Deborah Middleton explains how Bermuda is using its pre-eminent position in the re/insurance industry to extend its financial services business
Bermuda's emergence at the forefront of global business is a remarkable story of planning, careful execution and adaptability. Once known only for its beaches and its temperate climate, Bermuda has established one of the world's leading insurance and reinsurance industries and created a financial services sector that competes on a par with the US, UK, Hong Kong and European contenders.
Perhaps no greater testimony to this strength and solid standing can be made than in the island's continued growth and success in 2003 despite a horrific hurricane, challenging global economy and less than friendly political climate in the US and elsewhere in the world.
The natural question that emerges in the face of all of this is how does Bermuda remain successful and continue to grow? The answer is by recognising its assets and capitalising on its regulatory standing, stable political environment, well-educated workforce and one of the most advanced telecommunications infrastructures anywhere around the world.
International regulatory bodies such as the Organisation for Economic Co-operation and Development (OECD) and Financial Action Task Force (FATF) have positively regarded Bermuda's history of maintaining and implementing legislative and regulatory provisions that encourage innovation from business while maintaining the highest standards of conduct. Certainly, the business climate and infrastructure allow companies to compete effectively in the global market and this, in turn, has contributed to Bermuda's attraction as a jurisdiction of choice. This statement is supported by the fact that 75% of the world's Fortune 500 companies have a presence here.
Throw into the mix the fact that Bermuda's business community enjoys a sound relationship with policymakers, resulting in a meaningful dialogue between government and the private sector, and you can then readily understand how the island manages to strike a delicate balance between business and regulation. Bermuda's pragmatic 'Know Your Customer' (KYC) procedures date back to 1940 and were introduced to ensure that Bermuda's assets were kept out of the hands of wartime enemies. Naturally, at the end of the war in 1945, the focus changed and 'the enemy' became those who might want to use Bermuda as a base for unlawful activities or whose association with Bermuda could engender unacceptable risks to the island's reputation.
Bermuda has never lost its sense of right and wrong, and has maintained its focus on quality not quantity. As a result, regulation is appropriate and in many instances more sophisticated and effective than that of the US, the UK, the EU and others.
Traditionally better known for a burgeoning and dynamic insurance industry, Bermuda is now seeing an increasing diversification of its financial services business underpinned and driven by that very same infrastructure which so ably serves the insurance sector. Of particular note are the hedge fund and trust sectors which have recently come into their own.
In terms of statistics, as of June 2003, Bermuda's mutual and hedge fund industry reported a total net asset value of funds of $89bn, representing over 10% of a published worldwide estimate of $745bn. Net assets in Bermuda grew by more than 25%, well above the 15%+ projections for continued global industry growth. Perhaps contributing to these numbers, household names such as Citigroup, BISYS and the Bank of New York have recently established a presence on the island. Similarly, the acquisition of Bank of Bermuda by HSBC thrust Bermuda into the spotlight for financial services. The arrival on the investment scene of these major players gives Bermuda a huge credibility boost in terms of the island's hedge fund servicing capabilities.
It stands to reason that such key market players would not invest in a jurisdiction that had not passed vigorous scrutiny as regards opportunities for future development, economic and political stability as well as the workforce and technology to support their needs.
Prior to September 11, Bermuda's regulatory environment may have been considered more onerous than in other jurisdictions. However, with the post-9/11 mindset, Bermuda has proved it is ahead of the curve in this regard and this has translated into more funds establishing a presence on island. The system of regulating collective investment schemes in Bermuda serves the sector well.
The Bermuda Monetary Authority (BMA), an independent body responsible for regulating the funds industry, has adopted a sensible, risk-based approach. The BMA applies tougher standards and requirements for those funds involving general public investors and relies much more on full transparency and disclosure for those targeting the sophisticated investor.
The underlying premise is that the sophisticated investor can reasonably be expected to understand more fully the potential risks than a member of the general public. At the other end of the spectrum, in the case of institutional schemes (including hedge funds), the primary focus is on proper disclosure and market discipline. Such a system of regulation has been judged by hedge fund experts to be fair and transparent with the appropriate degree of regulation for specific investor bases. The BMA unabashedly states that it does not aim to do marginal business. This is another reason why it supplements proper disclosure and market discipline with its own review of the promoters, directors, auditors and other service providers. With imitation being the sincerest form of flattery, Bermuda's regulatory environment and the enforcement capabilities of the BMA have served as a model for other jurisdictions around the world.
Unlike some jurisdictions where the fund is established in one country and administered in another, Bermuda has the resources to facilitate the significant investment in technology and systems needed to meet the increasing demands of the new breed of investor. This enables 'one stop shopping', to use a hackneyed phrase, and is yet a further reason why there has been an increase in the number of funds establishing in Bermuda. Interest from European lawyers (and no longer just the traditional US-based investment managers) is driving growth. They like the option of setting up the fund in Bermuda and using Bermuda-based service providers for all the fund's operational aspects as an alternative to domiciling in one jurisdiction and administering from another.
To the private investor, 'reputation, reputation and reputation' are the three most important factors when choosing a jurisdiction. Where Bermuda scores points is in its excellent reputation for economic and political stability, solid judiciary system and world class industry support services.
Again, it is the infrastructure in terms of intellectual capital, and technological, legal and regulatory systems, that is contributing to the growth of Bermuda's trust industry.
Bermuda has never actively promoted its trust industry, which is by its very nature a discrete sector. High net worth individuals value confidentiality when it comes to their family matters, and privacy has always been a hallmark of dealings in this area. Recent research, however, shows that Bermuda has an enviable reputation as an innovator in trust administration, with more than 35 licensed trust companies and standards comparable to those of the US and the UK. Local expertise in terms of lawyers, accountants and trust management dates back several decades, and there are now more than 700 members of the Institute of Chartered Accountants of Bermuda and 250 lawyers called to the Bar to professionally support the trust industry to a very high standard. All this, coupled with the flexibility to provide a range of options from a straightforward discretionary trust to complex, multi-generational estate planning structures (which often include the use of private trust companies) contribute to the increase in trust business. Indeed, Bermuda's trust sector caught the attention of HSBC and was one of several motivating factors for its acquisition of the Bank of Bermuda, which has a thriving trust business. It is likely that this will lead to an even greater development of the island's trust industry.
Diversification of Bermuda's international business sector is a healthy addition to its economy. The service providers initially supporting the insurance industry now fulfil multiple roles, overlapping as consultants and support professionals to the funds trusts and other business sectors on island. With more than 40 years in the 'business of international business', Bermuda has developed its infrastructure to handle the needs of the players in a global marketplace.
Infrastructure aside, one investor has cited the intangible "ease of doing business" as one of the prime reasons for operating from Bermuda.
When your banker, accountant, lawyer and favourite lunchtime restaurant are all within a half mile radius, it really does help you to operate efficiently and get things done more quickly - and it does not hurt to be working in a temperate climate in a location with true physical beauty.
- Deborah Middleton is CEO of the Bermuda International Business Association, a business organisation of Bermuda resident service providers.