk-based approach to regulatory oversight

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Bermuda's financial regulator, the Bermuda Monetary Authority, takes a risk-based approach to regulating and supervising the entities for which it is responsible, including investment funds, investment providers, fund administrators, trust companies, insurers and banks. 

The Authority's mission, says Melissa Morton (pictured), Assistant Director, Licensing & Authorisations Department, is to protect and enhance Bermuda's reputation "as a leading financial services jurisdiction, utilising a team of highly skilled people. Bermuda is a full member of the International Organisation of Securities Commissions (IOSCO) and as international standards evolve, we must align Bermuda's legislation accordingly. At the moment, the Authority is performing a review of the Investment Funds Act 2006 (IFA) and the Investment Business Act 2003 (IBA)."

One of the points the Authority likes to emphasise to those thinking of doing business in Bermuda is that, as a proactive regulator, it always looks to engage in a thorough consultation process with the market prior to amending any legislation. "We are reviewing the existing legislation with a view to proposing amendments that consider international standards, whilst ensuring the legislation remains fit for purpose for the Bermuda marketplace. We hope to move this forward in the latter part of 2017 following the completion of our consultation with the marketplace," adds Morton.

Recent evidence of this was in Q4-2013 when the Authority amended the IFA to introduce two new fund products to help give managers who are dealing only with qualified participants a quicker route to market: the Class A and Class B Exempt Funds. The Class A Exempt Fund registration in particular is very streamlined. The Operator of the fund self-certifies that the various criteria for registration are met and the fund is registered on the same day. The Class B Exempt fund can be registered in six days or less. The filing requirements for the Class A and B Exempt Funds are reduced commensurately from those of authorised funds.

"This development was made in response to there being a need for a more user-friendly class of investment fund for qualified participants where speed to market is very important," explains Ifor Hughes, Assistant Director in the Authority's Policy, Legal & Enforcement Department. "We always have to ensure that our approach is aligned with international standards. We are open to the feedback we get from the marketplace regarding growth opportunities, but the necessary balances have to be in place."

One of the hallmarks of Bermuda as a jurisdiction is the diversity of players that operate on the island. More than merely a funds jurisdiction, Bermuda is the world's leading insurance-linked securities (ILS) centre, a leading re-insurance centre, and boasts an array of service providers, all of whom operate under the purview of English common law, which has existed in Bermuda for over 400 years. 

"With that diversity there is a quality of infrastructure that has developed to support the efficient conduct of business, including law firms, auditors, fund administrators, etc, who service different sectors of the market. Overall, the Authority operates a risk-based framework. We apply the appropriate level of supervision depending on the sophistication of the investors. It's a sensible, pragmatic approach," says Morton. 

Such is the institutional character of Bermuda that Hughes is keen to stress: "We don't take a cookie-cutter approach. An overwhelming proportion of our business is institution to institution and that is reflected in our bespoke risk-based approach."

"In our discussions with any new fund sponsor, we will highlight our ability to offer speed to market. A Class A Exempt Fund sponsor would be considered a Non-Licensed Person (NLP) and while the registration is automatic, they would also have to register as an NLP for Anti-Money Laundering (AML) purposes. For all other fund classes, the fund can expect to be up and running within six business days from the time their submission is filed," confirms Morton. 

"We would also highlight our requirements for registration: Excluded funds are private funds not marketed to the wider public and having no more than 20 investors. To qualify for a Class A Exempt Fund, the investment manager should already be subject to oversight by an equivalent regulator in the EU or at the federal level in the US; if not, the fund can qualify as a Class B Exempt Fund. All funds must appoint a Bermudian trustee or representative. Finally, we would highlight the ongoing reporting requirements for funds which reflect the nature of their class."

As well as interest in Bermudian investment funds, one clear trend has been for family offices to look at captives for insurance purposes as they make for an effective risk management solution. 

Morton confirms the Authority is also seeing a lot of interest in ILS, indicative of a growing convergence between the capital and risk markets. 

"We have the Segregated Account Companies Act 2000 in Bermuda. This legal structure, in addition to captives, is providing yet another opportunity for family offices. The segregated account company (SAC) allows them to participate in a cell structure within an incorporated entity. This can help them diversify their investment strategy by establishing multiple cells, each of which is legally ring-fenced to protect the assets and liabilities of each cell," says Morton.

Looking ahead, another opportunity which Bermuda is positioning itself to capitalise on is the potential for a recommendation by the European Securities and Markets Authority (ESMA) for Bermuda to operate as an Alternative Investment Fund Managers Directive (AIFMD)-equivalent jurisdiction, paving the way for Bermudian fund managers to opt in to the regime and avail of an AIFMD passport should the EU authorities extend this option to third countries.

Hughes says the Authority was encouraged that ESMA identified no particular obstacles to extending the passport to Bermuda in respect of three of the five assessment criteria. Work is ongoing to achieve full implementation of the Bermuda AIFM regime, thereby allowing ESMA to issue definitive advice with regard to the final two criteria.

"We are committed to completing that process and we remain in contact with ESMA. We will have an AIFM regime that is ready and available for managers to opt in to and be appropriately supervised to market their funds into the EU. The question remains as to if, and when, a passport will be made available. We think our AIFM regime will be a useful option for some, not all, fund managers and we remain committed to this. It will provide even more flexibility," concludes Hughes.

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