The Tribune

Hubert Edwards, in the third of a five-part series, sets out the process for repositioning the Bahamian financial services industry.

To date, The Bahamas’ main appeal has been the fact it is a jurisdiction with a “light touch” taxation regime for international entities. This is changing rapidly, and there has been incremental but sustained pressure brought to bear, which is undermining the country’s attraction as a “no” or “low tax” jurisdiction. Looking back, we will see that The Bahamas was blacklisted by the Financial Action Task Force (FATF) in 2000. Subsequently, around 2010, it was identified by the Organisation for Economic Co-Operation and Development (OECD) as being a non-cooperative jurisdiction and carried the label of being a so-called “tax haven”. Significant pressure was being placed on the country by supranational agencies. A declaration from the G-20 Summit held in London, England, on April 2009, declared in part, that “the era of banking secrecy is over”. Back then, the G-20 was demanding that all countries adopt the international standard for tax information exchange as outlined in the UN Model Tax Convention, and signalled the readiness of its members “to take agreed action against those jurisdictions which do not meet international standards in relation to tax transparency”.

For The Bahamas, that statement pointed to significant challenges that have eroded - and could eventually eliminate - the most compelling rationale for doing business in this nation. The European Union’s (EU) own anti-tax evasion drive in 2018 reinforced that these pressures will not go away. In response to the EU blacklisting, there were arguments floated about the need for The Bahamas to introduce a corporate income tax. Yet there were counter overtures that corporate income tax was a “no-go” area. In 2020, the EU’s “foot on your neck” position looms large. So, too, does the “nothing you can do” response.

The one thing that is true about these ongoing initiatives is that, over time, they have become more effective and efficient. They effectively force jurisdictions to paint themselves into a corner, ultimately eroding options. This is aided by slowness of response and the escalation of aggressive demands by external forces. The way to get ahead of this is to seek to control the floor to the greatest extent possible. This becomes easier when seen over the long-term. Self-imposed limitations of “now” and electorate reaction will always result in a poor response. This is a response that solves the issue for a moment; a response that comes with a price but little or no incremental gain; a response which protects the pie and plays to a narrative which suggests that compared to the alternative of losing it all this is a good outcome.

All things considered, The Bahamas faces some important issues that goes to the very survival of its financial services industry. The issue here is simply this: Until and unless there is a comprehensive analysis and assessment, taking into account not just the immediate issues before us but also considering all the linkages, inter-linkages, potential spillovers and cluster impact etc, there will be no clear understanding of where the industry truly stands nor a clear view of its potential future direction and gains.

While we tend to discuss matters in abstract, and as disparate considerations, consider this. Back when The Bahamas made its “services only” offer as part of the Economic Partnership Agreement (EPA) negotiations with the European Union (EU), it was called “into question” by the Europeans as possibly not going far enough. The EU was then on the prowl. The pressures back then from the G-20/OECD, with their call for tax transparency, were fundamental game-changing events. At the time we concluded that the changes required to overcome these challenges would have a fundamental impact on the financial services industry. Whatever they resulted in would have significant influence on the continued existence of the international aspect of the financial services industry. We now see this to be the exact case, for while the focus has shifted from the OECD, it must be noted that the EU’s latest initiatives are inextricably linked to the OECD’s “harmful” taxation drive. All have become part and parcel of the same effort, which is to repatriate tax revenue allegedly owed by their citizens and which they claim is rightly due to their various jurisdictions.

There is no indication that these countries will relent. This makes the argument unequivocal. The way in which the financial services sector is organised and positioned will continue to face pressure for change. In the absence of careful, forward-looking and strategic planning, there are clear risks of the industry being seriously “damaged”. It must be accepted that in this process there will be disruptions. However, we must not cower at the idea of being disruptive given that an entire industry, and possibly up to one-third of the economy, may be put at risk. Accept the fact there will be ongoing challenges, and become comfortable with the idea that The Bahamas will, until a more defined approach is taken, be susceptible to the vagaries of the demands and designs of the world’s most influential economies. Marcus Aurelius stated that the “obstacle is the way”. This is true but defining the obstacle is critical. In this instance, the obstacle is not simply overcoming the EU or any other supranational demands. The obstacle is the erosion of a vibrant economy, and the eventual impact that losing the financial services industry will have on the standard of living.

Recommendations

The following recommendations are outlined in three specific segments. The first are big picture positions, which seek to create a basis for thinking and operating way into the future. They address matters which, if properly contemplated and implemented, create a situation that has continuity. Continuity is very important because of the political interplay with the industry. Parties generally think within five-year cycles, while the interest of the industry ought to be considered over longer horizons.

The second section focuses on impacting the value proposition, seeking to bring focus to areas which, when addressed, will improve the market perception of what it gets for the value it gives up. These are areas that are value creating, and go fundamentally to the efficiency and effectiveness with which The Bahamas will be able to deliver products to an increasingly sophisticated and discerning market, and positively impact its value proposition.

The final section deals with product development, and calls for focus on a specific class of products or the way in which product development is approached in The Bahamas. It seeks to underline the need for a total rethink of product development and how the market is made aware of new products. It seeks to apply corporate strategy in securing some element of surprise for the market while looking at the entire industry machinery and building it in a manner that enables it to deliver products, or adjustment to products, that are not easily duplicated by other jurisdictions in a very short time.

1. A high level strategic thrust

As The Bahamas seek to grow and develop its financial services industry there are certain fundamental changes that need to be addressed. To date, based on research and analysis of the country’s performance across a range of areas, it is clear that individual corporate strategy is the major engine behind any impetus within the industry. The argument being proposed here is not that strategy should not to be the concern of private companies. This is, in fact, the case. However, there is a larger issue of how the location of the companies influences strategic activities, and how the cumulative outcome of such strategies influences the competitiveness of the location. This appears to be one of the main areas of weakness for The Bahamas. It seems that a more cohesive approach to addressing the country’s competitiveness, as it relates to financial services, is needed.

In his book, The Competitive Advantage of Nations, Michael Porter stated the following: “A firm’s home nation shapes where and how it is likely to succeed in global competition.” It follows, therefore, that the likelihood of success is based on factors within a nation that will determine whether companies will locate there. Porter argues that “within an industry, a nation’s circumstances also favour competing in particular industry segments and with certain competitive strategies”. The Bahamas cannot be considered home for most offshore companies, but this is where the opportunity exists. For growth to be realised through headquartering and substantive physical presence, The Bahamas must be seen to have clear advantages. Thinking in this direction can separate us from the rest of the region, all of which are pursuing the same “me too” strategies.

Extending this argument, industry arrangements exert strong influences on corporate strategies, and therefore provide a basis for driving competitiveness relative to rival nations. The country, through national or industry leadership, has significant influence in framing the competitiveness of that industry and signalling the direction of corporate strategies. Implemented effectively, these strategies lead to greater productivity, enhance wealth creation and the potential of sustainable competitive advantage. The Bahamian financial services industry must be looked at in this light if it is to secure long-term growth and development. Against this backdrop I offer the following suggestions:

• Financial Centre Vision - A unified team of professionals from the Association of International Bank and Trust Companies (AIBT), the Clearing Banks Association, the Bahamas International Securities Exchange (BISX) and related industries (legal, real estate, accounting, maritime), in conjunction with government representative and representatives of all major political parties, should be created and tasked with articulating a clear and sufficient long-term vision for advancing beyond being just an offshore financial centre to one that takes on more characteristics of a full international financial centre (IFC).

The discourse and development should be facilitated by a comprehensive study of economic data and information relative to the industry. The vision should be developed within the context of a national outlook, and should be clear in signalling intent and direction for the benefit of the industry and country. The vision should clearly define the strategic goals. These strategic goals should be based on competitive analyses. The Bahamas should end up with a clearly-expressed vision for the FSI.

• Strategic Goals - Assess and determine the areas in which The Bahamas wishes to focus its competitive efforts. Once areas are agreed they should be effectively communicated to the industry in very clear, understandable and measurable terms. In developing the strategic objectives, The Bahamas must seek to position itself as a leader in these areas. This is critical, as a perception of being a laggard works adversely with respect to being recognised as a globally competitive financial centre. The Bahamas has significant strength in the areas of private banking, wealth management and trust services. Relative to competitor nations there are weaknesses which should be addressed in setting strategic goals.

For example, certain strategic goals can be articulated as follows: Leader in private banking, wealth management and trust services; expand overall assets under management to $’x’bn in five years; increase hedge fund business by x percent and surpass Cayman as a leader within x years; capture 10 percent of the regional insurance and captive insurance market; become the number one city to live within the Caribbean, and Nassau being one of the top five most attractive cities in the Americas; and the top stock exchange in terms of market capitalisation and diversity of listings within the Caribbean.

• Industry Cluster - The industry cluster shows the core of the industry with supporting segments and institutions. The implementation of a vision to advance beyond being just an offshore financial centre must be approached from the perspective of optimising and enhancement of the industry cluster. Assessment of the industry cluster for The Bahamas financial services industry will highlight various positives and negatives of the industry when looked at in terms of the determinants of competitiveness.

By focusing on these models and seeking to correct weaknesses and enhance strengths, policymakers can influence competitiveness. The Government will play the active role as facilitators of the industry with efforts driven by the private sector/industry organisations. Strategies employed by the various companies within the industry will then likely play to industry strengths, furthering the thrust towards the stated vision. This approach ignores individual companies and focuses on broad-based actions designed to achieve a pre-determined outcome.

To be continued....