With increasing competition from Singapore, Michael Olesnicky outlines the challenges that lay ahead for Hong Kong, if it is to maintain its status as the leading international finance centre in Asia.
HONG KONG HAS LONG been perceived as a major hub from the perspective of global wealth management, funds management and the provision of trust services, and certainly as the leading centre in Asia for these types of private banking services. Indeed, until recently, fortune has smiled on Hong Kong. Today, however, Hong Kong is at a crossroads.
In the past, the government’s policy of ‘positive non-intervention’ has served Hong Kong well and has permitted the private banking industry to flourish. The government has never conferred special incentives or tax breaks to encourage specific industries. Nonetheless, the private banking industry has thrived in Hong Kong’s laissez-faire environment due to the lack of the types of impediments that are found in many other countries. Hong Kong has never imposed exchange controls. It has never imposed barriers on foreigners investing in Hong Kong. Its tax system to date has been fairly benign for residents and non-residents alike with respect to their private investment income. Regulatory controls have existed, but Hong Kong has certainly not suffered the degree of overregulation found elsewhere.
These features have enabled the private banking industry in Hong Kong to attract funds for management from high net worth families and others throughout Asia as well as from Hong Kong itself.
Times change and circumstances change. Suddenly, Hong Kong’s system, although perfectly adequate, is starting to look like an old model Mazda compared to the sexy Porsches and Maseratis that are blossoming elsewhere. Many think that the house needs a facelift if it is going to remain attractive. This is where the Hong Kong government’s policy of non-intervention has suddenly become problematic. The private banking industry in Hong Kong needs a facelift to bring it up to date and to continue to remain attractive, and this requires the government to take positive steps to support the industry.
Two developments have occurred in recent years to exacerbate the situation.
First, the Hong Kong government dealt the Hong Kong banking industry a blow by abolishing estate duty in mid 2005. Suddenly, Hong Kong families no longer had the most obvious incentive to establish trust structures. To its credit, the trust industry in Hong Kong has responded well to this challenge. It has reassessed the needs of Hong Kong-based families, and has concentrated on providing trust services designed for other purposes such as family succession and asset preservation. Freed from the strictures imposed by Hong Kong’s previous estate duty laws, trust deeds now reflect the true intention of settlors instead of imposing the sorts of controls that were previously needed to avoid estate duty. This has enabled trustees in Hong Kong to utilise a wider range of trusts tailored to the specific needs of their clients, and has made Hong Kong a more attractive location for trusts.
The second – and more significant – recent development has been the emergence of Singapore as a competing regional centre in Asia for private banking services. Unlike the position in Hong Kong, the Singapore government has actively sought to promote the development of the private banking industry by providing a wide range of incentives to fund managers and trustees. The government has amended Singapore’s tax laws to confer concessional tax rates on trustees and tax exemptions upon their trusts and their underlying companies. It has reformed and modernised Singapore’s trust laws. It has introduced new types of business vehicles, and simplified its company laws to make the use of Singapore entities more attractive. These initiatives have made Singapore an attractive jurisdiction for the establishment and maintenance of trusts.
These initiatives have been successful to the extent that Singapore is now increasingly being seen as a major competitor to Hong Kong for the provision of private banking services. There is now a “buzz” about Singapore that didn’t exist before. That being said, although the ground-work has been laid, it remains to be seen how successful Singapore will be in attracting offshore business of a sustainable and durable nature.
The issue for the Hong Kong private banking industry is – how should it meet the challenges of Singapore and, more fundamentally, of other offshore centres that over the years have positioned themselves as more ‘modern’ in their approaches to wealth structuring and wealth management issues?
When it abolished estate duty, the Hong Kong government stated that its reason was to make Hong Kong more attractive to foreign investors. The reality is that estate duty is only one part of the total mix so far as foreign investors are concerned. In order for Hong Kong to be an attractive offshore investment location for both resident and non-resident investors alike, it must provide a more comprehensive and attractive range of facilities. More steps must be taken.
For example, Hong Kong’s trust law is of a traditional type, unlike the modern trust laws that exist in competitive jurisdictions around the world. Hong Kong’s company laws remain old-fashioned, so much so that even Hong Kong residents prefer to use offshore vehicles for their private wealth structuring. The impact of Hong Kong’s tax laws remains uncertain with respect to the gains made by trusts and their underlying asset-holding companies, to the extent that these are supervised and administered in Hong Kong.
Singapore to its credit has addressed these issues and has dealt with them in a clear and comprehensive manner. It has shown a willingness to take whatever steps are necessary to make Singapore as attractive a base as possible for the private banking industry. This has encouraged trustees and fund managers to bring their business to Singapore. Sadly, so far, Hong Kong is lacking.
Notwithstanding Hong Kong’s traditional laissez-faire policy with respect to the encouragement of industry sectors, the Hong Kong government must now take positive steps to sustain and encourage the further development of the private banking industry in Hong Kong. It needs to reform Hong Kong’s trust laws, corporate laws and tax laws. Only by doing this will Hong Kong be able to maintain its position as a pre-eminent centre for the private banking industry.
Hong Kong does have obvious advantages. Unlike Singapore, it has relatively few tax treaties, and is therefore not subject to the same degree of exchange of information obligations as is Singapore. Its tax system provides a level playing field that applies to all investors equally, and therefore does not incur the wrath of the OECD which is seeking to impose controls on jurisdictions such as Singapore that treat foreigners differently from local residents. Singapore’s statutory banking confidentiality law also makes Singapore more vulnerable to pressure from the OECD to reform its position and make information available to foreign governments, whereas Hong Kong’s traditional and tested common law duty of bankers’ confidentiality achieves the same level of privacy without being as provocative.
Some people, especially Europeans, are reluctant to invest in Hong Kong because they are concerned about Hong Kong being part of China. These people fail to appreciate the nature of Hong Kong’s separate political, economic and social systems, as encapsulated in the concept of ‘one country two systems’. It would be naïve for any private bank or trustee to be swayed by such a view in deciding where to set up operations in Asia. The reality is that China is the biggest potential market for the wealth management and funds industry, and these types of China operations can be managed only from within China itself, including Hong Kong.
These issues are not new. The private banking industry in Hong Kong has organised itself to lobby the government to bring about the necessary reforms. Hong Kong has shown itself to be adept in the past, and it is inevitable that the necessary changes will be effected. The government has already enacted an express tax exemption for foreign residents who invest in Hong Kong’s securities and financial market, and this is a sign that more is to come. Readers should keep their eyes fixed on these coming changes.
Senior Consultant in Tax, Baker & McKenzie in Hong Kong, formerly Senior Advisor at KPMG in Hong Kong. He has more than 25 years’ experience advising on corporate tax, wealth management, trust planning and estate succession matters. Since 1986, he has been the Chairman of the Joint Liaison Committee on Taxation, a quasi-governmental committee interfacing between tax practitioners and the Hong Kong Inland Revenue Department. Olesnicky is also the Chair of STEP in Hong Kong and chairs its China sub-committee.