Financial Services – Building Block of a Strong, DIVERSIFIED Economy

Speech made on Friday 8th November in Turks and Caicos.

Good Morning:

The Premier has given my address but as I am here, I will elaborate on what she has said☺

INTRODUCTION

Thank you for inviting me to this important conference of Government representatives and the private sector.

I am delighted to be back here in your lovely country having worked with a number of you a few years ago. Your fearless AG is not here but the rest of the team is – Keneisha Bacchus and Henry Saunders. We spent many a night in odd places like Irish Pubs preparing negotiating positions for the next day!

I am honoured and very pleased to deliver this address, as tourism and financial services form part of my DNA. I have been asked to speak to: ‘the benefits that can accrue to TCI if the financial services sector were groomed to become second string to your ‘superlative’ tourism and UHNW real estate offer’– quite a mouthful – although very specific.

If I may though, I would like to entitle this address:

THE BENEFITS OF BUILDING A TWIN PILLAR ECONOMY.

In a recent Report I read that ‘the Financial Services sector in TCI has been a proportionately declining contributor to GDP and Government income in recent years. If nothing of substance is done, expectations are for this decline to continue, at a more rapid pace over the next five years.’

‘The industry is at a crossroads with potentially its last chance of growing to become a meaningful contributor to the island’s economy. Without immediate action, the potential benefits highlighted… for TCIslanders and the wider economy cannot be realized’. 

It is clear that the time for action is now!

In making this presentation I speak from the prism of personal experience, continuous discussion with industry in many jurisdictions, and keeping current on new developments in the sector.

To be clear, I have chosen to take the ‘long view’ in this presentation, conscious that financial services at the moment form a relatively small part of your economy. With such a gathering of policy leaders, senior public officials and the private sector, a friend of mine likes to say ‘we cannot let this opportunity go to waste!’

It is my strong belief that the Turks and Caicos Islands can and should diversify its economy into a substantial international business and financial services centre for the BENEFIT of its people: building on its solid platform of tourism; on its record of compliance with the international standard setters including most recently the European Union, and on its long-standing relationship with the US.

TCI should also look to Asia, including China for new growth.

You may well ask why all this talk about diversification now as TCI is content, but if you bear with me to the end you will get your answer.

 THE UKOT’s CONTEXT (Historical context):

As UK Overseas Territories we were all encouraged to diversify our economies by growing our financial services. The 1999 White Paper ‘Partnership for Progress and Prosperity’ recognized, and I quote, ‘the growing significance of the offshore financial centres in some territories’.

In 2007 the Foot report in essence provided benchmark standards against which each of the jurisdictions should assess their performance.

 A few years prior, another Report commissioned by the UK Government required the separation and independence of the financial services regulator in all Overseas Territories.

The Regulator would be responsible for legislation and ensuring that the industry adhered to the highest standards of transparency, probity and governance. On the other hand, Government would be responsible for promotion and business development.

And then came the most recent White Paper of 2012: ‘Security, Success and Sustainability’ with the UK again committing to supporting its overseas territories’ financial services. Again, I quote significantly for these purposes that:

‘Bermuda, the British Virgin Islands and the Cayman Islands have developed important niche positions in international financial markets. The UK Government strongly believes that Territories which meet financial sector international standards should be free to continue to compete in international markets without discrimination'. 

I have taken a few moments to establish the consistency of the UK’s support. Bermuda, Cayman and BVI took the lead with their respective comparative advantages of insurance, funds and international business companies.

I firmly believe that TCI’s time is now! 

LUCK VS TIMING:

At a STEP conference I attended several years ago, Tim Ridley, then of Maples, made the point that most offshore jurisdictions developed as a result of a combination of timing and luck.

Bermuda developed as the leading captive insurance domicile due to lack of capacity and high premiums in the US corporate market, and its geographical convenience to the US Northeast and Midwest where many of these major corporations were based.

The Channel Islands and the Isle of Man were well placed geographically, particularly for UK (being within the Sterling area for exchange control purposes), for European and, more recently, Middle East sourced business.

The BVI became one of the largest corporate domiciles starting in the late 1980s, built on the instability of Panama during and immediately after the Noriega era. Today BVI has more than 400,000 active business companies on its corporate Register.

The Cayman Islands first developed as an offshore banking centre in the 1970s, following perceived political instability in the Bahamas during the lead up to and post-independence. The total value of Cayman licensed banks are now around US$1.6 trillion. Today, Cayman is probably best known for being the major offshore banking and hedge fund domicile and one of the leading captive insurance jurisdictions.

STRATEGIC ACTION BASED ON OPPORTUNITIES:

I gave you that broad picture of the development of these offshore jurisdictions to make this critical point: TCI has the opportunity to deliberately and strategically develop its financial services to benefit its people based on advice yes, but equally based on the experiences – including mistakes - of other centres.

You might think that you are coming to the party late, but the reality is that the demand for International Finance Centres remains extremely strong!

About three years ago BVI Finance commissioned a study by the UK Think Tank, Capital Economics, to explain in dollars and cents, how the BVI adds value globally.

This same group a couple of months ago confirmed that despite a weakening of the pace of global growth, there continues to be a strong demand for international financial services.

Capital Economics assert that international investors are still looking for opportunities to ‘match their portfolios of investments and their desired profiles of risks and expected returns’. Entities that want to borrow want to do so at a lower cost. And this is indeed what ‘Offshore’ does best: offshore facilitates globalization by making capital less expensive.

Opportunities for the development and growth of offshore financial services abound:

Asia will continue to be huge – At the moment it accounts for 38% of global output. The west is heading there. I turned on my TV a couple of days and who must I see standing next to President Xi Xinping but President Emmanuel Macron of France!

Indeed, it is anticipated that over the next decade, the Belt and Road Initiative will increase China’s outbound investment by US$25 trillion!

Then there is India which is expected to maintain its annual growth rate of between 5-7%, making it the fastest major growing economy globally.

Vietnam also continues to be one of that Region’s best performing economies with exports continuing to outperform the rest of Asia. Admittedly there are challenges now – not the least being the Hong Kong riots - but in its 30 plus year history, Asia has shown a strong affinity for offshore, particularly the BVI, Cayman and Bermuda. Volume still comes mostly from Asia, and this is expected to be the case going forward.

So, as I said, the opportunities abound and it is imperative that TCI puts itself in the mix!

So how does TCI begin to take advantage of this myriad of opportunities?

Well, Premier Cartwright has done the right thing by getting a highly respected and experienced firm of consultants to carry out a strategic analysis of the sector and to propose a way forward.

My specific role is to tell you how TCI can benefit from building this second economic pillar, based on my experience. 

BVI and TCI have many parallels:

We have each emerged stronger from countless challenges – from the EU Savings Directive in the 90’s, to threats of being blacklisted by the OECD if we did not sign at least 12 TIEA’s with their specified jurisdictions, to signing on to FATCA, to adopting the CRS to name just a few of these.

Today we are in a good place for two specific reasons:

• Firstly, we now have a seat at the table when new international standards are being drawn up - some of the time at least and
• Secondly, we have complied with all the rules as they relate to transparency and good corporate governance despite ever-shifting goal posts.

So crucially the foundation is laid for your diversification into financial services.

With your superlative tourism product, you are the envy of many of the Caribbean countries in the business of tourism. And I should be the last to admit that coming from one such country.

I would urge you to diversify by building on your strengths for the benefit of your people.

These strengths as I see them (in no particular order of priority) are:

• A strong tourism product together with (crucial) International air access;
• The Union Jack;
• US Dollar as your legal tender/no exchange controls;
• Compliance with all international standards;
• A good Regulator/decent legislation;
• Good relations with international regulators;
• Good relations with other jurisdictions; and
• Good US relations.

Let me now deal with each of these and demonstrate why they are important, starting with your international airport.

 STRONG TOURISM PRODUCT/INTERNATIONAL ACCESS:

The value of your airport is obvious: it is undoubtedly the catalyst for TCI’s caliber of resorts and vacation villas – definitely some of the best on this side of the world. But why not view your international airport in economic substance terms as well?

Take advantage of the status of being fully compliant with the European Union and their substance requirements: Ultra High Net Worth Individuals (UHNWI) as well as companies will be attracted to a territory that looks like yours but equally that has this status. 

The truth is that multinationals and wealthy families will continue to look for pleasant places like TCI to live and domicile, especially if there is access to quality professional services and advice.

It’s all in the marketing! 

A colleague, in describing what substance could look like in the context of the BVI, describes a wealthy person who has decided to relocate his family where its summer year-round, with beautiful beaches, best sailing in the world, etc. Naturally he would also set up a family office there.

He would never leave the BVI if he could get on a plane to New York or Miami in the morning when he needs to, conduct his business there and be back home in time for dinner with his family. 

The reality is that he cannot do that from the BVI, but he sure can from TCI! And I did see those private jets at the airport as I arrived yesterday!

Several benefits will accrue from establishing a family office in TCI: that UHNWI will hire accountants, bookkeepers, secretaries, and will rent office space. Needless to say, that person will also purchase property to build a home, shop in your supermarkets and stores, and on and on – directly contributing to your economy. Offer the right incentives, market your offerings, and voila!

A whole subsector that combines tourism and international business is established in TCI.

Use your status with the EU to attract businesses interested in real economic activity that will add value to TCI by having the vehicles domiciled here - making substantive decisions. I remember Premier Cartwright Robinson’s announcement in March which made us all jealous: Capitalize on this! We have each emerged stronger from countless challenges – from the EU Savings Directive in the 90’s, to threats of being blacklisted by the OECD if we did not sign at least 12 TIEA’s with their specified jurisdictions, to signing on to FATCA, to adopting the CRS to name just a few of these. 

As you know, the Economic Substance Act names nine areas of relevant activities including:

1. banking business;
2. distribution and service centre business;
3. financing and leasing business;
4. fund management business;
5. headquarters business;
6. holding company business; (what we call pure equity holding companies)
7. insurance business;
8. intellectual property business; or
9. shipping business.

Each one of these has a special meaning, which the lawyers will tell you can be very convoluted, so we should have some fun discussing these in the break-out sessions later today.

But seriously here is another opportunity for TCI to diversify its economy by attracting substantial companies.

These companies will mean more jobs, and further growth of your economy given that:

1. A number of the company directors must be resident in TCI;  
2. Most board decisions must be taken in TCI; 
3. An adequate number of qualified employees are to be located in TCI;
4. An adequate level of annual expenditure is incurred in TCI, investments performed, or other relevant activities undertaken;
5. Business premises are to be located in TCI; and 
6. Accounting takes place in TCI. 

Your Act is less than a year old, but it is never too early to start preparing a package of incentives that will lure business to TCI. I honestly feel that over time economic substance could be the game changer for TCI.

I now turn to another strength, the benefit of THE UNION JACK.

Nothing sells financial services like a sense of stability. Traditionally the Union Jack and the status of a British Overseas Territory conveyed that image.

In spite of the unprecedented confusion in the Mother of all Parliaments over BREXIT, investors love tradition so I will place the Union Jack in the strong box. And when the dust settles, I firmly believe that Global Britain and its territories including TCI will become a force to reckon with!

I will place also in that strong box, the fact that the US dollar is your legal tender and that there are no exchange controls. I can tell you that these are HUGE marketing tools that can result in significant income for both industry and Government. 

LEGISLATION/REGULATOR:

Moving on, I’d like to emphasize that sound legislation and a well-resourced Financial Services Commission are the bedrock of a jurisdictions’ growth. The BVI’s Financial Services Commission with over 200 staff members, mostly nationals, provides stellar leadership to the industry.

In drafting your basic laws, you found one of the best - in the person of Richard Carpenter – he drafted ours as well. But needless to say, legislation must be constantly updated, refreshed and indeed be product driven when necessary.

Which means that you need a cadre of lawyers – hopefully many TCIslanders - in the Regulator’s office. In terms of product legislation, you will need to identify persons in the private sector capable of drafting or giving good instructions.

I know that you are awaiting the FATF’s rating following your recent mutual evaluation. Like you I hope it comes out right. But I still will say this: if TCI feels that the Commission should be more vibrant, business-oriented and more responsive to the needs of the industry, immediate priority must be given to strengthening the Commission.

Potential investors become frustrated with long delays in getting approvals of licenses or for company directors and the like. If this is a perceived problem, investors will simply move to the next jurisdiction and spread the word.

INTERNATIONAL STANDARDS:

Although we are not here to discuss international standards we live in a world where the supra national organizations call the shots.

The changes in global standards and regulatory processes are endless. I mentioned several of these earlier and you may well ask whether there are still other benefits to TCI of meeting these standards.

Well what it really all comes down to is reputation!

Meeting these standards makes you extremely attractive and sends you the right kind of business. This may be a good segue to the importance of having good relations with other jurisdictions.

GOOD RELATIONS WITH OTHER JURISDICTIONS:

I am a firm believer in maintaining robust relations with other jurisdictions and am convinced that if we worked more closely together as Caribbean Overseas Territories we would accomplish more with our collaborative strength.

The Channel Islands are a prime example!

A decision that could have a negative impact on our financial services is the UK Parliament Act, requiring that all Overseas Territories introduce public registers of beneficial owners. 

BVI’s position is that we will introduce a public register when it becomes the global standard. 

Yesterday a friend sent me Premier Cartwright Robinson’s announcement that TCI’s position is similar to Cayman’s: which is to ‘introduce a public register in 2023, in line with evolving standards and international obligations.’ Nothing wrong with that!

In fact this is a step in the right direction, and is beneficial to the TCI Government as TCI is working in tandem with other leading jurisdictions.

BUILDING SUSTAINABLE BENEFITS:

BVI is no stranger to the issues TCI is currently facing, having wrestled with similar issues over the years, including the perception that the financial services industry is of limited benefit to nationals together with questions related to its sustainability.

In 2014 we worked with McKinsey who proposed ten priority areas, two of which were key to fully appreciating financial services’ benefits territory wide and ensuring their sustainability. These were:

1     Engaging our population

            and

2     Building BVIslander capability.

I will look at each of these briefly and add one or two other areas that are vital to growing your financial services for the good of your people.

ENGAGING THE TCI POPULATION:

Undoubtedly a population that’s well-informed about the role and benefits of financial services makes it easier to unlock the political will required at the top to drive the growth of the sector.

The TCI community as a whole must understand the financial services industry, and its benefits.

In the BVI not only did we teach the basics of Financial Services to our students but in 2014 we launched a Territory wide campaign on its benefits with the result that with greater awareness came even greater engagement with the financial services industry.

Please allow me to digress briefly to discuss the importance of political will in developing financial services as this is so fundamental.

The TCI Government can engage the finest of consultants who will produce the finest reports. However, without the political will to implement the recommendations, those Reports will simply gather dust. The Government must have the will to provide a stable and reliable, political, legal, judicial, economic and social environment.

Government makes the laws. Government must make sure that they are upheld!

Without Government’s direct intervention an investor could have difficulty in attracting and retaining talent due to the most routine of reasons: such as immigration and labour policies and processes that are well meaning but frustrate that investor.

Long delays in getting work permits is the worst possible ‘turn off’ or equally, not knowing whether that permit will be renewed! What investors crave… is certainty.

Your proposed five-year work permit is an ideal solution. In the interim why not introduce a fast track system like BVI where persons earning over US$100,000 per annum get their permit renewed in a week or less, directly by the Minister.

I must now say a few words on immigration:

Like us (the BVI), TCI has a limited population base from which to supply talent to the Financial Services industry. The reality is that a number of professionals will have to be recruited from abroad.

Besides expertise, which will be passed on to TCIslander staff, outside talent brings with it critically important contacts and connections to a new clientele.

Immigration is a touchy subject all around and I am afraid to open a can of worms (here). I will say this though: Government must devise and implement sensible policies to ensure that TCIslanders are meaningfully employed in the industry, even as Government recognizes the immediate need for outside talent. Many of you will go yeah right!

I identify with this problem coming from a jurisdiction where BVIslanders, last census made up less than 50% of the population.

BUILDING TCI CAPABILITY:

McKinsey when they worked with us advised that there were six big questions to be answered on Capability building:

1. What was the BVIslander talent deficit?
2. How do you ensure an adequate labour force?
3. How to organize and operate the FSI (effective training)?
4. What were the relevant scholarships and internships needed?
5. How do you assure relevant secondary education?
6. How do you use secondments to bolster government skills?

A friend of mine points out that education and training must be aligned with opportunity. With the growth of Financial Services will come opportunities for training and education of TCIslanders in a host of fields including accounting, law, insolvency, company management, trusts management, funds administration and so much more.

Continuous Professional Development courses offered through STEP, ICSA, etc are key to building this capability. I can assure you that at the end of the day the skills toolkit of TCIslanders will be significantly expanded.

It is important to note that these skills will also strengthen the wider economy.

Looking now at the LEGAL AND TECHNOLOGICAL INFRASTRUCTURE:

I combine these two not because they are not important but in the interest of time. Despite the fact that TCI has some of the finest, most competent and most highly qualified lawyers in the world what is crucially missing is the offshore magic circle names. 

Confession time: I was a member of a committee which looking back now had as its objective (unwittingly) to keep lawyers out of the BVI – for a while there shooting ourselves in the foot!

So, the Maples, the Carey Olsen’s, the Campbells, the Mourant’s, and so on had to jump through hoops to practice in the BVI. But we quickly appreciated that with the more well recognized legal names being established in the territory, we flourished.

So I would strongly encourage you to attract a few of those firms to join your existing fraternity. Speaking frankly, I know of a couple of jurisdictions that have maintained a nationalist or protectionist policy on law firms. But it is for you to decide if that is a preferable route.

I have to say that those that are more open have fared better in both the numbers and profiles of clients. A few firms of that caliber raise the profile of TCI, bring in much bigger business and employ significant numbers.

Turning quickly to technology, a recommendation of KPMG is that TCI develop a strategy on cybersecurity, data protection and a digital strategy to facilitate ease of doing business in TCI. 

Here is an opportunity if grasped at the right time, for TCI to be ahead of the curve.

BVI prudently invested heavily in technology over many years with both our corporate registry (VIRRGIN) and more recently the Beneficial Ownership Secure Search system (BOSSs). 

An investment in this latter technology by TCI Government would be money well spent, as signatories to the 2016 Exchange of Notes, and now with TCI being fully compliant with the EU Economic Substance requirements.

Ray Wearmouth of Ogier makes the bold statement that ‘firms and…jurisdictions which do not invest in automation to satisfy clients’ increased demands for speed, accuracy, convenience and digital interaction in all things will most likely face extinction’.

I concur with this but am of the view that despite our investments in the BVI we have not gone far enough!

Here is your opportunity to invest in training your people to manage technology in keeping with your existing and prospective clients’ requirements. You will therefore be putting TCI on the cutting edge.

It’s an opportunity not to be missed!

MARKETS:

I look to the markets now. The products contemplated – insurance, trusts and funds are with the North American Market in mind – I look forward to further discussions later today. However let’s not forget the importance of China which together with the United States continue to be the most dominant markets in the world. BVI operates in both those worlds and from China originates 40% of our international business.

Certainly, China should not be ruled out as a future market for TCI.

Finally, in taking a close look at the BENEFITS OF BUILDING A STRONG FINANCIAL SERVICES INDUSTRY:

We must conclude that the major benefits are economic.

A diversified economy will result in a higher per capita income for TCIslanders and a higher standard of living across the board. 

The BVI financial services industry directly employs about 2,200 people directly and another 3000 indirectly, with over 2/3 of these numbers being BVIslanders. This might sound impressive but don’t forget that we have been at this for over 35 years.

Stick with your strategy - starting now - and you will see faster results. Now to my promise made at the beginning.

The BVI really understood the importance of diversification in 2017 when our tourism product was completely wiped out by two major hurricanes. Thanks to the nature of financial services, the nimbleness of both our Regulator and industry together with the kindness of other Centres, the Financial Services industry kept the economy of the BVI going and still does, as our tourism industry takes a longer time to revive.

In fact, last year incorporations rose by 2% over previous years.

So 62 cents of every dollar that the BVI Government spends comes from financial services. Our budget is roughly $330million. So do the math!

Although tourism before the hurricanes accounted for one in four jobs and financial services one in ten, proportionately financial services contributes more to our economy for several reasons including higher paying jobs.

It is vital that TCIslanders understand the role and benefits of financial services to the economy as too often this lack of understanding creates the ‘they’ against ‘us’ attitude. What your population must understand is that a strong financial services sector will impact and contribute to the livelihood of every TCIslander through direct and indirect economic activity.

Critical public services such as education, healthcare, social security, roads and other infrastructure will be funded by the revenues contributed by the Financial Services sector.

You see it is all too easy to assume that what Capital Economics calls ‘the surreal and remote world of international finance’ makes no difference to our real lives as government officials, hoteliers, businesspeople, voters, and families. But it is the substantial cross-border investments that enable us to live in a world that is safe and healthy with all the creature comfort and amenities we require.

I hope that you can now see how the further development of TCI’s financial services could not only be of benefit to this territory but how they would form a greater part of the global landscape.

To conclude:

In this address I have tried to set out what a sound financial centre will look like together with the attendant benefits. Adopting a practical ‘can do’ culture in the public service, a readiness to quickly adapt to the frequent changes in the global landscape as well as enticing one or two household names to set up shop in TCI will significantly reverse the declining trend I cited at the beginning.

TCI’s foundation is rock solid: with a world class tourism product including international air access, compliance with international standards and a blueprint for the way forward, TCI is poised to diversify its economy into sustainable financial services.

The benefits to the territory that will accrue can be significant but there must be the courage, confidence and the political will to start and to start today!

Thank you!