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AmericasMarch 1 2016

Fast and flexible: wealth management the Bahamas way

The Bahamas' ability to create investment products quickly in response to clients' specific needs gives it an advantage as an international financial centre, though greater communication efforts may be needed to convince its critics regarding the country's compliance with international regulation. This Leadership Series roundtable article was sponsored by the Bahamas Financial Services Board, Equity Bank and Trust, Deltec and the Bahamas Ministry of Financial Services and independently edited by The Banker.
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  • Ivylyn Cassar, vice-chairman, Equity Bank and Trust Bahamas
  • Ivan Hooper, CEO, the Winterbotham Trust Company
  • Tanya McCartney, CEO, Bahamas Financial Services Board
  • David Munoz, CEO, Deltec Bank and Trust
  • Michael Paton, partner, Lennox Paton
  • Hope Strachan, minister of financial services and local government, Bahamas

The Bahamas is internationally known for its idyllic beaches, as well as its status as an international financial centre. But while the success of the country's tourism sector mainly relies upon travellers having the money to spend on a trip to the country, the development of the Bahamas’ financial activity depends on a variety of factors.

International regulation and general distrust towards offshore centres have presented challenges in recent years. But the Bahamas' ability to swiftly create new investment products continues to attract business, in particular from Latin America, although Asia is featuring increasingly strongly.

The Banker travelled to Nassau, the capital of the Bahamas, to talk with a number of senior professionals from both the public and private sector about the importance of financial services to the local economy, whether any concerns over transparency and compliance are justified, and what sets the Bahamas apart from its peers.   

Q: What will drive growth in the Bahamian financial services sector? 

Hope Strachan, minister of financial services and local government, Bahamas: Growth will be driven initially by innovation and new products. The financial services sector is so very vital because it is the second pillar of our economy and it contributes about 15% to our gross domestic product. 

Tanya McCartney, CEO, Bahamas Financial Services Board (BFSB): When I speak to [the BFSB’s] members, they continue to say that private wealth management is where the focus will be for us as a financial services sector. We will be focusing on our very strong toolkit. We will continue to work on the areas in which we have specialised over the years.

Ivan Hooper, CEO, the Winterbotham Trust Company: We see a lot of growth in the structuring of products, trusts, funds and companies – particularly as [legislation is changing in clients'] countries of domicile and they’ve had to adapt their structures to become compliant. This has allowed us to innovate and set up new structures for families.

Michael Paton, partner, Lennox Paton: What is driving clients is a true desire to become compliant in their [investment] structures. The world is definitely changing in this regard and everyone recognises that. So you’re seeing a demand for more complex structuring at the high end.

I think the market is moving to the high end in the Bahamas as opposed to the retail end; [this includes] trust structures, bespoke investment and funds for family investments. This gives the opportunity for the international groups that are here to provide international trust services [to] interact with the local players such as Equity, Winterbotham and Deltec for fund services and the support services that go with them. It’s a more complicated environment to operate in for everybody, and it is very important that the bankers, the trust officers and the lawyers that are actually interacting with these clients are cognisant of what all [the new] issues are.  

Q: What about the composition of the financial services sector? Is the mix between local and international companies a healthy one? 

David Munoz, CEO, Deltec Bank and Trust: I think it’s a healthy ratio in that the international banking and trust companies provide a global pillar for the economy and bring a tremendous amount of expertise. The local players continue to be very innovative and that’s an important part of continuing to distinguish ourselves from the international players. There’s growth in every sector of our business and that really is coming from the change that we see in the strategy of international players on the one hand, but also in the change in economic and political circumstances globally.

It’s not a surprise that international players have taken, over the past seven years, a very conservative risk management approach to their businesses and have focused largely on developing their business in-country. So if they are present in a particular country, they’re serving those clients in that country. Whereas local players... by definition, are serving clients from all over the world and so there’s a real juxtaposition in terms of how we think about serving those markets versus how the international players focus on [their] markets. 

Mr Paton: The international banks give us the credibility on the international scene. The local players give us [innovation] and the ability to provide client services that the international banks aren’t necessarily geared up to do here.  

Q: How do the private and public sectors work together to make sure that the economy is on the right path? 

Ms Strachan: The government of the Bahamas believes totally in the collaboration with the private sector. The BFSB [underpins] that collaboration, it is the liaison between the private sector and the government, and Ms McCartney is the recently appointed new CEO of that particular organisation. Any time that we are dealing with legislation, of course we consult with the private sector and we never move with any kind of new legislation unless [there is] consultation. 

Ms McCartney: I certainly agree, anything that relates to informing policy that the government may be working on that impacts the financial services sector, we ensure that there is consultation – the BFSB provides a forum for consultation where the government and industry will sit down and review the pros, the cons and then come up with consensus on what is best for financial services. 

Q: The word 'offshore' is very much disliked in the Bahamas, as it is in other financial centres. How should the Bahamas be defined? What sets it apart from its peers? 

Mr Paton: What we’re really talking about here is aggregating client funds in the Bahamas, which then go and interconnect into investments either in portfolio investments in the capital markets onshore, or into private equity funds that are going to be invested in the onshore world, if you want to contrast onshore and offshore. The idea that the Bahamas is just a black hole for offshore deposits is just not correct because everything that comes through here ends up going back into mainland, onshore markets.

For most operations here, Latin America is a very important market. There’s a natural tendency for offshore centres to focus on particular areas. You can look at Jersey, the Channel Islands, they’re looking at Europe. In the Bahamas, we’re looking at Latin America and, more importantly now perhaps, we’re looking over to Asia. Since the 1950s, private banking and private wealth management trust services are something the Bahamas has done very well and that I think will continue to do very well.

BahamasRT_PQ1

Mr Hooper: We have a very strong regulatory framework, that’s one of our advantages. We also have good infrastructure. We have big support from top-tier banks that are based here – particularly doing wealth management - and I think we’re very good service providers on the accountancy side, on the legal practice side and also on the trust and back-office side. I don’t think we’re competing on the basis of under-regulation; it’s the other way around, I think we are, in certain aspects, highly regulated as compared with developed nations, in particular on know your customer.  

Q: Do you think that the international community sees the Bahamas as a strongly regulated jurisdiction? 

Mr Hooper: Well, my quick answer is no, and I think further work has to be done from our part to make sure that people understand the role of the different framework that we’re living in here. 

Mr Munoz: I think the perception is that this is not recognised, but when you look at, say, an objective standard such as the recent Financial Action Task Force review, I think the Bahamas scores very highly and that’s certainly a review that most people should look at if [in doubt.]. As Mr Hooper said, the regulatory framework is very strong but it really comes down to the practice of the individual players. We all know each very well. We know the type of business each of us does and it comes down to that practice. To be competitive in the global marketplace, we have to be innovative, we have to be thoughtful and bespoke in our products, but we also have to be good citizens of the financial marketplace globally. 

Ivylyn Cassar, vice-chairman, Equity Bank and Trust Bahamas: I do a lot of business development and I attend a lot of conferences and seminars and I feel that the Bahamas does have a very good reputation as an international financial centre – certainly the intermediaries that I deal with are interested. We’re doing business and it is compliant business; we wouldn’t have it any other way. Our regulators are progressive and I feel that the Bahamas has made very good strides with implementing all of the things that were required of us, such as the Foreign Account Tax Compliance Act. 

Ms McCartney: A key part of the work that the BFSB does is to promote the Bahamas as a responsible international player. I’d say 50% of my mandate, perhaps more, has to do with promotion and not only promotion of products and services, but of the jurisdiction and speaking about what the Bahamas' advantage is. We’re supported by the government in that effort. 

Q: How should Bahamian banks and investment firms look at innovation? 

Mr Munoz: We understand, particularly the local players, that we have to listen to our clients and we recognise that each one of them has a problem and they’re all a bit different. So while there may be essential toolkits or structures that could work, we have to [add bespoke solutions] into an existing structure to ensure that we’re addressing those issues.

Today, more than ever, the winners [in our business] are going to be those who are very thoughtful and mindful when listening to their clients and able to take the time to address those specific concerns. Not only when they first meet the client and create a structure that addresses their issues, but continuously following it up. It’s not about putting a client into a structure and forgetting about them. When you look at the big institutions, they are public companies that are driven by [presenting yearly] profits, not profits over the long term. So you have senior management teams that are incredibly myopic in terms of how they manage their businesses. 

Mr Paton: International banks and trust companies are going to have a much more conservative mandate with their operations. They’re going to want to see that a product is tested [before using it]. Whereas if we sit down with Mr Munoz, Ms Cassar or Mr Hooper and say: 'Okay, this is a new piece of legislation. We think we can use it for these structures, these products, these strategies,' they’re more likely to take it up quickly rather than sitting down with a head office in Zurich or Geneva.

BahamasPQ2

The key is to have players like the people around the table that say: 'Okay, we think there’s an opportunity for a fund structure that’s going to work for Latin American clients, Brazil specific, that meets all the Brazilian touchstones to be a recognised fund, to give the Brazilian client the tax deferral that they want.' 

Q: The Bahamas is particularly proud of some of its investment solutions, such as ICON, Smart funds and BEE. Can you talk us through them? 

Mr Paton: With ICON, the Investment Condominium [modelled on the Brazilian concept of an investment fund that has a civil law construct], we saw an opportunity to attract Brazilian funds that were looking for international diversification, but that wanted [the funds] to be in a structure that was recognised and respected for tax purposes back in Brazil. So a group of us sat down with the Brazilian lawyers, with the [Bahamas] government, with stakeholders present at this roundtable and said: 'This is what we’re going to try and do. It’s new. It doesn’t fit in any statutory toolkit that anyone in the common law has seen, but we think we have a market for this,' and we brought it to market in less than two years.

I think it is a pretty good example of how we [spot] a niche. It’s not a global product, it’s a niche product but it makes sense for us; there are many examples of us doing [the same] in the past. 

Ms Cassar: We were the first investment fund administrators to do an ICON in the Bahamas. Certainly Brazil is a key market for us; for the Bahamas to come up with an investment fund to suit that market, that is compliant and transparent, shows how the public and the private sector working together get these new products launched very quickly. We also have the Smart fund, which is very innovative, compliant and transparent. [The Specific Mandate Alternative Regulatory Test – or Smart – fund gives practitioners greater flexibility in the design of investment features than the one granted in other collective investment vehicles.] Whereas you may have trusts that are not registered, these are all licensed by the regulator. They are a wrapper for investment strategies that are unique to a group of investors. 

Mr Paton: The Smart fund product is now being copied by Luxembourg. It is seeing what we saw 10 years ago. It is very important for us in private client wealth management. Other people are recognising that they need to provide alternative [solutions] as well. 

Mr Hooper: BEE [the Bahamas Executive Entity] is a very innovative product, particularly because it takes an entity to act on a specific role that adds to other innovative moves. [BEEs are used as vehicles to carry out executive functions in private wealth structures, such as the ones of a trustee or investment adviser.] So as you can see, Smart funds, the ICON, BEE and [the Bahamas'] trust law, there’s a history of trying to be innovative in the wealth management arena. 

Q: What other factors underpin the development of the Bahamas financial centre? 

Mr Munoz: I’ll just give you another example of the partnership between the BFSB and the private sector, and that’s in the insurance space. Over a number of years, BFSB has been discussing with the private sector the development of the insurance space within the Bahamas. The insurance marketplace and banking marketplace have coexisted for hundreds of years, but the intersection between the two has been very fragile.

We’re starting to see now, not only in the private wealth space but globally, that the intersection of insurance and banking is growing tremendously, in New York and in London. You’re seeing firms that are using that intersection to diversify risk. Within the private wealth space, you’ve not seen the interaction between the private client balance sheet and the private client’s business balance sheet in the past and, now, with the innovation of insurance products, you’re starting to see more crossover. I think that’s an important area of innovation for the Bahamas. 

Ms Strachan: The fact that we do have a fairly stable political environment, and also the fact that we are a democracy has been part of our success as well. People want to know that they’re going to be doing business in an environment where political change is [not] going to cause a risk to their investments.

This Leadership Series roundtable article was sponsored by the Bahamas Financial Services Board, Equity Bank and Trust, Deltec and the Bahamas Ministry of Financial Services and independently edited by The Banker.

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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