• Strategy
  • The Economist

What It Takes to Succeed

For offshore financial centres, not only low taxes but a great deal besides.

One way OFCs maintain a light touch is to involve auditors and other service providers in regulation. Jeremy Cox, the supervisor of Bermuda’s insurance industry, describes the island’s way of doing things as “practical regulation that tries to use the experience of industry”. Bermuda also puts some of the regulatory onus on independent auditors, who must sign off on insurers’ annual filings and confirm that they meet minimum liquidity and profitability standards.

In Cayman all regulated or licensed professions — including lawyers, auditors, fund administrators and auditors, insurance providers and service providers for trusts — are required to blow the whistle if they suspect that something untoward is going on. This is separate from the money-laundering rules.

Jack Be Nimble, Jack Be Quick

For all OFCs one of the advantages of being small and predominantly reliant on the finance industry is that they can change existing rules and laws quickly to react to new opportunities. Inevitably this takes much longer in big, diversified economies, where any change in the status quo involves difficult negotiations among an assortment of interest groups.

Thanks to its nimbleness, Singapore has been able to score a number of successes against Hong Kong, its slower-moving rival. New trust laws in Singapore that came into effect a year ago have prompted Hong Kong to re-examine its own. Singapore was also ahead of Hong Kong in passing legislation on real-estate investment trusts (REITs), a relatively new investment class in Asia that has been growing rapidly, fuelled by the local property boom. “We are small in a big world. We survive because we stay ahead of the region,” says Kelvin Chan, a former government official who is now with the Partners Group, a Swiss private-equity firm. “In this, being small is our strength.”

Luxembourg manages to move quickly even though it is part of the EU and must comply with all EU directives, which have become increasingly onerous over the years. Luxembourg dominates the market for a type of investment fund called UCIT, similar to mutual funds, that complies with stiff requirements so that it can be sold freely throughout Europe. This is because it was the first country to incorporate the UCIT directive into law in the 1980s.

Being quick on one’s feet is important for OFCs not only because competition is fierce but because many offshore products are easily commoditised. There is nothing particularly special about a Cayman-domiciled hedge fund, for instance; indeed more offshore hedge funds are domiciled there than anywhere else, and lawyers have so much practice that they can quickly set up another one. Hedge-fund managers themselves look for safety in numbers. “You go there because everyone else does,” says one New York investor. BVI companies are popular in Asia for much the same reason: they are familiar, they work, and everybody else uses them.

OFCs with critical mass and expertise in certain niches often act as subcontractors for financial institutions in big onshore centres in the same region. Investment bankers in London, for instance, often work with bankers in Jersey on mergers and acquisitions. Bankers and lawyers in Cayman work with the lawyers of American multinationals on structured-finance transactions.


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