An outline of objectives for advancing TCI’s financial services industry.

By Gilbert NMO Morris, Chief Economist, The Landfall Centre for Finance, Trade and International Affairs

Finance is the Turks & Caicos Islands’ second most profitable industry after tourism. A steering committee set up earlier this year aims to breathe new life into the sector and boost the industry’s share of the economy, creating high quality jobs and income for Islanders. Dr. Gilbert Morris was recently appointed to handle marketing for the TCI’s Financial Services Association, charged with the task of raising the profile of the sector. Following are some of his ideas for doing so.

Following is some insight into the objectives in advancing the financial services of the Turks & Caicos Islands. This I must do without revealing specific plans, since I mean to include every stakeholder and have not yet had the advantage of their fullest opinions. As such, what you will see is a substantial outline of the thought process which will be critical in making our way.

The opportunity

There is an opportunity to create a financial services centre – not yet in existence – sufficiently small, providing a more intimate service model, yet technologically advanced enough to allow for maximum client participation and real-time reporting. It will be profoundly well regulated – with a reputation for the same – with deep and wide domestic economic impact. The disparate strands of this opportunity have become my bailiwick to bring into unison as a full-bodied financial services centre, which has been in incubation for many years.

My position on financial services centres in developing nations – brought on by a wide experience – is as follows: (a) The sector model must emerge from, or out of, collateral developments or reforms of a domestic market; (b) Such markets should have demonstrated investor comfort with the jurisdiction; (c) The institutions which service the existing international client base must serve as the initial springboard for advancements, additions or improvements to the model; and (d) The jurisdiction must first master basic instruments (trusts, IBCs, property transactions, banking transactions, reporting, technology and legislative turnarounds) as a means of demonstrating its commitment to servicing a select client base.

The thinking framework

The nexus

The nexus we must keep in mind is financial services and tourism. They may overtake each other in sequence, but must be in discrete and continuous coordination. In the Bahamas, for instance, financial services ignited the tourism industry. In the Turks & Caicos, the matter is the other way round. Both employ similar promotional mechanisms, yet they must never become so intermingled that they disappear into each other since this will mean that unforeseen external economic shocks may bring them both to ruin at once.

If we look to London, notice how its financial services model was developed – organically, from its position as an international trading centre. It became necessary to develop financial services as an aid to the trade process. This is true particularly for the rise of the insurance industry in London more than 500 years ago. If you look to Switzerland, it seems that financial services are dominant. However, the quality and prestige of the Swiss financial services model is strengthened by its history and reputation for engineering, since the first precision locking systems for safes and vaults were developed there. The point is that if we are going to develop a comprehensive financial centre, that cannot be the only thing we do well. We must cultivate excellence across our administrative, economic, social and political spheres, as a means of building confidence in the world community as to our acuity for sustained excellence.

The impact

In choosing which of the nexus industries should lead, in my view it must be financial services. Tourism is not an efficient creator of domestic wealth. It is rather a reflection of some other more efficient wealth generation process. Further, in tourism, proximity to The Bahamas, Cuba, Haiti, Dominican Republic and even the United States means competition. In financial services, it means opportunity. What must be done therefore is to exploit that proximity to greater advantage. Switzerland did not become wealthy in proximity to Europe, nor has Singapore become wealthy merely by proximity to China or Japan through tourism. Both have strong tourism industries. But their tourism is a by-product of other expertise. The willingness of the world to see us only in touristic terms is a result both of our self-conception and the absence of a professional international footprint that challenges those assumptions.

India challenged assumptions and is becoming the IT and Biotechnology capital of the world. Ireland is now a financial services/IT centre in Europe. Australia leads in legal services; Finland in education and hardware development and in Qatar, its natural gas trading.

Each of these nation’s core activities has led to tourism. None of this is new, however. I do not believe our current disassociated tourism model can last beyond the next 10Ð15 years. The product is too much available in too many nearby places. Already we are seeing diminishing returns. It is law of development. If we stick with the current model, then service people are required. But our people – in the region as a whole – and particularly in Turks & Caicos, The Bahamas, Cayman and Barbados, rightly want a lifestyle which tourism cannot offer on a mass scale. At the same time, their opportunities and access to capital and credit, to earn the lifestyle they want, are limited in the tourism model because of the capital intensity of that industry. As such, to extend the current model is merely to deepen and prolong the socio-economic problems they incubate. Financial services operates primarily from legislative strategy and comparative skill, and is thus more amenable to the priorities and policies of developing nations.

The new normal

It will not be available to us to erect a financial centre without notice of the rest of the world, either as competitors – particularly amongst smaller jurisdictions – or without concern, from the larger ones. We must initially get the fundamentals right: good training, education, legislative platform and regulation. In these we must attain a form of routine perfection. Then, the challenge is to find the thing in which we can effectuate a position of dominance, as Bermuda has done with insurance. It follows that there will emerge two or three additional areas which are collateral to financial services – such as technology, tourism and health care, for instance – from which can be established a broader and deeper field for success.

The particular advantage Turks & Caicos enjoys is that at the very least, more than 2,000 persons have struck – by their purchase of condo-hotel properties and various other investments – a vote of confidence in the Islands. Taking the mean of the market prices over 10 years, that is more than $2 billion of retail good faith. We must improve the experience of condo-hotel owners to a degree that is sustainable, then we must tender our existing and new financial services to that “inherent market”, for whom we generally do little in the way of comprehensive financial services. No other jurisdiction enjoys such a position.

It is reasonable to ask several questions: one concerning the viability of these islands as a financial centre and other questions about threats to a financial services model. First, viability is a question of capacity and systemization. I have heard some people say investors will not put their money into such places. Yet, we know already the case is different for Turks & Caicos. Markets are about structure and performance. If it is well structured and performs, I see no reason for doubt.

Moreover, people used to say that clients would never allow their accounts to be held in our region. Now we are responsible for more than 1/3 of bank accounts in the world.

Second, the more obvious of actual threats are the shifting sands of cross-border regulations and in particular, the various initiatives of the global institutions, still vying for predominance in the regulation of financial transactions. Our attitude to these issues must be very, very serious. The United States is increasingly advancing upon what one of my colleagues calls “Lex Americana Universalis,” (or American law made universal). This can be seen in the disregard that was had for Antigua’s defeat of the US before tribunal of the WTO, and in the US’s subsequent disregard for the ruling and its recent outlawing of Internet gambling, with the effect that it reaches across borders into the sphere of other nation’s laws. There is nothing a small jurisdiction can do to stop these overreaches. Our duty will be to master them by knowing their trends and the turnstile of objectives at which they aim. This is the “new normal.” Things will not now, nor ever, return to their old ways. A new President will not restore things as they were. No jurisdiction can live in hopes of returning to the old ways and compete or survive.

The response

Our response to the new normal (which is nothing more than that small governments will have a harder time guaranteeing what their laws promise, where it conflicts with the laws of larger nations) must be strategic.

Any strategy will begin with international treaties and agreements signed by the government of the Turks & Caicos Islands. Deciding which agreements to sign will arise from the foundation that is established as the basis of our service model. This is a critical point, since agreements such as double taxation treaties or tax exchange agreements will have a determinative impact on financial service provision. The key is to know what to sign and why, and the “why” must not be external pressure but internal strategy. The mastery is to structure matters in such a way that the former is anticipated elegantly in the latter.

In pursuit of a strategy, and to ensure the broadest possible participation by those directly affected, we shall have to form a number of committees. Of importance will be:

• The Public/Private Sector Working Group
• The Financial Sector Discussion Group
• The Working Group on Regulations
• The Permanent Sector Review Committee
• The Working Group on Terrorist Financing

These are but a few of the working groups. Over the fall, we shall be seeking out the general opinions of a wide number of persons. We have established a “wiki” for electronic review and commentary on strategy, policies and bodies of legislation to be announced. Yet there are even more general factors which must be put right to advance our objectives.

First, we must get our foundation right. General educational success must be seen as a means of combating crime long-term, along with after-school programs to engage the young people of these Islands. This impacts financial services in the same manner that it does tourism: it creates a “crime-free” environment, even as it develops a groundwork for a skilled labour force. The idea is to cultivate a “smart nation” image which is true in fact and achievement.

Second, continuous training, monitoring, modeling, scenario building and testing – designed by us for ourselves – is necessary to drive the Turks & Caicos financial services model toward sustained excellence. (It may be said that Switzerland did none of this. However, Switzerland did not have another Switzerland as competition when it began, nor did it have a Bermuda, Cayman, Bahamas or Barbados.) As such, the process must be very deliberate, and the organic national development must emerge from that.

Third, we must get our general services platforms in perfect working condition. Communications, power supply, medical care, mail services and basic banking platforms must be made ready to meet the most exacting standards.

Fourth, our contact with the centres of American and international cross-border financial services regulators must be maintained at all times. We should not wait until some initiative is passed or announced before we react. Tactically, we must cultivate an ongoing relationship.

Fifth, our services platform should be designed to substantially steer clear of the stated concerns of large nations and their membership bodies. As such, general tax arbitrage will be difficult to sustain as a free-standing policy and service offering. Tax neutral structures which advance the overall financial management of clients, or which provide services to international businesses, will prove more sustainable. Yet, it is not to be doubted, that some larger jurisdictions are careless as to whether policies are neutral where their competitive impact is significant. However, when small nations select competitive models that are tied to their unique position in the world, or the unique structure of their economies, they are less vulnerable to international pressures.

Once we have the right understanding of our opportunity, the correct discipline of mind, the sharpest – remorseless – instincts about the “new normal” and a committed attitude to a comprehensive plan, it seems clear to me that the Turks & Caicos Islands can advance upon its long held hopes of developing one of the more unique financial centres in the world.

Gilbert NMO Morris, FSWGC, FRSOF, FIDSR is Chairman of MDB Trust International (www.mdbintl.com) and Chairman of The Landfall Centre for Finance, Trade & International Affairs (www.landfallcentre.com) at 242-322-8771. He also serves as Editor-in-Chief of the Turks & Caicos Free Press.

A renowned leader in the fight against the OECD and FATF blacklisting, Dr. Morris became an advisor to 40 of the world’s most prestigious private banks and over the years has advised jurisdictions on how to design, construct and regulate their financial services sectors.