Timothy Ridley: Reading the tea leaves - whither the private trust industry in
the Cayman Islands
Remarks by Mr Timothy Ridley, Chairman of the Cayman Islands Monetary Authority, at the
10th Anniversary Dinner of STEP Cayman, George Town, Grand Cayman, 25 October 2006.
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First, may I thank the STEP council for paying me the honour of inviting me to address you on the
occasion of the 10th anniversary of STEP Cayman. Secondly, I must issue the usual caveat that my
comments tonight are personal and do not necessarily reflect the official Cayman Islands Monetary
Authority (CIMA) position. Finally, may I warn you that it is indeed daunting to speak to those who are
considerably more expert than I on trust and trust related matters. So please consider this an
avuncular 'fireside chat" from a retired warhorse that must be suffered politely by those paying for his
nosebag.
We have enjoyed a breathless two decades in the Cayman Islands and not simply due to Hurricanes
Gilbert and Ivan. Cayman and other small international financial centres (SIFCs as we are now
termed) have struggled to deal with the onslaught of the UK, the US, the EU and their client alphabet
soup international standard setters (who seem dedicated to the game of leapfrog). The enthusiasm of
the UK is particularly ironic, given that the mother country had for many years encouraged her
offspring to develop as financial centres in order to reduce the financial burden on the UK. The cost to
the SIFCs in terms of financial and human resources and lost opportunities has been significant, as
was perhaps the very intention of the anti competitive and protectionist drivers of the onslaught. But by
dint of fleet footwork, hard work and some good fortune we have survived and indeed thrived and
have become an important cog in the wheel of global capital markets. But the onslaught is by no
means finished. Indeed we may merely be at the end of the beginning. Where the initiatives can be
expected to go next must be left for another evening.
Tonight, I propose to spend a little time on the subject nearest and dearest to the hearts and minds of
many a STEP member. If there is one piece of the Cayman success story that lacks the full luster of
the others it is perhaps the private client segment. It may very well be not so much that Cayman is
losing ground to its competitors but that private client and trust business, while reasonably successful,
has been overshadowed by the overwhelming success of the banking, insurance, structured finance
and more recently fund industries that have been the primary focus of the local and international
professionals and service providers. Dare I say it, because the pickings have been far better. Local
anecdotal cocktail party chat seems to be that we think we are perceived as not much interested in
private client and trust work, as not being the dynamic innovators we once were and as not having
moved with the times both to innovate and also to relax some of the more burdensome aspects of our
regulatory regime, particularly with respect to the licensing of private trust companies. Against that, we
still have an excellent cross section of major brand named trust companies and a good and growing
number (around 80) of licensed private trust companies. Of course we do not know the number of
private trust companies in our main competitor jurisdictions as they are generally not required to be
licensed.
Over the past few months I have been informally polling local and overseas professionals to ascertain
their views. It is certainly the case that the feedback from the local enquiries was somewhat
pessimistic. The overseas feedback less so.
Apart from immigration, the high cost of doing business in Cayman (including may I say local
professional fees) and the knock-on effects (subjects for yet another evening), the common theme
from most local (and some overseas) professionals is the uncompetitive regulation or overregulation of
private trust companies and the cumbersome and sometimes intrusive licensing procedures. Following
discussions between CIMA and STEP, I am hopeful that you will see an improvement in the
processing of applications and a reduction in the time taken to carry out the due diligence. In
particular, CIMA welcomes an early filing of the details of directors, shareholders, settlers etc so we
can commence our due diligence as early as possible. We are also reviewing the personal
questionnaire to see if it can be shortened and also made more "user friendly". The proposal that
CIMA issue a general advisory or guidance as to what we consider not "carrying on trust business"
and thus not requiring licensing runs the risk of making black white and did not find favour with us. So
we will not be so proceeding. Nevertheless, CIMA will continue to entertain specific submissions for
"no action" letters as has happened occasionally in the past.
The foregoing may be a temporary band-aid. We at CIMA very much prefer to see a legislative
solution to the problem and have so indicated to STEP. I believe the Deputy Financial Secretary, Ms
Deborah Drummond, leans to this view also. I personally would be supportive of a less stringent
regime, given that an application of CIMA's internal risk rating has resulted in nearly all existing
licensed private trust companies being categorized as "low" risk. But these matters are not always as
simple as they may first seem. We must be mindful that there is significant pressure from outside to
extend regulation rather than reduce it. And it is necessarily more difficult to argue the case for
deregulation than simply not to regulate something in the first place. On the other hand, I am not
aware that there was any in-depth analysis of the need to regulate private trust companies in the early
1960's immediately prior to the enactment of the Banks and Trust Companies Law in 1966 (Cayman
simply copied the Bahamas legislation lock, stock and barrel). Demand for the animal in the form we
now know it was small if not non existent. Wealthy settlors (often with inherited UK/US wealth) were
content to entrust their assets passively to brand named trust companies. Today, the drivers of the
private trust companies are very much entrepreneurial families from all around the globe who have
little time for traditional corporate trustees and who wish to control more closely the investment of the
assets. Equally, old line corporate trustees struggle to fit the demands of such clients and their risk
appetites within the traditional trust framework. The best solution to these frictions is often the private
trust company controlled by the family (or family friends or friendly trustees or charities) perhaps
administered by an unrelated corporate trustee (or more likely by the family office).
Since CIMA's position is that regulation must meet the test that it be necessary, appropriate and
proportional and that the benefits must outweigh the burdens and costs, it seems to me very timely
that we revisit the 41 year old regulatory regime for private trust companies in that light. Prima facie, it
appears to me the burdens of the current system outweigh the benefits. This is underscored by the
fact that a number of key competitor jurisdictions such as Bermuda, BVI, Jersey and even Singapore
choose not to regulate private trust companies or subject them to a lighter touch. Further, there is
currently no international standard setter mandating the regulation of trust companies or company
managers. To-date CIMA has followed the Offshore Group of Banking Supervisors Statement of Best
Practice for Trust and Company Service Providers. This Statement interestingly notes that a number
of jurisdictions do not regulate trust and company service providers, but does not specifically address
the issue of private trust companies, although it does recognise a "lighter touch" is appropriate for
those, such as company formation agents, who do not act as trustees.
Cayman has recently set something of a precedent by reducing the regulation of debt issuing trustees
wholly owned by licensed trust companies. I hope that this first toe in the water can be the basis for a
broader review of the regulatory regime so that we can enhance Cayman's attractiveness for Islamic
finance structures (that require the use of a special purpose trustee company) and for family/private
trust companies by reducing the level of regulation or by eliminating it entirely. My personal preference
would be to amend the definition of "carrying on trust business" in the Banks and Trust Companies
Regulation Law so that the activities of a typical special purpose trust company or family/private trust
company fall outside the scope of the Law.
There is proper concern about not watering down the scope of our anti money laundering regime. It is
arguable that the general AML regime that applies to all Cayman entities is sufficient for private trust
companies. An alternative would be to require that any private trust company (even if no longer
licensed) continue to appoint a local unrestricted trust company as its authorized agent with
responsibility for ensuring AML compliance. While on the subject of AML, I should mention that the
Guidance Notes Committee has started its work to see how we can move our AML regime to a more
flexible (dare I say it common sense) principle and risk based system rather than the current overly
prescriptive and rule based system. This will certainly help reduce the unfortunate perception of
Cayman's gold-plated and over egged regime.
There are also concerns about the loss of revenue to the Government if the existing 80 or so restricted
trust companies were to deregister. No doubt the auditors would also file objections but I think we
could safely ignore those. To solve the loss of revenue, I would suggest that the precedent set by the
mutual fund industry be followed. So if the sector servicing private client business recommends
deregulating private trust companies, I trust they will support the quid pro quo of an increase in their
fees to balance the Governments books.
The final issue is how to retain some overall monitoring and to obtain useful statistical information
about the number of private trust companies in existence in Cayman. I personally dislike a system
whereby CIMA does not (properly) regulate an entity yet still bears the reputational risk because there
is a filing or registration with it, and perhaps a nominal fee. And I think we need to steer clear of words
such as "exempted" or "excluded" as these seem now to raise red flags in the eyes of the alphabet
soupers. One suggestion to consider is that there be a separate PTC category under the Companies
Law (perhaps in the same manner as LDCs or SPCs) in a way that would enable the Government to
keep track of the number of these entities and also charge an additional fee! An alternative may be to
require the local authorized agent to file with CIMA or the Government a quarterly list of its
unregulated private trust company clients.
Let me now turn to what we might consider doing to regain our reputation for innovation. Let me back
up a little by saying that I do not think that "compliance fatigue" alone stopped us innovating. For many
years Cayman was the leading inventor and enhancer. In the trust field alone we saw the Fraudulent
Dispositions Law, the Trusts (Foreign Elements) Law, the STAR trust, the Perpetuities Law and the
reserved powers trust. But inevitably the speed of innovation slowed as we could find no new Holy
Grails. Other jurisdictions simply turned the photocopier on (as admittedly we do too), and there has
thus been a great convergence of products in the various competitor jurisdictions. But there are some
things out there we should look at. And we must always listen closely to what our business producers
are telling us. So I put these ideas forward for you to chew on. First, should we abolish the rule against
perpetuities entirely and allow South Dakota style dynasty trusts and as also proposed in some SIFCs.
Second, should we reduce the 6 year period in our Fraudulent Dispositions Law to match that of the
Bahamas? In this connection, is our Bankruptcy Law a potential deterrent to wealthy clients actually
coming to live here (check the sections on settlements)? Third, should we move ahead with a
Foundations Law? Fourth, should we revisit extending the Hague Convention on Trusts to the Cayman
Islands? Fifth, would investor protection treaties help? Sixth, should we include a Delaware style
statutory limitation on trustees' liability? Seventh, what can we do to deal with the long term threat that
the EUSD will be expanded to include all types of passive income and cut-through provisions
applicable to companies, trusts, partnerships and other entities (even Foundations and Anstalts!)?
Lastly, is our court and judicial structure of respected generalists the right one for increasingly complex
and lengthy litigation?
These are all ideas that various of you and your overseas colleagues have floated. I suggest that the
time has come to stop floating and to get some focused discussion and agreement on what should be
done. I know that STEP will find that the Deputy Financial Secretary will lend a willing ear.
I hope this evening I have given you some small cause for optimism and much food for thought. Thank
you very much for listening.