A regulatory haven is jurisdictions that have light financial regulation system. They often associated with having more lenient tax regulation which allows them to function as a tax haven, and for having financial secrecy. Regulatory havens can be a state, country, or territory which maintains a system of financial secrecy and little or no financial regulation. Some of the countries that are considered to be regulatory havens include Cayman Islands, British Virgin Islands, Singapore and Hong Kong. They are used by some financial firms to avoid strict financial regulation and is a form of regulatory arbitrage.
It has been argued that the existence of regulatory havens has consequences, including increased inequality of income redistribution and systemic risk of financial markets in countries that operate well developed financial regulations, while benefiting those jurisdictions that operate as regulatory havens by attracting business activity and economic development.
Characteristics
Regulatory havens are used by market participants in order to maximize their profit to exploit regulatory gaps. They take even more market risk that is, due to existence of the gap, not detected in a timely manner or is simply ignored by the regulatory agencies even if it is noticed. Companies that try to maximize their profits in this way often take advantage of regulatory havens. Regulatory havens can be defined as jurisdictions that have light financial regulation system as well as lax tax regulation. Also, regulatory haven poses less strict reporting requirements and trading restrictions. Those mostly include low minimum capital required and opacity of the owners to conduct a business in a country that is considered to be regulatory haven. Some of the countries that are considered to be regulatory havens include Caymans, Singapore and Hong Kong. Regulatory havens can most easily be characterized as jurisdictions that have different tax system that is usually suitable for companies trying to use regulatory gaps to increase their profit and as jurisdictions that apply stricter confidentiality rules compared to the country where the company that uses such haven is placed (Morriss, Henson, 2013). Besides that regulatory havens, also often called offshore financial centers, can be characterized as follows:
Jurisdictions that incorporate big number of various financial institutions that mostly conduct business with non-residential business subjects, Financial systems that are in possession of external assets and liabilities that are not proportional to the domestic financial intermediation and are primarily designed to support domestic economy and economic growth, Systems that offer multiple financial services to nonresidential business partners. Some of those services may include low or no taxation, light financial regulation as well as bank secret and anonymity.
Components
As a financial system, regulatory haven can be divided in two components that include: Financial services. Financial services of regulatory havens are services provided and billed to nonresidential companies outside their domestic territory. These services may include some of the following: service fees for intermediaries, foreign exchange, financial leasing, commissions, trading in securities and other financial instruments, services in the context of asset management etc. Registration fees that are obligation for licensed entities such as offshore banks, international companies, insurance companies, trusts etc.