The impending divorce between the UK and the EU brings a lot of uncertainty. But that doesn’t mean countries and services providers cannot assess the potential impact and make contingency plans.
Where IFCs such as the Cayman Islands are concerned, Brexit’s potential impact centres largely on the services sectors and primarily the financial services industry.
Whereas discussions on tariffs can impact the trade of goods, this is not relevant for financial services. Instead, the impact of Brexit on financial services will occur primarily via the EU’s regulatory climate.
Put simply, the EU will only allow other countries to sell services to their markets (i.e. gain access to EU clients) if the delivery of those services is regulated to EU standards. Generally speaking when a jurisdiction meets these equivalency rules and is permitted to continue to access the EU market this is known as ‘passporting’.
The Cayman Islands have been working on securing this equivalency status for sometime as a direct result of an earlier initiative known as the AIFMD, but this process is not yet completed.
Therefore in the meantime, the potential impact of Brexit on Cayman based financial services firms, will depend broadly on a number of factors which can be simplified as the four Ps (Presence, Partnerships, Percentage of EU clients and Performance). Firms looking to do a ‘Brexit health check’ should carry out a review of these four Ps as part of their contingency planning.
Presence in the EU– where a Cayman Islands financial service provider (bank, law firm, fund administrator etc.) has a subsidiary or affiliate office based in the EU (for example Ireland, Luxembourg are some of the most common locations), then that firm will be able to restructure its business to ensure continued access via their physical presence in the EU. Clearly firms with a more global presence will make the transition more easily.
Partnerships in the EU – whether the Cayman based firm has potential partners it can work with which will help to maintain delivery of services to the EU market is another key factor. Firms without a strong history of EU relationships will need to start cultivating some now.
Percentage of EU clients – Cayman based firms with minimal exposure to EU clients will have less to be concerned about. But those with at least 10% EU clients will need to start putting contingency plans in place. This percentage may not tell the full story either because it’s possible to derive a disproportionate percentage of revenue from a relatively small client base.
Performance – If setting up new offices in the EU is one of the possible options for a firm they will be considering the financial implications of that move as part of their contingency planning. If financial performance post the move looks bleak, then firms will likely decide to withdraw from the market entirely (cull those clients from their portfolio). But if setting up a new EU based office and dealing with ongoing costs is worth it the firm may actually expand over the medium to long term.
Generally, firms that invested in a global presence are more likely to withstand Brexit than those that have not. There are many truly globalised financial services firms operating from the Cayman Islands that may find themselves on the right side of the UK’s divorce from the EU after considering the four Ps.
If you are a Cayman Islands client, speak with your service provider about their Brexit contingency plans and how they can help you. If you are a service provider and need assistance with assessing Brexit’s potential impact on your service lines, contact FTS