Executive Director (The Securities Commission of The Bahamas)

The financial services sector is known to be one of the main economic pillars in which the Bahamian economy stands. During the 20-year anniversary gala of the Securities Commission of the Bahamas, Mr. John Rolle, Financial Secretary in the Ministry of Finance, remarked on how much this sector has accomplished / developed over the past 20 years. How would you summarise the financial services sector today in the Bahamas?

The Bahamas’ financial services sector is facing increasing pressures from external factors. Traditionally, we were an industry that was focused heavily on trusts and private banking but today we are seeing that business contract - not so much trusts but certainly private banking. The contraction we see is due to number of reasons, mostly international pressures. Also, following the 2008 financial crisis and global recession, a number of international institutions doing business from The Bahamas have been looking at their business models and realigning their business strategies. Unfortunately for The Bahamas, the business and profits generated here for a large international bank are not always significant enough to rationalise keeping the local entity as part of its overall business strategy and as a result, we are seeing some contraction in private banking. Despite these challenges, I see a tremendously good opportunity for The Bahamas to reshape and guide the sector into new areas.

As far as the Securities Commission is concerned, we are seeing growth and expansion within our scope, particularly in funds and especially smart funds. We are seeing a year on year growth of over 12% in the number of Bahamas-based investment funds, and also we are seeing growth in the number of registrants under the Securities Industry Act - people who are registering as investment advisors particularly. So what we are seeing is a shift in our financial services from big bank institutions to smaller and more specialised, service-oriented institutions, and then of course, as already mentioned, the investment funds sector is also growing.

What would you say have been the reasons for this growth?

In The Bahamas’ securities sector we have this model where, traditionally, wealth managers would be responsible for asset management on behalf of their clients. Many clients, and in some cases their family offices, are now taking on this activity themselves and so they are setting up structures to handle their investment management directly. This has contributed to the increase in the number of investment advisor licensees. We are seeing the shift from large private banking to smaller wealth management operations who do not need a full scale banking license. They are instead structured as investment advisors or pure brokerage operations. Also, we are steadily seeing more and more SMART and professional funds being set up exclusively for a small number of individuals, very often families.

For 80 years the Bahamas has been one of the world’s foremost financial services jurisdictions, thanks to its low- or no-tax regime and high quality of service. Many say, however, that in recent times tougher international regulations such as FATCA are impacting the jurisdiction’s value proposition in this area. In your opinion, how are these impacting the sector and how is it adapting to these changes in order to remain competitive and relevant?

FATCA is interesting because it is focused on US clients. I would say that since 2003, when The Bahamas entered into a Tax Information Exchange Agreement with the US, industry participants have gone to great lengths to ensure that only US tax compliant business is booked in the jurisdiction. Since that time, local institutions have been aligning themselves to ensure that any activity with US beneficial owners or beneficiaries is tax compliant. As a result, FATCA shouldn’t represent a drop off in business for The Bahamas. What FATCA is perhaps doing is increasing the cost of doing business because financial institutions are having to do much more reporting and tracking. These local institutions will have to constantly conduct reviews of accounts to ensure they are aware if the residency status of a beneficial owner or beneficiary changes. In this global and mobile environment, they may have a scenario today where they believe their account holder is not a US person and then, because people move around so often, within a few months the account holder becomes US resident for tax purposes. Whether it’s fair or not, licensees now have to keep on top of these issues and that increases the cost of doing business. Again, I don’t see FATCA causing a drop off in business because I think that The Bahamas went through that alignment more than a decade ago.

Established in 1995, the Securities Commission of The Bahamas has the objective of contributing to the growth and development of a financial services sector that is vibrant and competitive. Given the Commission is this year celebrating its 20th anniversary, how would you describe the impact of the commission on the sector over this time?

The Commission brought much needed structure to the capital markets in The Bahamas as well as to the securities industry. Prior to the Securities Industry Act, we had only the Central Bank Act, which governed the entire scope of the industry and the truth is a Central Bank doesn’t look after market conduct and it doesn’t look after a lot of aspects of the brokerage business that a securities commission would look after. There was a gap there and the Commission has filled and continues to fill that gap.

Also, the Commission has done extensive work in developing the funds industry. Prior to the legislation we had collective investment vehicles that were really unregulated in The Bahamas and we brought regulation and oversight to that. So in those ways we have really helped to shore up the investment funds industry and bring some legitimacy to it in The Bahamas, and as a result I think that we have seen its growth and expansion.

The Commission has also been involved in some key pieces of innovation in this industry, particularly the SMART fund, which is an innovation of The Bahamas, and the Investment Condominium, or ICON. The Commission was directly involved in the development of those two products and as we assess the needs of the industry, we continue to be involved in development. The next piece of innovation that we are looking to put together relatively soon is a crowd-funding regulatory regime. We see the need for it and our licensees have talked to us about it. Initially when we were contemplating crowd funding, we were thinking about developing a regime that would attract international activity but our licensees have told us that there is serious need for a local regime and so now we just need to put the infrastructure in place in terms of the rules, which should be well underway by early next year.

The Commission’s mandate is to supervise and regulate investment funds, securities and capital markets, and to inspect financial and corporate services and protect investors. What are the biggest challenges you are facing at present, and what are your strategies to overcome them?

Investor education is a big challenge for us, and that has mainly to do with the stage of development where The Bahamas is at. The country is still an emerging economy and so it is understandable that savings is still an issue and that potential retail investors often lack basic investment literacy. Getting people to understand the correlation between savings and investments, and how they interplay with the sustained funding of economic development is a huge challenge but this is something that we are committed to continue to plug away at.

Our size is also a challenge for us. The small size of The Bahamas limits the development of our capital markets--a small population with a low savings rate represents a serious limitation when it comes to injecting new funds into the market. We have to somehow get international reach with our capital markets.

Staying on top of global developments can also present a challenge but this is one where remain in step. The Bahamas is a part of a number of international organisations and we have also signed up to various international agreements and conventions where we have committed to exchange of information. The Commission, for example, is a member of IOSCO and an “A signatory” to its Multilateral Memorandum of Understanding. To achieve this, The Bahamas submitted to adopting IOSCO principles for its securities sector as well as putting in the place necessary laws to allow for the exchange of information within the framework of the MMoU.

The Commission is empowered by law to establish rules that govern the financial markets in order to create a vibrant, competitive sector that has sound regulatory practices and policies that promote confidence. Is there any particular legislation that you have implemented, or are in the process of planning, that you are particularly proud of that will further strengthen the Bahamas’ financial markets?

The Securities Commission is responsible for three pieces of legislation: the Securities Industry Act, the Investment Funds Act and the Financial and Corporate Service Providers Act. With the exception of the Financial and Corporate Service Providers Act, we have written our legislation so it’s not like other regulatory bodies where the legislation is written by general legislative drafters appointed by the Government. We are actively involved in writing our legislation ourselves and then we put it through a process where it eventually goes to parliament. We are now in the process of overhauling the Investment Funds Act and the Financial and Corporate Service Providers Act. We inherited the latter but we will rewrite it. We are proud of the Securities Industry Act, 2011 because it’s the first of its kind in the region and quite a few regional jurisdictions are looking at it to model their own industries.

In August of this year, the Commission organised and hosted the first of its kind “ Capital Markets Development and Oversight Training Programme” with the assistance of the U.S. Securities and Exchange Commission (SEC).What prompted this inaugural training and how will it improve the Commission’s oversight function of supporting the orderly development of the Bahamian capital markets?

What we wanted to accomplish through that training is really the expansion of our staff’s technical capacity. The U.S. SEC oversees the largest capital markets in the world. They offer the training through a program that they have with their Office of International Affairs. They do this all over the world and they offered it to us early in the year. Normally they would provide regional training where we, as the host jurisdiction, would have had to invite other regulators from the Caribbean region, but because we had enough interest and participants, they agreed to conduct the training only for The Bahamas. These were closed sessions that we participated in and we also invited some local regulators to participate. So we were speaking regulator to regulator about the investigation and enforcement processes and procedures at the U.S. SEC. It was a great opportunity for us to learn from them.  Very often in emerging markets, and especially in this global environment, we don’t have the luxury of learning slowly; we have to get up to speed very quickly and when we have the chance to learn from another regulator, we take it. There was a half day public session with the industry on AML/CFT, which was very interesting as well. We also did a half day private session exclusively for the judiciary, and that was interesting because it gave us the opportunity to highlight some of the challenges we have surrounding international requests for information. We would like to have some consistency in repeating the training - not every year though because information takes a couple of years to be refreshed. We would like to do it every couple of years.

Earlier this year your entity signed MOUs with securities regulators of Cyprus, Austria and Spain. What effect do these have on the market?

This is a part of the Alternative Investment Fund Management Directive initiative out of the EU, which requires certain conditions be met in order for Bahamian-based fund managers or funds to continue marketing and management activities in Europe. The issue here is that the AIFMD framework requires a country’s securities regulator to sign a memorandum of understanding with EU counterparts to enable its licensed investment managers and funds to have access to the EU market. That is the first part of the protocol. The Bahamas has signed with 27 EU countries. Now we have to look into whether there is any part of our legislation that needs to be changed as a result of these MOUs and the AIFMD requirements and then to adopt the necessary changes. The MOUs will allow the 27 EU regulators the ability to request information from The Bahamas. It will also mean that The Bahamas may have to adopt certain aspects of the EU framework in terms of how we regulate our funds industry. What we would expect to see, once we get to the stage where The Bahamas is given the AIFMD passport, is that as fund managers go into Europe they will be exposed to the potential that EU regulators may request information from the Commission, as their home regulator. We are expecting to sign with all of the countries that are part of the EU protocol by the end of this year.

As you know every entity needs to have a clear set of goals but it is the vision of its leader that enables it to reach the objectives. Given this report will be published early next year, where do you - as Executive Director of the Commission - see the entity in the next six months?

We have some targets in terms of legislation: the Investment Funds Act and the Financial and Corporate Service Providers Act. For the next six months, we also have some targets for the issuance of a number of industry guidelines, including guidelines on suitability of client investments, AML/CFT and corporate governance. All of these short term targets play into a longer-term vision for the Commission. I believe that if the financial services sector is to survive in The Bahamas, then the Securities Commission of The Bahamas must play a more active role in the development of the industry. We don’t market the industry but certainly when it comes to putting in place the framework that will lead to development, that is a role we can play and we intend to play a much more active role than we have in the past. So where we can do that legislatively, we will.

Can you tell us how you would like the Bahamas to be perceived by international investment and business communities?

I would like for the international community to see The Bahamas as a place that is open to business and where it is relatively easy to do business once you are committed to playing by the rules. The truth is that The Bahamas is not a place where people come to hide money or engage in market misconduct. We have not been that place, if ever, for a long time and we just need to change that perception. I would like legitimate and healthy businesses to know that we are a place where you can invest money and where there is a robust regulatory regime that facilitates business. At the end of the day, that is what we are here to do.

On a more personal note, you were appointed Executive Director of the Securities Commission in just January of this year, bringing over 20 years of experience in the financial services industry and with senior management positions in international institutions. What is the most valuable lesson you’ve learned over the years that you now incorporate to your role at the head of the Commission?

The most valuable lesson is probably being practical. As a regulator it’s very important that we understand the rules but we understand them practically in the context of how business is done. That is what my industry experience has enabled me to bring to the table.

Having done a professional leadership development program at Harvard, you would fully appreciate that the readers of Harvard Business Review include many of the world’s most influential business and political leaders. What message would you like to send them about the Securities Commission of the Bahamas?

The Securities Commission of The Bahamas is a fledgling institution but we are more than capable to operate at standards and levels that are at international best practice. We have a team of dedicated professionals that are extremely hard working, and we try to keep ourselves on the cutting edge of international development. We are actively engaged with our industry, and we listen to their concerns and needs and are able to be nimble and adapt. Of course, we are a regulator so our context and priority is to ensure the integrity of the industry and the confidence of the investing public.