Government Breaking Down ‘Offshore’ Banking Divide
The Government yesterday broke down the divide between Bahamian domestic and international financial institutions to meet European Union (EU) demands.
KP Turnquest, the Deputy Prime Minister, in unveiling a radical regulatory shift said the Government will “make the playing field level for all financial institutions in The Bahamas” by enabling them to offer services to both domestic and international clients once the necessary regulatory approvals are in place.
The move effectively eliminates the “walls” that separated financial institutions that served the domestic economy with Bahamian dollar transactions, such as commercial banks, from so-called “offshore” entities that were solely focused on foreign clients and dealt in foreign currencies.
By “equalising the tax treatment” of the two sectors, Mr Turnquest said institutions in the international banking, insurance and securities/capital markets sector will be able to offer services to Bahamians in Bahamian dollars should they so choose once the necessary supervisory approvals are in place. And, in similar fashion, Bahamian commercial banks will be able to target international clients subject to possessing the necessary permits.
The overhaul to the Bahamian financial services industry’s regulatory framework was driven by the need to comply with the Removal of Preferential Exemptions Act – the newly-passed law that requires this nation to eliminate so-called “ring fencing” and preferential tax breaks for non-resident entities as demanded by the EU.
“Offshore” institutions receive such favourable treatment in comparison to their domestic counterparts, the latter paying a 3 percent Business Licence fee on interest income in addition to the asset-based fees all must provide.
Going forward, all financial services institutions will be exempt from paying Business Licence fees from January 2020 onwards. This is being replaced by a three-tier structure, which will be determined by factors such as the complexity of their business, the systemic risk they present, costs involved in regulating them and whether they decide to offer Bahamian dollar services.
Besides complying with the EU’s demands, the Government is seeking to balance a number of competing objectives with its reforms. These include facilitating the “ease of doing business”; ensuring there is a “revenue neutral” effect for the Public Treasury with no losses; and the maintenance of the financial services industry’s regulatory integrity.
Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, told Tribune Business that the proposed solution was “digestible by most players” given that it was developed by the Government in concert with private sector partners.
He revealed that a Working Group, comprised of representatives from BICA, the Chamber of Commerce, Bahamas Financial Services Board (BFSB), Clearing Banks Association and Association of International Banks and Trust Companies (AIBT), had collaborated closely with the Minnis administration over the Christmas period.
Mr Bowe said “the critical distinction to make” between this effort, and similar initiatives in the past, was that “it’s a Bahamian position as opposed to a Bahamian government position”.
While the implementation details were still being worked on, he added: “This is intended to ultimately be palatable to the EU, but is being driven by an agreement among domestic players as to the best way to overcome rind fencing and preferential treatment.”
The BICA president conceded that there was likely to be minimal cross-over of international financial institutions into domestic Bahamian dollar transactions and vice versa, given that business models were unlikely to require it, but said all “now have the flexibility to do so” – something that could inject more competition into the local market.
Mr Turnquest, meanwhile, said: “By demonstrating our commitment to global standards, we are working to maintain The Bahamas’ competitive edge as a global leader in the financial services industry and ensure that the country’s second economic pillar remains vibrant over the medium and long term.
“The establishment of this new framework follows broad consultation with industry representatives in both the private and public sectors, some of whom are represented here this morning. We also sought input from international tax advisors.
“Under the framework, all financial institutions will now be permitted to offer services to both domestic and international clients, provided that the financial institution meets the prescribed regulatory requirements in respect of the services offered,” he explained.
“It will remove any difference in the fiscal treatment of financial institutions that cater primarily to the domestic markets, and those financial institutions that cater to international clientele. This is essential to removing the preferential treatment of specific businesses as implemented under the recently passed Removal of Preferential Exemptions Act.”
The new framework, which took effect on January 1, proposes that financial institutions – such as banks, insurance, trust companies, investment advisers, mutual fund administrators, broker/dealers and other regulated financial services entities – will be exempted from paying Business Licence fees when renewing or applying for a licence from January 2020.
Breaking down the “three-tiered system”, Mr Turnquest explained: “All financial institutions will pay a flat registration fee, which will be set on a sliding scale between $2,250 and $250,000 per year, although smaller institutions such as credit unions will pay much lower fees, as is currently the case.”
This fee will be determined primarily by the “operational complexity” of the institution, aligning with the level of resources expended to regulate financial institutions based on their respective size and complexity.
Then, all financial institutions deemed systemically important, based on their integration into the domestic system, will be subject to an additional fee in respect of Bahamian dollar liabilities and contingencies.
Finally, any bank bank wishing to access the domestic payments system, or to operate as an authorised agent for Bahamian dollar transactions, will be charged fees reflecting the substantial supervisory and management costs of these arrangements for the Central Bank of The Bahamas and other regulators such as the Securities Commission and Insurance Commission.
“It is important to point out that the new regulatory regime for financial institutions, and the planned changes within the Business Licence regime, are not expected to have a material impact on what respective businesses currently pay into the Public Treasury in terms of regulatory and business fees. The changes are intended to be revenue neutral, and the financial sector will continue to bear its current fiscal obligations; this will not be passed on to any other sector or segment of the economy,” Mr Turnquest reassured.