Update on Legal Matters Regarding Funds | 2nd March, 2020
The Cayman Islands government has reaffirmed its commitment to cooperating with the European Union (EU) and aims to be delisted as a non-cooperative jurisdiction as soon as possible, potentially by October 2020.
In a significant move, the Cayman Islands government passed the necessary investment funds legislation on 31st January 2020, effective from 7th February 2020. This legislation includes the Mutual Funds (Amendment) Law, 2020 and the Private Funds Law, 2020, which were published on 7th February 2020.
The Mutual Funds (Amendment) Law, 2020 provides for the registration of mutual funds that were previously exempted from registration. The Private Funds Law, 2020, on the other hand, provides for the registration of various closed-ended fund vehicles with the Cayman Islands Monetary Authority ("CIMA").
The EU has moved the Cayman Islands to its Annex I list of non-cooperative jurisdictions for tax purposes on 18th February 2020. However, it's important to note that the EU has not developed comprehensive sanctions or regulatory interventions as a result of the Cayman Islands' inclusion on the list. The Cayman Islands government maintains that it has been fully cooperative with the EU's requests.
Meanwhile, the financial services sector globally is grappling with the impact of climate change. Investors are seeking green products, and there is increased global attention on the industry's role in combatting climate change. This shift is also reflected in the asset management sector, where fund liquidity, the impact of increased outsourcing to third parties, the expanded use of artificial intelligence, and algorithmic decision-making are key focuses.
In the UK, the Financial Conduct Authority (FCA) has published measures to improve the rules on open-ended funds invested in illiquid assets, which will come into force on 30th September 2020. Additionally, the FCA has published its annual 'Sector Views', an assessment of the risks and potential harm to consumers across seven financial services markets.
On a broader scale, the EU Directive 2018/822 (DAC 6) introduces a new tax reporting regime in the UK, effective from 1st July 2020. This mandatory reporting regime requires the disclosure of certain cross-border tax arrangements to tax authorities to increase transparency and combat tax avoidance.
Under DAC6, both intermediaries and taxpayers are required to report these cross-border arrangements if they meet certain hallmarks indicating potential tax avoidance. Intermediaries typically include advisors, banks, lawyers, and other service providers involved in designing, marketing, or implementing reportable arrangements. If no intermediary exists or the intermediary is bound by legal professional privilege, the obligation falls on the taxpayer involved in the arrangement to report it instead.
Reports must be submitted within 30 days of the arrangement being made available, ready for implementation, or when the first step is implemented. Failing to report may result in significant penalties depending on the jurisdiction.
Investor demand is the key driver for 85% of managers in adopting Environmental, Social, and Governance (ESG) principles into their investment process. In fact, 59% of hedge fund managers are either at the 'mature' or 'in progress' stage of implementing ESG via appropriate policies, committees, research, and data.
The Cayman Islands' proactive approach in addressing the concerns raised by the EU and its commitment to adopting new legislation demonstrate its dedication to maintaining high standards in the financial services industry. The implementation of DAC6 and the focus on ESG principles reflect a global trend towards transparency, accountability, and sustainability in the financial sector.
[1] EU Directive 2018/822 (DAC 6) [2] Cayman Islands Government Notice on DAC6 [3] CIMA Notice on DAC6 Registration and Reporting [4] FCA Measures on Open-Ended Funds Invested in Illiquid Assets [5] FCA Annual Sector Views 2020
- The Cayman Islands government's commitment to being delisted as a non-cooperative jurisdiction by the EU extends to its proactive approach in addressing concerns, as demonstrated by the recent implementation of the Mutual Funds (Amendment) Law, 2020 and the Private Funds Law, 2020.
- As part of its efforts to increase transparency and combat tax avoidance, the EU Directive 2018/822 (DAC 6) introduces a new tax reporting regime in the UK, requiring both intermediaries and taxpayers to report certain cross-border tax arrangements.
- In the UK, the Financial Conduct Authority (FCA) has published measures to improve rules on open-ended funds invested in illiquid assets and has published its annual 'Sector Views', reflecting a broader focus on addressing risks and potential harm to consumers across financial services markets.
- The financial services sector globally is experiencing a shift towards sustainability, with investor demand being the key driver for 85% of managers in adopting Environmental, Social, and Governance (ESG) principles into their investment process.
- The financial landscape encompasses diverse aspects, such as personal-finance management, technology, education-and-self-development, entertainment, general-news, sports, and even casino-and-gambling, each with its unique dynamics and trends. The Cayman Islands' approach to business and its EU relations serves as a case study in the dynamic interplay of these factors in the broader financial landscape.
