The Government of Bermuda is on record as welcoming the KPMG Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda (the ‘report') and its core recommendations. The report clearly serves to validate the rigour and effectiveness of Bermuda's regulatory systems and practices while at the same time pinpointing areas for possible enhancement and strengthening. Government agrees with the thrust and intent of the core recommendations and proposes to implement many of the necessary changes in 2001 following appropriate consultation with key stakeholders in the financial services sector.

The report contains more than 80 recommendations of varying weight and consequence. Government has undertaken a preliminary assessment of the recommendations against the following criteria: whether the recommendation was based on an international standard or not; the legislative implication; the market impact; the resource requirement for implementation; and whether or not the recommendation added value to Bermuda's regulatory regime. In addition, Government invited and has received written comment on the report from leaders of financial institutions and organisations of Bermuda's financial services sector. Generally, the report was positively received by industry.

Many of the supervisory statutes and practices identified in the report as in need of attention had already been reviewed by Bermuda's regulators and targeted for early amendment or enhancement. For example, various weaknesses in the Investment Business Act 1998, the Trust Companies Act 1991 and the Collective Investment Scheme Regulations 1998 had already been highlighted. Moreover, the Bermuda Monetary Authority was already taking administrative action to implement other requirements such as the need to enhance on-site work programmes for banks.

Government agrees with the core recommendations related to improved regulation, independence of the regulator, better international co-operation through enhanced exchange of information between regulators and extending the anti-money laundering provisions to cover the proceeds of all serious crime. Government endorses and supports the underlying international standards and principles in these areas. Existing legislation that will require amendment as a result of these particular recommendations include the following statutes: Bermuda Monetary Authority Act 1969; Insurance Act 1978; Bermuda Monetary Authority (Collective Investment Scheme) Regulations 1998; Companies Act 1981; Investment Business Act 1998; Proceeds of Crime Act 1997; and Trust Companies Act 1991. Government is committed to completing the required amendments in a timely manner and anticipates substantial progress by September 2001.

However, there is good reason to more closely examine some of the recommendations on insurance regulation, corporate governance and licensing of corporate service providers where no international standard exists or similar practices have not been adopted by onshore jurisdictions. Government's view is that Bermuda's approach in many of these areas provides for equivalent safeguards to those set down by the recommendations. Bermuda historically has taken a cautious approach to promoting itself as a financial centre. Unlike many other jurisdictions, including many onshore jurisdictions, our regulators carefully vet the principals of Bermuda-registered entities and are selective about the nature of the financial services and the associated risks which Bermuda businesses may carry on. For example, as Bermuda's international insurance industry and investment businesses generally deal with sophisticated or institutional investors, a practical but no less effective approach to regulation or exemption is appropriate.

Government has reserved its position on the recommendation advocating the adoption of the Model Compulsory Powers Ordinance (the ‘Ordinance'). The Ordinance is designed to provide regulators with the power to compel the production of information from both regulated and unregulated individuals or entities in order to satisfy a request for assistance from a foreign regulator. Government considers that the USA-Bermuda Tax Convention 1986 has been recognised as a good model for providing assistance with the enforcement of fiscal matters and this model could be used for sharing other types of information. Government proposes to examine its existing exchange of information powers against those in the Ordinance to determine where significant gaps may exist. Gateways and additional powers will be introduced wherever necessary to enhance the effectiveness of existing mechanisms for co-operation with foreign regulators.

Government is mindful that adoption of the Ordinance by the Overseas Territories is a priority for Her Majesty's Government and is ready and available to consult further on the issue.

Further, the report recommends that the efforts to control money laundering must be enhanced by expanding the definition of financial crimes and by reviewing the ‘grandfathering' of all clients being serviced before the Proceeds of Crime Act 1997 came into effect. Government considers that until onshore jurisdictions make similar changes, the Bermuda legislation is adequate and Bermuda need not be held to a higher standard.

The report also recommends that corporate service providers, including lawyers, accountants, and investment business providers who are exempted from the licensing provisions under the Investment Business Act 1998 should be regulated institutions for the purposes of the Proceeds of Crime Act 1997. Many of these persons are, of course, already subject to professional codes of conduct. Government has not finalised its position on this issue and proposes to consult further with industry representatives before making a decision.

The timetable to address the agreed legislative amendments spans two years with priority items such as the Bermuda Monetary Authority Act 1969, the Insurance Act 1978, the Companies Act 1981, the Trust Companies Act 1991, the Investment Business Act 1998, the Collective Investment Scheme Regulations 1998 and the Proceeds of Crime Act 1997 scheduled for substantial completion by 30 September 2001.

Amendments to the aforementioned legislation will address the core recommendations concerning independence of the regulator, international regulatory co-operation and anti-money laundering regimes.

Bermuda's regulators will have adequate resources in 2001 to address recommendations pertaining to changes in supervisory practices and regulation of financial services.

The attached schedule summarises the Government of Bermuda's position on each of the recommendations in the report. Government wishes to state clearly and emphatically that it will implement those recommendations that are based on international standards and principles of supervision, whose adoption will strengthen and enhance Bermuda's supervisory and regulatory systems and practices.

Where no such standard or principle exists, Government considers that it is sensible to more fully assess the implications of related recommendations before taking a decision. This is in no way to detract from Bermuda's unreserved commitment to continuing to maintain the highest of standards, evidenced by KPMG's conclusions that in certain respects Bermuda already goes well beyond what is already in place in most other centres, both onshore and offshore.