The Financial Services Institute in collaboration with Conyers, Grant Thornton and Cayman Finance hosted its fourth comprehensive training seminar on “Preparing for an Onsite Inspection from the Cayman Islands Monetary Authority (CIMA)” on 2 May 2024 at the Kimpton Seafire Resort & Spa.

This event marked a record attendance drawing over 135 industry professionals. CIMA shared some valuable insights into its approach to market oversight and key findings from the 2023 inspection cycle. The discussion covered various topics, ranging from its approach to regulatory oversight to the primary focus areas of its recent and future inspections. Conyers Partner Róisín Liddy-Murphy, Head of Regulatory & Risk Advisory (Cayman), presented and shared her hands on experience regarding the legal risks and considerations for onsite inspections.

International Collaboration and CIMA’s Role

CIMA highlighted the importance of its cooperation with other national regulatory authorities around the globe. This collaborative approach ensures a more robust regulatory framework and promotes a sound financial system.

CIMA’s Risk-Based Approach to Regulatory Oversight

Like many other internal regulatory bodies, CIMA applies a risk-based approach to oversight of its regulated entities, ensuring that attention is directed to critical and higher risk market participants.  While this does not absolve lower risk market participants from CIMA scrutiny, it does mean that those representing a higher risk of negative prudential or customer impact will be subjected to higher degrees of regulatory supervision.

Inspection Process

It was explained that onsite inspections are a key supervisory tool utilised by CIMA for the purposes of effectively executing its supervisory mandate over regulated entities in the Cayman Islands. CIMA conducts two primary types of inspections:

1. Full Scope: A comprehensive examination of an entity’s operations; and
2. Limited Scope: A more focused inspection targeting specific areas of concern (often referred to as a thematic inspection).

Both inspection types involve three distinct stages:

1. Pre-inspection/Planning: Preparation and planning for the inspection by CIMA;
2. Field Work/On-Site Execution: The actual on-site inspection and data gathering phase; and
3. Post-Inspection/Closure: Analysis, production of discrepancy lists and closure of the inspection process following adequate remediation.

Key Findings from 2023 Inspections:

During 2023, CIMA identified 420 findings across its various regulatory inspections covering multiple risk areas of regulated businesses. While the below omits findings relevant to anti-money laundering related inspections, key operational and governance issues were highlighted that all regulated entities should be cognisant of including:

Operational Risk:

1. Outsourcing: the need for more robust oversight and control mechanisms was highlighted;
2. Cybersecurity: it was explained that simply having group cybersecurity measures in place is not enough and these measures must align with CIMA’s standards and regulatory expectations;
3. Business Continuity Management (BCM): many BCM plans lacked comprehensive consideration of all relevant risk factor focus, with insufficient consideration beyond obvious matters such as hurricane-related risks; and
4. Record Management: there were clear issues with record legibility, language barriers and the timely disclosure of information to CIMA which demonstrated a lack of implemented record management policies and procedures.

Corporate Governance:

1. Succession Planning: there was an identified lack of clear plans for leadership transitions;
2. Governing Body Performance Assessments: there was a clear lack of assessments which should be conducted at both the board and individual director levels on a regular basis; and
3. Conflict of Interest Management: many firms lacked robust measures for declaration and management of conflicts of interest.

Business Conduct:

1. Client Asset Protection Policies and Procedures: there was a clear lack of sufficient policies to protect client assets;
2. Disclosure and Transparency Practices: it was observed that greater transparency in business operations was needed across inspection subjects;
3. Client Services Agreements: firms lacked formalised and up-to-date client service agreements; and
4. Complaints Handling Measures: inadequate processes for addressing and resolving client complaints.

Key Focus Areas for 2024

One of CIMA’s core focus areas for the year ahead will be corporate governance and oversight measures.  In light of its recently published Rule on Corporate Governance for Regulated Entities, CIMA confirmed that approximately 15 regulated entities were selected to undergo an inspection process and that these reviews were underway.

Conclusion

Regulatory inspections continue to be an important regulatory tool for CIMA and its key findings from 2023 demonstrate the level of robust regulatory compliance that CIMA expects from market participants.  Conyers has hands on experience with assisting clients at all stages of the inspection process including relevant advice and review services to ensure that clients are well placed prior to becoming the subject of an inspection process.

[View source.]