Column: New Reality Of Economic Substance

January 18, 2019

Scott Pearman Bermuda December 2018[Opinion column written by OBA MP Scott Pearman]

Denial. Anger. Bargaining. Depression. Acceptance.

These emotions, doctors tell us, are the five stages of grief.

And the people working in Bermuda’s international business community – ‘Bermuda Inc’ – have experienced most of these emotions since the gunboat of EU Substance appeared on our horizon, with consequential legislation passing through Parliament just before Christmas.

‘Denial’ and ‘Anger’ were first out of the gate, of course – just as the cycle dictates. Denial and Anger.

Denial, from some, that an increase in required presence for Bermuda Inc. will be a bad thing. Deniers suggest legislative change could mean more jobs for Bermuda. Well…it could. But will jobs gained through enhanced presence outweigh the job losses caused by companies which may leave Bermuda as a result?

Anger, that the EU is forcing upon Bermuda the requirement for more physical business presence when the EU is not demanding the same of its European members.

“Do as I say – not as I do” has been the EU’s mantra thus far. EU demands have focused upon 13 international financial centres, including Bermuda. Yet the EU has elected not to hold its own members to the same standards. Why?

Anger, that for now at least, there is no level playing field, no singular global standard – there is only a heavy burden imposed by the EU upon the offshore world.

Anger also at politicians: in an extremely perceptive article earlier this month, former OBA Senator Vic Ball expressed his personal views that: “Our political leaders have failed grossly to prepare us for exactly how [EU substance legislation] is bound to affect every Bermudian in a substantial way.” Anger and Denial.

So what does this all mean – and how will this affect us?

In simple terms, the 13,000 or so companies and other business entities in Bermuda will, by the Summer of 2019 at the latest, face a stark choice.

Either companies must comply with EU substance legislation, by ensuring an adequate presence on the Island, or those businesses will move elsewhere.

Then there’s stage three of grief: ‘Bargaining’. In many respects, the bargaining is largely behind us – although some may not yet appreciate what has happened.

Yes, there is a transition period of six months to ensure relevant businesses implement substance. But the EU has already forced international financial centres to show their hands. Most centres, including Bermuda, have already passed domestic legislation on substance.

As a Member of the Opposition, I might be expected to blame the PLP Government for being late to the bargaining stage. Being fair, Bermuda faced precious little choice but to comply with EU demands.

This was a rare occasion where the interests of our insurers and reinsurers – ‘Bermuda Re’ – did not align with the rest of Bermuda Inc. Given the vital importance of Bermuda Re to our economy, our Parliament was keen to keep Bermuda off the EU ‘blacklist’.

We shall learn in a few short months whether Parliament succeeded or whether Bermuda is blacklisted by the EU despite our legislative efforts.

Last week, KPMG hosted a forum on how the substance legislation will impact Bermuda. No matter what view you may take on the merits of increased substance, one thing is certain: this will demonstrably change our Island. The next 18 to 24 months will see considerable uncertainty.

One of the speakers at the forum, Mike Penrose, predicted we will soon see “tidying up [of Bermuda’s substance legislation] to prevent jurisdictional arbitrage.” By which he means that there is now a risk that the differences between the legislation passed in the various offshore jurisdictions might be leveraged against each other to encourage businesses to move. To prevent this, a harmonisation of offshore substance laws needs to occur.

Because of the way the EU played its hand in the ‘negotiations’, each offshore jurisdiction was compelled to prepare its own domestic legislation in isolation. This proved a masterful ‘divide and conquer’ strategy by the EU. Offshore jurisdictions were left [largely] uninformed of what concessions other jurisdictions might make. They were bidding against themselves. Perhaps unsurprisingly, the EU adopted an unbending approach to its demands.

If Bermuda hopes to minimise the impact, then we must take swift steps to harmonize our domestic legislation with the legislation of other international financial centres to ensure Bermuda remains competitive.

At the KPMG forum, the mood was trending towards ‘stage four’ of the cycle: Depression. Contrasting Bermuda’s legislation with other offshore jurisdictions reveals significant differences. But has Bermuda conceded too much? Or, when the EU blacklist is announced, will our Island have been sensible to set the bar high?

Depression: that the regulatory ground is shifting beneath our feet at a time when we so desperately need to grow our faltering economy. Last week one business leader [who is largely supportive of the PLP Government] shared privately his opinion of what the Government needed most to achieve economic growth. The word he used was “courage”. But the steps most needed may not be comfortable ones for the PLP to take, given their historic positions.

Consider also the PLP current proposals for economic growth. Crypto currency and fintech are seedlings. If they do develop, they will surely have slow growth. They may yet whither.

The jury is out on crypto. Some say better to try something than nothing. Others [rightly in my view] underscore the reputational risk and potential for damage to both Bermuda Re and Bermuda Inc if something goes wrong. It is said that fools rush in where angels fear to tread. The footwork around crypto currency needs to be very careful indeed.

Fintech – buzzy shorthand for ‘financial technology’ – is a different concept to crypto. But Fintech is also amorphous and indefinite – how do you grasp it properly without it slipping through the fingers?

And if we set no other rule for ourselves, we must nonetheless abide by this one: Bermuda’s reputation is sacrosanct.

Take for example Malta’s recent effort to rebrand as “Blockchain Island”. If you did not see the negative TV coverage Malta recently received on ‘60 Minutes’ [and elsewhere], then you should. Remember all those ‘Memorandum of Understandings’ the PLP Government was rapidly signing with blockchainers in 2018? Many of them selected Malta instead. After the criticism on ‘60 Minutes’, has Malta benefited?

Now to the final stage of grief: ‘Acceptance’. What does acceptance actually look like for Bermuda?

The truth is that it is too soon to tell. Some have forecast the departure of thousands of companies, impacting upon the jobs at local businesses which support those companies. Others have [rightly in my view] observed that those international businesses which stay will likely enhance their local presence. This may, and probably will, cause an uptick in jobs with those companies. But will those new jobs be the salmon swimming upstream against the flow of departures?

Here is my take on Acceptance. I will not be the first [or last] to trot out the time-worn cliché of making lemonade from lemons. But to juice our economy we must implement immigration and tax incentives.

To generate wealth, Bermuda must do all it can to attract wealth generators. Wealth generators, who bring with them foreign capital. Wealth generators, who spend their wealth within our economy for the benefit of Bermuda and Bermudians. Wealth generators, who generate new businesses and create new Bermudian jobs.

Sure, there may be a benefit in the latest sexy dot com moving to our Island. But it is far simpler to encourage expansion in our existing sectors – we must strive to ‘grow what you know’.

One of Bermuda’s home-grown success stories is the folks at Orbis: one of the World’s leading investment managers, based right here in Hamilton. What might Bermuda’s economy look like if we could gain even two or three more businesses like Orbis? And what would it take for those new businesses to move to our shores?

Acceptance of grief necessarily means you are prepared to move forward. For Bermuda to move forward from the impact of economic substance, some tough decisions will be needed from the current PLP Government.

Gaining more businesses like Orbis will require considerable immigration and tax incentives. Note the approach already taken by the Cayman Islands: Cayman now rivals Bermuda with a population of 61,000. Cayman was only half our size in 1995.

Our fledgling Minister of Finance, Curtis Dickinson, is, like me, brand new to politics. He is learning on the job. To his credit, he appears to be a fast learner. And so he must be given the challenges we face.

Minister Dickinson, and the Government, must grapple with this new reality. The PLP have the opportunity to chart a bold course on immigration reform. This is needed now, more than ever, to help spur economic growth. We face a future where enhanced substance for Bermuda Inc is the new normal. Let us hope that 2019 will see the “courage” so desperately needed from the Government.

- Scott Pearman MP is the OBA’s Shadow Minister for Legal Affairs


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Comments (18)

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  1. 2 Bermudas says:

    This is a fantastic piece. Leadership and bold decisions are what’s needed most right now. Does the Pee El Pee have the courage to do what is right even though it will cost them political capital?!?!

  2. Retro says:

    Nice column Mr. Pearman. I hope your Party colleagues take notice of the fair and reasonable tone of your column. The PLP are going to need a lot help from the private sector and opposition to turn this into a positive. Let’s hope that happens.

  3. watching says:

    This is the longest op-ed ever.
    Bearing that in mind, MP Pearman needs to realize that this issue is one that should transcend political parties, and the country needs to work together to move forward. Backhanded slights about what the government is or isn’t doing to encourage new business is unhelpful. Jobs are not going to appear overnight regardless who is in power. It will take us all working together. Clearly the Min of Finance has the support of the IB and business community who stood with him at the recent press conference. Does MP Pearman expect that all these people should not support the governments measures, and instead should be listening to the rhetoric being spouted by MP Dunkley, Senator Kempe, Vic Ball, and now MP Pearman? The OBA did nothing in their term to diversify our economy, and nothing encourage any future development. It is totally disingenuous for them to now play politics with the country’s livelihood.

    • 2 Bermudas says:

      Ya, your Pee El Pee are trying to diversify the economy by going after Fintech which is yielding next to zero results!! Stick to what we know which is tourism and traditional IB and grow that way. That’s what the OBA were doing and it has worked and continues to prop up this country today!!

      • Tania Stafford says:

        2 Bermudas, which bit of Watchings comment about backhanded slights did you not understand? Your childish moniker for the Government of Bermuda says more about you than them.

        Watching, I agree that bi-partisan action is required in the two most important issues facing our island today; economic substance and education.

        Minister Dickinson and MP Pearman are both agile thinkers, working together with Premier Burt they are the leadership we need. I should also like to Nick Kempe in this leadership team.

        The length of this op-ed will stop many from reading it, which is a shame, as it is good. The Government is better at punchy communication which reaches a wider constituency.

        Thank you MP Pearman for writing this, I am hopeful that you and Minister Dickinson will work together to lead us forward.

    • Double S says:

      “and nothing encourage any future development”

      For the umpteenth time, you do realise that the policies that the PLP is using to try and entice business to stay in Bermuda was introduced by the OBA.

      The same PLP that railed against the policies as being ‘anti-Bermudian’ whilst in Opposition.

      And where were your cries for unity when your team rabidly opposed every and anything the OBA put forward whilst in power? Rank hypocrites…

    • Toodle-oo says:

      Say what you want but you can not ignore the fact that (business) confidence in Bermuda has gone in the gutter since the last election . Have you not wondered why that is ?

    • Come Correct says:

      This is the longest comment of “how can I be an absolute hypocrite”, that aside I have nothing else to say because it doesn’t matter. You completely ignore what the plp did during the OBA tenure. You got what you voted for now live with it.

  4. Rocky5 says:

    The PLP will just attack the messenger here and completely ignore this very sensible, well thought through piece by OBA MP Scott Pearman. He clearly understands what needs to be explored and possibly implemented to enable the Bermuda economy to grow once again.

  5. Duh says:

    Malta got into hot water because they are selling passports. A scheme the OBA attempted to introduce

    • question says:

      Nothing like what happens in Malta was ever suggested here. But keep peddling those lies. We know you love that stuff.

      • Answer says:

        You clearly didn’t read the article did you. Mr Scott compared Bermuda’s FinTech push to Malta’s.

        “Take for example Malta’s recent effort to rebrand as “Blockchain Island”. If you did not see the negative TV coverage Malta recently received on ‘60 Minutes’ [and elsewhere], then you should. ”

        Try Again

        • Duh says:


          Malta’s reputation problem came down to corruption, passport selling, and other issues as discussed in the 60 minute interview. Pearmans comment is misleading to the unaware.

  6. Aware says:

    This is a very good piece if you ignore the odd political comment. Scott is of course correct that a couple more “Orbises” or a couple more reinsurers will do way more for Bermuda in the short to medium term than the fintechs, although we need to diversify the economy. Cayman as a place is not a patch on Bermuda as a place to live in my view, but they have this right. Grow the population with wealth and job creators and Bermuda will flourish. Immigration and residence reform is the key to this and I hope the upcoming legislation being shortly tabled by Wayne Caines focuses there. Of course e need to do the right thing by our long term resident friends and colleagues and give them the immigration security they deserve and need, but let’s also open our doors to the newcomers we need. This is not politics, it is economics. Be courageous PLP and you will have the support of all, not just your traditional constituents.

  7. Bermewjan says:

    Well written Scott.

  8. Mother Theresa says:

    Awesome Scott!

  9. sandgrownan says:

    “…Note the approach already taken by the Cayman Islands: Cayman now rivals Bermuda with a population of 61,000. Cayman was only half our size in 1995…”

    Yup, there are many companies hedging and thinking of setting up in Cayman, and not just the traditional Trust companies, Insurance companies too….it’s a trickle…Curtis needs to put his finger in the hole.