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Legislative and regulatory framework

i Legislative and regulatory regime

The Cayman Islands are a British overseas territory of the United Kingdom. They were also a dependency of Jamaica for administrative purposes between 1863 and 1962. Cayman law is therefore a common law system largely based on English common law and statutes, with some influences from Jamaica.

The legal system has not diverged far from that of England and Wales. Many of the divergences are a result of the Cayman Islands being an international financial centre. Companies and partnerships established in IFCs are commonly used in structuring financial transactions, including Islamic finance transactions. Accordingly, many of the divergences between Cayman and English laws have arisen because of the Cayman Islands' legislature's desire to facilitate, and provide confidence around, financial transactions. For example, there is no restriction on a Cayman company giving financial assistance for the purposes of the acquisition of its own shares or shares of a holding company.

The financial services industry in the Cayman Islands is regulated by the Cayman Islands Monetary Authority (CIMA).

The relevant legislation is summarised below.

Banking

'Banking business' is a regulated activity. Section 2 of the Banks and Trust Companies Law (2013 Revision) (the Bank Law) defines banking business as 'the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or similar account money that is repayable by cheque or order and may be invested by way of advances to customers or otherwise'.

The Monetary Authority Law (2016 Revision) and the Bank Law give CIMA the responsibility for both licensing and regulating banking business. In relation to licensing, CIMA may issue the following categories of banking licences:

  1. Category A Banking Licence;
  2. Category B Banking Licence; and
  3. Restricted Category B Banking Licence.

The Category A Licence is the broadest and permits domestic business with residents of the Cayman Islands as well as offshore business. The Category B Licence permits only business conducted outside the Cayman Islands. The Restricted Category B Licence is subject to the same limitations as the Category B Licence, but the licensee is further restricted to a pre-approved customer base.

CIMA further categorises each type of bank into two further categories – home-regulated banks and host-regulated banks. CIMA's policy has different requirements for each type of entity. Home-regulated banks are banks incorporated in the Cayman Islands and are financially regulated by CIMA. Host-regulated banks are usually branches of a foreign parent bank that are subject to regulation by the parent's home regulator. CIMA's approach to the licensing (and continuing regulation) of home-regulated banks is stricter, including in relation to:

  1. capital adequacy requirements;
  2. financial resources;
  3. information required to be provided to key shareholders;
  4. financial resources of key shareholders;
  5. audit requirements; and
  6. the bank's local presence in the Cayman Islands.

While Section 17(1)(a) of the Bank Law states that it is the duty of CIMA to maintain a general review of the banking practice, Cayman statute does not regulate the type of banking products that can be offered by licensee banks. Accordingly, there is no regulation in relation to Islamic banking products.

In addition to the regulation of banking business, 'money services business' is also regulated by CIMA. The Money Services Law (2010 Revision) defines money services business as including:

  1. money transmission;
  2. cheque cashing;
  3. currency exchange; and
  4. the issuance, or sale or redemption of, money orders or travellers cheques.
Capital markets

The Securities Investment Business Law (2015 Revision) (the Securities Law) provides for the regulation of persons carrying on 'securities investment business', including market makers, broker-dealers, securities arrangers, securities advisers and securities managers in or from the Cayman Islands.

Securities are broadly defined in Schedule 1 of the Securities Law as including:

  1. shares;
  2. debentures, bonds and certificates of deposit;
  3. warrants;
  4. options;
  5. futures; and
  6. certain types of swaps.

The regulated activities are set out in Schedule 2 of the Securities Law and include:

  1. dealing in securities;
  2. arranging deals in securities;
  3. managing securities; and
  4. advising on securities.

No distinction is made in the Securities Law between Islamic securities and other securities.

Under the Securities Law, a person who engages in securities investment business must hold a Securities Investment Business Licence unless exempted under:

  1. Schedule 3 – Excluded Activities; or
  2. Schedule 4 – Excluded Persons.

Excluded Activities include where a company is dealing in securities on its own account or providing finance to enable a person to deal in securities. Excluded Persons include persons who carry on a securities investment business exclusively for sophisticated or high-net-worth persons and persons regulated by a recognised regulatory authority in the jurisdiction where the securities investment business is being conducted.

Offering of securities

In relation to the specific issue of the offering of securities:

  1. if the issuer of securities is a Cayman exempted company, pursuant to Section 175 of the Companies Law (2018 Revision), it is prevented from offering its securities to members of the public in the Cayman Islands unless it is listed on the Cayman Islands Stock Exchange; and
  2. if the issuer of securities is not incorporated or established in the Cayman Islands, it can offer its securities to investors established or operating in the Cayman Islands, but subject to the provisions of the Securities Law.

Again, there is no distinction between Islamic securities and other types of securities.

Insurance

Engaging in 'insurance business' is also a regulated activity. Section 2 of the Insurance Law 2010 defines insurance business as: 'the business of accepting risks by effecting or carrying out contracts of insurance, whether directly or indirectly, and includes running-off business including the settlement of claims'.

The Insurance Law gives CIMA the responsibility of regulating insurance business in the Cayman Islands. This includes licensing, ongoing supervision and enforcement. The day-to-day regulatory oversight of the sector falls to CIMA's insurance supervision division.

Similarly to the Bank Law, the Insurance Law focuses on the licensing requirements for insurers and their continued monitoring (particularly in relation to capital requirements, solvency, reporting and risk management).

Also similarly to the Bank Law, the Insurance Law does not stipulate what insurance products (be they Islamic or otherwise) a licensee may provide. However, Section 23(1) of the Insurance Law does state that CIMA may direct a licensee, in relation to a policy, a line of business or the licensee's entire business, to refrain from conduct that constitutes unsafe or unsound practice.

Funds

The Mutual Funds Law (2015 Revision) (the MF Law) is the principal legislation applicable to investment funds and determines whether an investment fund is required to be registered, administered or licensed with CIMA. In general terms, the MF Law applies to open-ended funds whose interests are redeemable at the option of the investor and that do not qualify or elect for exemption or other exclusion. One of the most commonly used exemptions is for funds with no more than 15 investors (the majority of whom are capable of appointing or removing the operator of the fund). We shall refer to funds to which the MF Law applies as 'regulated funds'. As a general rule, regulated funds tend to be hedge funds and in the form of a Cayman exempted company.

Under the MF Law, a regulated fund must not carry on business in or from the Cayman Islands unless a current offering document is filed with CIMA. The offering document must contain such information as is necessary to enable a prospective investor in the fund to make an informed decision as to whether or not to subscribe for equity interests in the fund.

The MF Law also imposes on regulated funds a number of continuing obligations, including:

  1. to file with CIMA material amendments to the current offering document within 21 days;
  2. to have its accounts audited annually by an auditor approved by CIMA and to file those accounts with CIMA within six months of the end of its financial year;
  3. to pay an annual filing fee; and
  4. to have appointed to its board of directors at least two directors at any one time. Generally, these should be individuals.

If CIMA is satisfied that a regulated fund:

  1. is or is likely to be unable to meet its obligations as they fall due;
  2. is carrying on or attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors;
  3. has not been directed and managed in a fit and proper manner; or
  4. has a person holding a position as a director, manager or officer who is not a fit and proper person to hold that position,

then CIMA may:

  1. cancel the fund's registration;
  2. require the substitution of any promoter or operator of the fund;
  3. appoint a person to advise the fund on the proper conduct of its affairs; or
  4. appoint a person to assume control of the affairs of the fund.

The MF Law applies equally to Islamic and non-Islamic funds. However, the majority of Islamic funds tend to be closed-ended private equity or property funds, which are structured either as exempted limited partnerships or exempted companies (see Section II.ii).

ii Regulatory and supervisory authorities

As discussed in Section I.i, CIMA is the principal regulator in the Cayman Islands. As discussed above, each governing statute gives CIMA certain powers in relation to the particular regulated sector and lists the measures that CIMA may take, as regulator. CIMA's principal functions are set out in the Monetary Authority Law (2018 Revision). Its regulatory functions not only include regulating and supervising financial services business, but also monitoring compliance with money laundering regulations. In August 2017, CIMA published a revised regulatory handbook that sets out the policies and procedures to be followed by CIMA. In particular, the handbook describes the policies and procedures for:

  1. giving warning notices to persons affected adversely by proposed actions of CIMA;
  2. giving reasons for CIMA's decisions; and
  3. receiving and dealing with complaints against CIMA's actions and decisions.

The handbook further states that CIMA is to have due regard to international standards governing banking, insurance and securities supervision.

The handbook also describes CIMA's approach to:

  1. licensing approval and cancellation – including for the banking, insurance and funds sectors;
  2. reviewing licensees' financial statements and on-site inspections of licensees' premises;
  3. anti-money laundering procedures to be followed by licensees; and
  4. enforcement – including applying for court orders.

The handbook is binding on all CIMA's committees and officers.

Also worthy of mention is the Cayman Islands General Registry. The primary function of this government department is to develop and implement policies and procedures for all registers under its administration to ensure their continued effective contribution to the financial services industry and the public. The registers maintained by the General Registry include the register of Cayman companies and Cayman partnerships. As discussed below, Cayman companies and partnerships are widely used in Islamic finance transactions.