Consolidated Supervision in the Cayman Islands – CIMA's updated Regulatory Policy

• CIMA's updated policy on consolidated supervision assesses financial groups' overall strength and risks, applying to entities under common control in multiple financial sectors
  
  
• Depending on whether CIMA is the host or home supervisor, the policy includes qualitative and quantitative supervision methods, on-site examinations and cooperation with international regulators
  
  
• The updated policy expands supervision circumstances, revises definitions of host and home supervisors, and includes supervisory colleges for enhanced regulatory cooperation

Introduction

The Policy expands on an earlier version published in 2009 and provides updated guidance on CIMA's approach to group supervision.

What is consolidated supervision and who does it apply to?

Consolidated supervision is a comprehensive group-wide approach to supervision, including assessing and evaluating the strength of an entire group, taking into account factors such as reputation, financial soundness, and overall risks affecting the group.

The Policy applies to all regulated entities which are part of a "financial group" or "financial conglomerate". These are defined as:

• "financial group" refers to a group of entities under common control that provide a range of financial services through multiple legal entities, including branches of such legal entities, typically confining their activities to a given sector (e.g. banking, insurance, securities, trust, etc.);
• "financial conglomerate" refers to any group of entities under common control whose exclusive or predominant activities consist of providing significant services in at least two different financial sectors (banking, securities, insurance).

How and when is consolidated supervision conducted?
CIMA will consider whether it is necessary to conduct consolidated supervision in addition to supervision of the individual regulated entity. It is open to CIMA to decide 

whether consolidated supervision is required at the licensing stage or at any other stage.

CIMA can decide whether to conduct consolidated supervision on a qualitative or quantitative basis, or include elements of both. Quantitative consolidated supervision involves collecting consolidated financial returns and financial statements. However, in certain instances, accounting consolidation is not meaningful and so CIMA may undertake qualitative consolidated supervision. This will focus on the general business of the group as well as its business controls, organisation, and management to evaluate the risks which are presented to the financial position or reputation of the regulated entity.

CIMA does not regard consolidated supervision as a substitute for individual supervision but as complementary to it. The activities of other entities may have a negative impact on the regulated entity in ways that individual supervision alone is not able to identify.

CIMA's approach

CIMA's supervisory approach will vary depending on whether it is the host supervisor ("Host Supervisor") (when a regulator in a foreign jurisdiction is responsible for the regulated entity) or the home supervisor ("Home Supervisor") (when the regulated entity or its group is based in the Cayman Islands).

CIMA acting as the Host Supervisor

When the regulated entity is a branch, subsidiary, or affiliate of an entity regulated in a foreign jurisdiction, CIMA is considered to be the Host Supervisor.

When acting as the Host Supervisor, CIMA will consider, when deciding to grant a licence, whether:

1. the Home Supervisor has any objections to the establishment of a branch, subsidiary, or affiliate in the Cayman Islands;
2. the Home Supervisor has any regulatory concerns with respect to the parent undertaking or its management;
3. the branch, subsidiary, or affiliate will be included in the consolidated supervision of the parent undertaking by the Home Supervisor;
4. the Home Supervisor has any restrictions on cooperating and sharing with CIMA information necessary for effective consolidated supervision of the applicant including, but not limited to, information relating to recovery and resolution planning; and
5. any other factors that could hinder effective consolidated supervision of the applicant.

CIMA acting as the Home Supervisor

Generally, CIMA will be the Home Supervisor where:

1. the regulated entity belongs to a group which is based in the Cayman Islands and the group is not subject to consolidated supervision by another regulator; or
2. CIMA may not be the group-wide supervisor, but it is the Home Supervisor of a significant regulated entity, within a wider group.

CIMA will consider the following when determining whether it should be the group-wide supervisor (the "Group-Wide Supervisor"):

1. Whether the group is based in the Cayman Islands and whether CIMA has the statutory responsibility to supervise the head of the group.
2. The location of the group's head office, and, where the head office is not the operational head of the group, the location where:
                a) the main business activities are undertaken;
                b) the main business decisions are taken;
                c) the main risks are undertaken; and
                d) the group has its largest balance sheet total.
3. Whether the supervisors engaged in the supervision of a group have determined the need for a Group-Wide Supervisor and agreed on the supervisor to take that role.

When acting as the Home or Group-Wide Supervisor, CIMA will supervise the regulated entity and the group on a consolidated basis in accordance with the relevant international standards. This may include, but will not be limited to, the assessment of risks and capital adequacy of the group.

Where the regulated entity is required to obtain CIMA's consent prior to establishing a branch, subsidiary, affiliate, or representative office in a jurisdiction outside of the Cayman Islands, CIMA will determine whether consent should be given by looking at factors such as:

1. the financial strength of the regulated entity and its group;
2. the appropriateness of the regulated entity's organisation and operational procedures for the effective management of Group-Wide risks;
3. the adequacy of regulation and supervision in the proposed host jurisdiction considering compliance with internationally recognised standards;
4. whether such consent would contravene public interest or the interests of the regulated entity's customers or creditors; and
5. any other factors as may be considered necessary by CIMA.

Generally, CIMA requires confirmation from the Host Supervisor that there is no objection to the establishment of the branch, subsidiary, affiliate or representative office before granting consent. Additionally, the Host Supervisor would be expected to cooperate with CIMA in the exchange of information for the purpose of consolidated supervision.

CIMA has discretion to require a regulated entity to bear part or all of the cost related to supervision.

Off-Site and On-Site Supervision

CIMA may also conduct on-site examinations of material overseas operations and where deemed appropriate, CIMA may allow an overseas regulatory authority to conduct an on-site inspection of a Cayman Islands' regulated entity.

Home-Host Relationships

Under the Monetary Authority Act (as amended), CIMA is able to request or provide information to an overseas regulator, on a confidential basis, about a regulated entity's financial condition, performance, and compliance with relevant laws and regulations subject to certain conditions.

CIMA may also enter into memoranda of understanding with overseas regulatory authorities to facilitate information exchange and cooperation for effective consolidated supervision.

CIMA works closely with relevant regulatory bodies to oversee Cayman Islands' regulated entities, participating in supervisory colleges where relevant. These supervisory colleges provide a key forum for cooperation and communication between CIMA and overseas regulatory authorities. They are established for the fundamental purpose of facilitating supervision of the group as a whole and improving the supervision of regulated entities within the group.

Changes from previous version of the policy

The changes made from the Regulatory Policy on Consolidated Supervision published in 2009 include:

• expanding the circumstances of when CIMA will decide to conduct Consolidated Supervision;
• amending the definitions of "Host Supervisor" and "Home Supervisor"; and
• the inclusion of "Supervisory Colleges" under the "Home-Host Relationships" section.

Next steps and actions for regulated entities

The Policy is already in force, so regulated entities (and those applying to be regulated) that fall within the scope of the Policy as a regulated entity as part of a group, need to take the Policy into account in their interactions with CIMA, but no major action should be required. In general, the Policy is a helpful statement of CIMA's approach to consolidated supervision, it is more comprehensive than the previous statement in this area, and is broadly in line with the approach of regulators in other significant jurisdictions.