AST talks to leading light to discuss future for industry in the Caribbean
AST meets a leading lights in the industry to discuss the future of the fund and asset servicing industry in the Caribbean
AST: How well did the Caribbean cope with the financial downturn?
John Bohan: It has coped exceptionally well. Three years ago, when the extent of the crisis was filtering through, it was widely expected that there would be a flight from offshore domiciles to onshore and more regulated jurisdictions. While there has been some movement, the appeal of offshore jurisdictions remains, and there is now as much demand as there were before. Of course the downturn means there are fewer funds and less business but the demand for unregulated product is still there in Bermuda and the Cayman Islands.
It’s a bit of a sliding scale when you look beyond those two markets. Curacao isn’t as successful as it once was, and the BVI has had some regulatory issues, which led to it being grey listed by the OECD. So while the region as a whole has coped very well during the downturn, on a case-by-case basis we are seeing macro effects on some jurisdictions.
AST: How strong is competition between Caribbean domiciles and other global jurisdictions?
Bohan: It’s extremely competitive. In many locations, regulators and industry bodies work side by side and there has been a massive push in some jurisdictions to gain new business. For example, Malta - in spite of being a regulated domicile in the EU – is able to compete on cost with offshore domiciles. As competition has heated up, there is a much greater focus on the end line investor – they want greater regulation, increased transparency, and more clarity on ownership and so on and cost remains a big factor.
The industry has come up with solutions with UCITS IV, which create a more unified solution when it comes to cross-border transparency and co-operation. The costs of UCITS have come down with the increased availability of global platforms. Investment managers looking for new revenue streams are leveraging out their expertise and facilitating use of their fund structures under their licensing umbrella, which makes the cost for smaller providers coming in much lower.
AST: What are the key regulatory issues you are currently facing?
Bohan: There is a lot of preparatory work going on at the moment, but so far none of the changes have been particularly drastic. The two key issues we’re looking at are FATCA and the rules that demand proof of the fitness and probity of directors and key staff within an organisation. For us, though, this is not new, we were prepared for the fit and proper staff controls before the crisis hit. Will FATCA provide opportunities for fund administrators? I’m not sure.
In many ways, the fund administration market is much like that of supermarkets, where everyone is watching what everyone else is doing - it may well be built in with only marginal increase in costs as the industry has become more efficient and competitive So if one administrator suddenly started asking for more and more information and charging higher fees, and its competitors don’t change, then it could be a differentiating factor that is not in their favour. With fee pressure on the asset servicing industry so intense, FATCA may give some firms the ability to differentiate so it may not become a revenue earner.
AST: Is there an increased blurring of the lines between the front and the middle office?
Bohan: You can ask 10 different people the definition of the middle office and you’ll get 10 different answers. Is middle office trade settlement, reconciliations, cash management? Where does it begin? Where does it end? Some of the reporting administrators have huge databases with information on every part of the fund - they’re not quite able to churn out live data on profit and loss, but they can give risk management parameters with dynamic charting. This can be offered as standard.
For small and medium sized providers looking for counterparty exposures, that can be provided (for a fee) and that allows then to move away from the separate data systems such as Bloomberg, which are very expensive. This means they’re getting their information from their in-house Excel sheets, and from their administrator. Apex has launched a subsidiary which is providing this service to its clients - allowing them to outsource trade reconciliations and cash management. We can go to fund managers and take on the entire middle office function.
AST: How has the technological requirement developed over the past couple of years?
Bohan: It’s become STP. There is an expectation in the industry that going from trade placement to pricing and NAV calculations can all be mirrored through one system. There’s dashboard reporting, risk management information, data to prime brokers and so on. Now, it all comes down to the degree of oversight that the fund administrator puts on the system - the technology is there, it’s about controls and procedures.
The underlying technology is essentially the same for the top five small and medium fund administrators - the massive administrators don’t have the flexibility to manouver their legacy systems quickly enough - so it comes down to the degree to which each administrator applies that technology. Outside the core administration packages are a number of other products and services that fund administrators can offer and it comes down to the initiatives and resources they utilise.
AST: What do you feel are the region’s prospects for the future?
Bohan: They’re very good. You may see some of the smaller jurisdictions fizzle out, but the top five will remain the jurisdictions of choice to domicile a fund - the regulatory structure in Europe doesn’t cater for the requirements of many hedge fund managers, for example.
Bohan: The massive administrators don’t have the flexibility to manouver their legacy systems quickly enough
FATCA will continue to play a part, but it’s important to remember that it’s not targeted specifically at the offshore industry, it’s a global regulation. AIFM is going to have something similar for European citizens/fund managers or managers selling funds into Europe, and we are preparing for that, and similar but less significant regulatory amendments are going on in other regions. Eventually each investor will be captured in the net one way or another. For smaller fund managers, the domiciles will remain offshore.