Despite an unprecedented number of new regulations being introduced into the Cayman Islands over the past 18 months, the jurisdiction has shown itself to be remarkably resilient, with the Islands’ funds industry in particular rising to the challenge and demonstrating its adaptability and flexibility.
In 2020 the Cayman Islands introduced several regulatory developments, including the Private Funds Act, changes to the Mutual Funds Act, anti-money laundering enhancements and economic substance regime updates. Sailaja Alla, a partner within the funds team at Appleby comments: “What our clients needed most was help navigating the new requirements imposed by these various regimes. As the jurisdictional needs of our clients have increased, we have leveraged our existing relationships and formed new ones to ensure that we continue to put the best solutions forward for clients.”
Christian Victory, also a partner in the Appleby funds team, notes, “Given the depth and breadth of legislation brought in over the last 12 to 18 months, I think the coming year will be about adjusting to the new normal. Many of the new requirements, however, codified what was already happening in practice across the majority of our fund clients. Notwithstanding the challenges faced – and overcome, the overall outcome has been overwhelmingly positive for Cayman. If anything, it has fostered a better relationship with the EU and reputation for Cayman internationally. Hopefully, we can continue to maintain that success, even though there will always be the possibility of headwinds and challenges on the horizon.”
“We continue to see investment funds consistently outperforming other alternative investment products. Further, we’ve seen no slowdown in terms of fund activity, formations, restructuring and so on, which is all very encouraging. We have also set up specialty practices which would not have traditionally been part of the funds team. Our objectives have been adapted to better respond to market opportunities, to provide broader and deeper expertise and to ensure a solutions-orientated approach for our clients. Appleby’s funds and regulatory teams have also expanded.”
Jennifer Parsons, who heads the Appleby regulatory practice, notes, “Cayman regulators met the challenges of the past year head on, extending filing deadlines and introducing more flexible documentation arrangements, where possible. Appleby’s regulatory team also sought to keep clients well informed through our Offshore Business Update, our quarterly regulatory newsletter and topical e-Alerts.”
Another regulatory development during 2020 was the introduction of the Virtual Asset Service Providers (VASP) Act, which creates a framework for entities carrying out virtual asset services in or from the Cayman Islands. The first phase of this new law came into effect in October 2020.
Peter Colegate, who co-heads the Appleby Global Technology and Innovation Group, notes that “recent years have seen the Cayman Islands take a number of legal and regulatory steps to make the Islands a jurisdiction that will allow innovation to thrive. That flexibility means that Cayman is well placed to take advantage of the current shift towards securitising common assets and decentralised finance (De-Fi) products.”
Cayman’s ambition to become a global technology hub is also supported by a Special Economic Zone within the Islands which allows technology companies particular advantages, including fast-tracked work permit applications for relocating employees to Cayman. To respond to the offshore requirements of the big tech firms and the growing number of tech entrepreneurs, Appleby was the first offshore firm to establish a dedicated technology practice.
”Increasingly, tech clients want lawyers who can speak their language. That’s become a key competitive advantage for the firm in the last two to three years,” adds Colegate.
The Cayman Islands continues to adhere to the highest international standards of anti-money laundering and counter-terrorist financing set by the Financial Action Task Force (FATF). In 2019 the jurisdiction also introduced its Data Protection Act to ensure that businesses and investors have the confidence that their personal data will be protected while in Cayman.
Looking ahead, the change in administration in the US and its path out of the pandemic are macroeconomic factors that the Cayman Islands’ financial services industry will be keeping a close eye on. Parsons comments: “Given a large number of our clients are US based, we need to consider what will happen with COVID recovery in that jurisdiction and whether the Biden administration will usher in regulatory change.”
Parsons adds, “We certainly do know that further Cayman changes are afoot for 2021, including the second phase of VASP regulation and exempted limited partnerships being brought into scope of the economic substance regime.”
Victory concludes, “Whilst we expect there to be continued focus on the areas of anti-money laundering and data protection, we understand Cayman’s regulators are also considering ways to broaden and update the spectrum of products available in the jurisdiction, to meet market demand. The Cayman Islands will always seek to meet and exceed global standards, so we‘re happy to embrace new requirements; provided those requirements are applied equally and in a fair and transparent manner. We remain positive on the outlook and are very much looking forward to 2021 being another successful year.”