A few days ago, figures in the Bermuda finance industry gathering in London said their jurisdiction of 65,000 people, which is a UK overseas territory, would be among the first non-European Union territories to achieve equivalence status under the EU’s Alternative Investment Fund Managers Directive, which was approved by the European Parliament last year. The directive must be implemented during 2013 and is designed to tighten regulations on the sale and management of such investment vehicles, which have been blamed for their supposed role in helping cause the 2008 financial crisis. (Critics of the rules have argued they are unnecessary and will not ultimately protect end-investors.)

It may not always seem fair that places such as Bermuda must prove themselves to be better governed and more open than the large nations slapping down a mass of new rules. But Bermudans are resigned to this state of affairs.

“If we want to be a major player in the financial world we have to keep up with regulatory requirements.  The onshore countries set the rules and don’t have to keep up with them as fast as we do. That’s just the way of the world,” Cheryl Packwood, chief executive, Business Bermuda, told this publication after she recently spoke at the London conference.

The country scores pretty highly on the Euromoney Country Risk barometer, with a figure of 69 out of a possible 100 for economics and politics, ahead of the global average of 57.6 (Source: Euromoney). Its ranking has risen recently, rising sharply from below 50 at the end of May. The next closest Caribbean jurisdiction is the Bahamas, at 59.43.

Bermuda is on the “white list” of the Organisation for Economic Co-operation and Development on the issue of tax transparency; the island’s government has set up a taskforce to promote asset management in Bermuda and to ensure that it can be flexible to meet all the needs of fund managers.

Among the major firms present there are law firms such as Appleby, Conyers Dill & Pearman, and Ogier, giving it the legal firepower to be ready for any regulatory challenges. As Conyers explained in a recent briefing note, the AIFM directive is a big deal for places such as Bermuda, the Cayman Islands and British Virgin Islands, as around 20 per cent of the body of the directive is focused on rules applying to so-called “third” countries (those outside the EU). Lawyers generally reckon that the directive, which initially appeared to be a draconian and protectionist piece of legislation, is now less damaging, but still will require considerable work to implement. 

Peter Hughes, managing director of Apex Fund Services, which provides global fund administration to investment managers investing in traditional and alternative assets, is confident: “Bermuda will be among the first non-EU jurisdictions to achieve equivalence; it is already recognized by international bodies as being among the best-regulated and most compliant jurisdictions worldwide.”

“Funds based in Bermuda aren’t limited or governed by the investment restrictions surrounding funds such as Undertakings for Collective Investment in Transferable Securities and have access to the many advantages such as no tax or remuneration caps, which can be attractive to investors,” Hughes said.

Other challenges

Even so, while compliance with the EU’s AIFM Directive is one of the most recent challenges, there are plenty of other developments worth noting for Bermuda.

The jurisdiction, made up of eight major islands and 130 smaller ones, has in recent years gained a strong reputation as a centre for insurance and reinsurance, although this footloose industry has recently given Bermuda some cause for concern, as threats against tax havens from the likes of the US government may have rattled the market.

In September 2009, the world’s third largest insurance broker, Willis Group Holdings, said it was moving from Bermuda to Ireland. Ace Limited, which was the biggest Bermuda-based insurer and reinsurer, also migrated to Switzerland in 2008. More brightly, Bermuda’s financial professionals are confident they can stem much more of an exodus by reaching equivalence with the EU’s forthcoming Solvency II Directive and professionals in that market are confident it will be ready.

Another benefit for Bermuda is its convenient time-zone slot: it is four hours behind London and one hour ahead of the US’s east coast. And the low or zero-tax regime appeals: Bermuda investment funds are not subject to any tax. There are no Bermuda corporation, profit, withholding and capital gains or income taxes applicable to an investment fund or to its share, unit holders or partners which are not resident in Bermuda (source: Appleby)

A small share

At present, Bermuda is home to about 5 per cent of the world’s $2 trillion-plus hedge fund industry, dwarfed by the Cayman Islands, which play host to around 80 per cent of such vehicles. Bermuda’s financial industry figures hope this share will increase if the territory can get equivalence for the AIFM Directive earlier than some rival centers.

Broadly speaking, the financial services sector in Bermuda covers six broad categories: wealth planning, aircraft registration; insurance/reinsurance; ship registration; private trust companies; and exempted companies.

To focus on wealth planning, which is a business stemming back to the aftermath of WW2 in the late 1940s, Bermuda has developed a trusts sector, tapping the benefits of a tradition of UK law, such as the Common Law heritage. Trusts come in various forms, such as revocable or irrevocable trusts, protective trusts and charitable trusts. Insurance and pension trusts also operate (source: Equity Trust, FSC Report 2011). The jurisdiction helped drive Private Trust Companies, which is a company with trustee powers that is not required to be licensed in Bermuda because it does not provide services to the public. The benefit of the PTC is that it can be set up where there is a need for a family office structure. The PTC suits the desire of a settlor to retain greater control over how a family’s assets are run.

As the marine world will know, Bermuda is part of the Red Ensign group of registration hubs and this means, among other things, that ships carrying this flag – or “red duster” – can ask for protection from the UK’s Royal Navy. Firms with this registration are exempt from taxes on profits, income and dividends, and Bermuda does not levy capital gains. 

There are four full-service banks in Bermuda, which is not primarily a banking hub, but one more for domiciling funds and organizations such as insurers. Full-service banks in Bermuda include HSBC, Capital G, Bermuda Capital, and Butterfield. (To read a recent interview with Butterfield’s private bank, click here).

Bermuda has, like many other international financial centers, been buffeted by the global financial storms of recent years. Judging by the confident comments of its financial practitioners, this famous group of islands in the Atlantic still needs to be taken seriously as IFCs battle for a share of expanding global wealth.