Regulatory Capacity

Limited Regulatory Capacity Poses Heightened Risk in the Smaller Offshore Centres. We are looking at the UK National Audit Office Report published on 16 November 2007 [link here]. The Report is titled Managing Risk in the Overseas Territories. There was a useful summary of it published in the internet newspaper Caribbean 360 [link here].

At paragraph 1.32 of the Report there is an interesting comment on the failure of Anguilla adequately to perform its regulatory function. There is also useful information on the extent of the industry in Anguilla and the numbers of persons employed in it. The Report reads:

Regardless of the scale of activity in their area, regulators must discharge core responsibilities including keeping abreast with developments in international standards and their application in the local context; support for drafting of legislation and maintaining specialist investigative skills to respond to regulatory breaches and to deal with overseas requests for information.

Regulators in key centres of Bermuda, and the Cayman and British Virgin Islands have, thanks to fees levied on their flourishing financial sectors, achieved major improvements since 2000, with staffing rising to complements of around 100 staff each. The position in Anguilla, Montserrat and the Turks and Caicos Islands is quite different. For example, in Anguilla, there are only about 200 employees in the financial sector as a whole, and the fees from the industry are insufficient to fund a fully fledged regulatory function. At present, Anguilla has just four professional regulators and has fallen behind with important actions. Regulator resources need to be broadly proportionate to the scale and nature of the industry that they regulate, but they also need a minimum critical mass to keep up with international standards. The Department has taken some steps to address limited capacity, by facilitating secondments and sharing of expertise, from Anguilla to the British Virgin Islands, from Gibraltar to Montserrat and from the British Virgin Islands to Jersey and the Isle of Man. It also held or supported various seminars or workshops in 2003 and 2005.

The point being made here, and at Table 7 of the Report, is a crucial one. Anguilla is one of the smaller offshore centres, with only 200 persons employed in the industry compared with over 4,000 in Bermuda, 5,400 in Cayman Islands, and 1,500 in each of the BVI and Gibraltar. The Cayman Islands is not only the world’s fifth largest banking centre, it is home to 80% of the world’s hedge funds. Bermuda is the world’s leader in captive insurance and a major competitor of London and New York in reinsurance. The BVI is the world leader in the provision of offshore companies, with over 600,000 companies on its Register. By comparison, Anguilla has little to boast about. The financial sector as a whole contributes not more than 15% of GDP and 7% of employment in Anguilla, well behind tourism. The sector is not large enough to sustain effective regulation. Yet, without adequate regulation, the industry poses a threat not just to Anguilla’s security and prosperity, but to the UK as well. More rough waters lie ahead.