20 May 2020
Innovation and reform needed as Bermuda navigates the economic shock of COVID-19
As Bermuda residents slowly start to emerge from their homes it's obvious to all that the humanitarian and economic challenges that flow from the scourge of COVID-19 will be unprecedented in our lifetimes. Here, Carey Olsen Bermuda's Michael Hanson and Sam Stevens outline how the island’s economy will require the implementation of a radical, flexible and multi-faceted regeneration plan, particularly given the fiscal realities that Bermuda faced even before the pandemic swept across the world.
The Bermuda Government has not shied away from our new reality, and has invited the public to identify initiatives and ideas for the Government to consider. In that spirit of collaboration, senior lawyers from across the practice groups at Carey Olsen Bermuda have considered key legislative and/or regulatory innovation that could help resuscitate and then grow the economy.
First, a caveat. As lawyers we are trained to limit risk, and protect and/or enhance our clients’ position. We are not economists and do not hold ourselves out to be. However, we hope our experience can provide some ideas for potential solutions. It is an unfortunate reality that most solutions require not only effort, but investment. While we have ideas to offset some costs, given Bermuda’s balance sheet it is inevitable that money must be taken from elsewhere in order to invest in these and other initiatives. Difficult choices are ahead, but there is little doubt they must be made.
Proposal 1: Invest in and modernise the Registrar of Companies
The existence of an effective regulatory framework, demonstrating clear adherence to and leadership of global regulatory standards, has a powerful positive impact on the generation of international economic activity. Add to that an efficient and accessible regulator, and we have a clear recipe for success. The Bermuda Monetary Authority’s well-earned reputation for effective, risk-based oversight of Bermuda’s regulated sectors is a perfect example of this success.
That same model must be now also applied to the Registrar of Companies, which, in a little more than a year, has seen its role transformed from being a repository of corporate records to an economic-substance regulator of all entities, across all industry sectors.
This is critical, as the bedrock of Bermuda’s international business pillar is its corporate structures. Bermuda companies, limited liability companies and limited partnerships, as overseen by the Registrar of Companies, provide a full suite of structural solutions for investors looking to do business in Bermuda and are a key driver of the Bermuda economy. Anything that can be done to protect and enhance the ability of those entities to operate effectively in Bermuda will have a direct and very significant positive impact on our economic wellbeing.
With the successful release of the new e-portal Economic Substance Declaration system, the Registrar and his team, supported by the Ministry of Finance, have demonstrated some progress in this area. Bermuda entities will be the direct beneficiaries of that, with the Registrar’s compliance team well positioned to deliver an effective, risk-based approach to economic-substance regulation.
The opportunity now clearly presents itself to build on that success, and fully modernise the Registrar’s structure, systems and service delivery. We are pleased that work by the Registrar is under way to develop and implement a digital e-registration system, allowing filings to be made online, and thereby greatly improving the efficiency of access to, and maintenance of, public-entity records. These initiatives should be robustly accelerated as a matter of urgency.
Proposal 2: Invest in and modernise Bermuda’s commercial dispute resolution infrastructure
One of the reasons international business is comfortable investing in Bermuda is because of the justified perception that we have a robust commercial court and high-quality commercial judges.
Much like the aftermath of the global financial crisis, we expect that this pandemic will lead to an increase in international commercial disputes. Bermuda will inevitably play host to its fair share of these. To maintain and enhance our reputation, our system will have to accommodate these cases in an efficient manner, in addition to swiftly clearing the backlog that will have built up because of the continued restriction of operations at the Supreme Court.
We appreciate investment is extremely difficult in times such as these; however, we cannot emphasise enough that now is the time for additional investment in the Commercial Division of the Supreme Court, including its physical infrastructure, staffing levels — both in terms of the number of full-time commercial judges and administrative support staff — specialist training and, crucially, technology. We are competing with multiple offshore jurisdictions as a place to hear disputes. Indeed, we are even competing with some onshore jurisdictions. Many are ahead of us.
To ensure the requisite investment is feasible, the Government should consider whether the court fees levied in the Commercial Division of the Supreme Court are appropriate when compared to those levied in the commercial courts of other offshore financial centres. By way of illustration, the fee charged to a creditor filing a winding-up petition in the Financial Services Division of the Grand Court of the Cayman Islands is $6,500. In Bermuda, the fee for the very same application is $50.
Obviously, one has to be careful of balancing an increase in fees with access to justice, but we do not expect increased fees for petitions, for example, would be of concern. We also have to ensure that increasing fees leads to a requisite increase in efficiency and service of our court “product”. Otherwise, such an initiative would be self-defeating.
The Government should also look to further develop Bermuda as a world-class centre for alternative forms of commercial dispute resolution, in particular arbitration and mediation. The planned Ottiwell Simmons International Arbitration Centre should be completed and modelled on other leading global centres for alternative dispute resolution — most notably Maxwell Chambers in Singapore — to make it commercially viable. To maximise publicity and best practice, the centre should be launched alongside a full suite of branded and bespoke arbitration and mediation rules.
From a legislative perspective, the outdated Arbitration Act 1986, which governs domestic arbitration in Bermuda, should be repealed, and the Bermuda International Conciliation and Arbitration Act 1993 should be (i) expanded to cover both domestic and international arbitration; and (ii) updated to include all of the latest amendments to the UNCITRAL Model Law on International Commercial Arbitration.
Proposal 3: Introduce legislation, regulatory reforms and tax reliefs to attract family offices
Bermuda has an impressive history of attracting ultra-high-net-worth families to establish Bermuda law-governed trusts, private trust companies and other entities to facilitate the administration, management and succession of the family’s wealth. A number of such families have also established private offices, employing their own teams. Such families ordinarily employ investment professionals, administrative support workers and many others to meet the personal needs of the family. The Government announced in its 2020 Budget that it is working with a number of stakeholders to introduce a new family-office offering to further facilitate the estate-planning objectives of this demographic and to persuade family offices to establish physical operations on the island.
Some of the proposals that we endorse include:
- Offering permanent resident’s certificates to high-net-worth families if they agree to meet certain conditions
Such conditions should include, at a minimum:
- Establishing a permanent and fully staffed family office in Bermuda
- The direct hire of Bermudians to work for the family office
- The purchase of real estate
- Donations to local charities
- Introducing a designated family office work permit
This new category of work permit should be made available to all non-Bermudian employees of family offices, and come with guaranteed, short timelines for processing and no limit or extra conditions on the number of work permits that may be obtained for skilled professional staff. All of these permits would be issued subject to the family office meeting the necessary conditions.
- Streamlining licensing, exemptions and reporting requirements for family offices
Exemptions should be granted to family offices from some of Bermuda’s licensing regimes and/or family offices should be permitted to make a consolidated application for the licences they may require — as opposed to having to make separate applications for different licences and exemptions for funds, private trust business, corporate-service providers. Further, family offices should be permitted to file consolidated annual reports that include information that may be required under multiple licences, provided that the activities are regulated under the same entity.
- Granting tax exemptions to family offices
These tax exemptions should include, as a bare minimum:
- A payroll tax holiday for new Bermudian employees hired by family offices
- A reduced rate of, or complete exemption from, stamp duty on real estate transactions where a qualifying family invest in real property and on residence transfers by the family and essential staff
Proposal 4: Liberalise and eliminate inefficiencies in Bermuda’s real estate market
The well-publicised slowdown in Bermuda’s real estate market since the global financial crisis has had a demonstrably negative impact on government revenues because of a large decline in stamp duty and other fees. The time is now ripe to reform and open up the market in a way that drives revenue into the pockets of the Government and homeowners, while ensuring that Bermudians are protected. Initiatives that we as a firm endorse include:
- Allowing work-permit holders to buy properties in condominium developments
- Allowing permanent resident’s certificate holders to purchase property without a landholding licence
- Drastically reducing the processing time of applications for landholding licences by non-Bermudians
This list is not exhaustive; there are many other initiatives to consider, a large one being immigration reform — which would require a thesis rather than an article. For our part, we will continue to look out for opportunities that are in Bermuda’s best interests, and hope we can help protect and then enhance our island’s position in the months and years to come.
An original version of this article was first published by the Royal Gazette, May 2020.
© Carey Olsen 2020.
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