By Marco Martins From Harneys

The Cayman Islands have for decades been one of the world’s leading banking and financial centres, currently ranking as the fifth largest banking centre worldwide, with over 200 banks, including 40 of the world’s 50 largest banks, and over US$1.5 trillion in assets.

As is the case in most sophisticated jurisdictions, the Cayman Islands’ banking regulations are based on prudent and trusted principles, including the international supervisory standards articulated by the Basel Committee on Banking Supervision.

In recent years we have seen a surge in interest and demand from entities looking to establish a licensed bank in the Cayman Islands. It is therefore helpful that the Cayman Islands Monetary Authority (CIMA) recently updated its Regulatory Policy on Licensing Banks (the Policy) so that the conventions that CIMA has previously applied to an application are now explicitly codified. This article provides an overview of the updates to the Policy. For further information about the requirements for a complete banking licence application please contact us.

Three types of banking licence:

The Banks and Trust Companies Law (2013 Revision) of the Cayman

Islands (Law) creates three categories of banking licence:

• an “A” banking licence which permits domestic business with residents of the Cayman Islands as well as offshore business;
• an unrestricted “B” banking licence which permits only business conducted outside of the Cayman Islands; and
• a restricted “B” banking licence which is subject to the same limitation as an unrestricted “B” banking licence but in addition, the licensee is restricted to a preapproved customer base.

CIMA has always categorised each type of bank into a further two categories; Home Regulated Banks and Host

Regulated Banks, and the updated Policy now clearly reflects the requirements for each type of entity.

Home Regulated Banks are those banks that are incorporated in the Cayman Islands, are usually independent of a banking group and are primarily regulated by CIMA.

Host Regulated Banks are usually branches or subsidiaries of a foreign parent bank which are ultimately subject to regulation by the parent company’s own home banking regulator. The approach to Host Regulated Banks reflects the view that primary responsibility for their regulation rests with the regulatory authorities of the foreign parent. If it appears to CIMA that the parent country regulation of a proposed Host Regulated Bank applicant might not be adequate, the applicant may be encouraged to form a Cayman Islands company which would be treated as a Home Regulated Bank instead.

The licensing (and continuing regulation) of Home Regulated Banks differs from that of Host Regulated Banks in some important respects, such as capital adequacy ratio requirements, financial resources, information that needs to be provided about the key shareholders, financial resources of key shareholders, audit requirements and the bank’s local presence in the Cayman Islands. Where these distinctions are not set out in the Law (or the regulations or regulatory policy promulgated thereunder) these distinctions are now clearly set out in the updated Policy. The Policy has also been revised to reflect the application details required by CIMA, in particular the contents of the business plan, as well as details about the proposed management of the applicant and its internal systems.

Capital adequacy

It has always been clear that banks which are incorporated in the Cayman Islands must maintain a minimum capital adequacy ratio of 15 per cent and branches must maintain a minimum capital adequacy ratio of 12 per cent, unless CIMA varies the ratio for a particular licensee if it considers it appropriate to do so given the risks associated with the licensee’s activities. Further, it was always known that a portion of an applicant’s issued capital, in cash or cash equivalent, had to be maintained at a local Cayman Islands retail bank, but the updated Policy now expressly sets that requirement at US$500,000 for Home Regulated Banks. This amount cannot be pledged without CIMA’s permission.

Shareholders

CIMA must be able to identify all intermediate and ultimate owners of an applicant and if the group structure of an applicant is overly complex or lacks transparency, this must be fully clarified and explained. The Policy now specifically requires all applicants to provide a complete corporate structure chart showing all entities under common ownership, including non-financial entities, rather than just a beneficial ownership chart.

The Policy is now clear that information must be provided on any shareholder holding 10 per cent or more of the voting power of an applicant or its holding company. If no shareholder holds more than 10 per cent, the 10 largest shareholders must be identified. There must be proper controls in place so that policies and procedures may not be overridden by shareholders or senior managers and Home Regulated Banks with two or fewer shareholders must provide details of their succession plan in case of death or incapacity of a shareholder.

Shareholders and financial resources

Under the updated Policy, CIMA will also assess the financial resources of the applicant’s owners. For Home Regulated Banks, applications will generally be considered if a shareholder holding more than 20 per cent of a class of shares or voting rights has a minimum net worth of the greater of US$10 million (not including prime residence) or five times the value of shares to which that member is subscribing.

For Home Regulated Banks a public accountant must independently verify the financial statements of shareholders. For Host Regulated Banks CIMA will expect to see a satisfactory audit history.

Business plan

CIMA now requires that a more detailed business plan (covering the first three years of activity) be submitted for applications for Home Regulated Banks and Host Regulated Banks. Applicants must demonstrate in their business plan that they have adequate manpower, systems and expertise to implement their objectives and the Policy now sets out an extensive list of items which CIMA expect to be addressed in a business plan. In addition to addressing items such as background, financial plans and corporate governance, the Policy now requires that criteria such as details of an applicant’s proposed marketing strategy, investment policy, dividend policy, remuneration plan, operational resources, risk management strategy and any reports of feasibility studies be addressed in the business plan.

The reasons for any outsourcing (together with copies of agreements in respect of these arrangements) must also be provided in the business plan. Home Regulated Banks must carry out rigorous stress tests that identify worst-case scenarios of possible events (over a three year period) and the Policy now provides that the results of such tests must be set out in an applicant’s business plan.

Internal systems

Detailed requirements for licensees’ policies, systems and internal controls are set out in further regulations, however the Policy expressly stipulates that applicants must provide an overview of their proposed IT governance structure and must demonstrate that they have developed their own Internal Capital Adequacy Assessment Process.

Management

The Policy has expanded the “fit and proper” criteria and the criteria for the proposed management of an applicant. The requirements for Home Regulated Banks and Host Regulated Banks are the same in this respect; both types of entities must ensure that there is a clear division of responsibilities between directors and management, so that there is a balance of power and authority. The updated Policy now stipulates that at least two directors of an applicant must have sound banking experience.

The updated Policy also specifically references the “four eyes” principle, which requires that significant decisions be made by more than one person. CIMA must also be satisfied that, where individuals take on more than one role, these roles are compatible.

The Policy also refers to an applicant’s MLRO and Compliance Officer, both of whom (if the role is not carried out by one individual) must be suitably qualified and experienced. The MLRO and Compliance Officer must be resident in the Cayman Islands and neither role may be outsourced.

Further information

The popularity of the Cayman Islands as a jurisdiction in which to establish a banking structure is based on decades of sound and prudent regulation and Cayman’s key role in the global financial industry. While the majority of Cayman Islands licensed banks are subsidiaries or branches of global financial institutions, we are seeing increased demand from large corporate groups which use banks as an efficient structure to manage global treasury operations, and from diverse financial institutions wishing to serve the high net worth market, particularly in emerging regions. The recently announced Policy will further clarify the process for these potential new clients and is a welcome development in a thriving industry.

With operations in all key emerging markets, we are well positioned to help clients across the globe, often in their local language and with a deep understanding of how to bridge local and international aspects of a banking structure.

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