The private client industry has seen the emergence of family offices as a global best-in-class solution for affluent families striving to achieve long-term wealth management and preservation. Family offices are arguably the fastest-growing investment vehicles in the world today, as families with substantial wealth are increasingly seeing the virtue of setting one up(i). Fuelled by the growth of ultra-high-net-worth (UHNW) families, the number of family offices has dramatically increased since 2000(ii).
You may have heard the old joke, “If you have seen one family office, then you have seen one family office”.
The expression “family office” covers all forms of organisations and services providing governance/succession/administrative structures for families and for managing their large private fortunes. Family offices might take the traditional form of single or multi-family office or might be a virtual or branch office. The Family Office Exchange has identified 8 types of family offices classified by the types of services they provide.[iii]
As an established private client jurisdiction, Bermuda has significant experience with the various forms that a family office can take. In a recent initiative, the Bermuda law reform committee has started crafting “The Family Office Act”, new draft legislation intended to facilitate the creation/operation of family offices, and to provide new tools that the family office can use when designing solutions for the families they serve.
Licences and Exemptions
While each family office is unique, there are some common functions that are often performed, such as investment management, governance, risk management, fiduciary stewardship, philanthropy, succession, and education to name a few.
International standards require regulation and licensing of most companies engaged in the provision of financial services. If a family office provides investment management, fund administration, captive insurance company management or acts as a trustee or corporate service provider, then the family office will likely need to obtain separate licences for each of these activities.
The licensing process can be cumbersome and time consuming, often requiring multiple licence applications and interaction with various government departments. Once the exemption or licence is granted, there are often ongoing unique annual reporting and compliance obligations for each licensed activity.
The Family Office Act will allow a Bermuda based family office to apply for multiple licences or exemptions with a single simplified application. Ongoing maintenance will be streamlined and consolidated. A dedicated government team will ensure that licences are processed promptly within specified timelines.
The family office will be able to select one or more of the following licences using the streamlined procedure:
a. Investment Advice/Management - if the family office or an affiliate is providing investment advice to the family or family office from Bermuda, it will receive an exemption from licensing under the Investment Business Act 2003.
b. Creation of a Family Investment Fund– families often create and manage their own investment funds which consolidate the family’s investments. A new exempt Family Investment Fund category will be created under Investment Funds Act 2006 for this purpose. This new fund would fast track the procedure for a family to create its own investment funds.
c. Fund Administration – the family office may wish to undertake the administration of their investment funds. In such cases, the family office will receive a fund administration licence under the Fund Administration Provider Business Act 2019.
d. Exemption from Trustee Licensing – the family office may wish to act as trustee for the family’s trusts. The Family Office Act will exempt the family office from licensing under the Trusts (Regulation of Trust Business) Act 2001.
e. Exemption from Corporate Service Provider licensing –the family office may wish to provide company administration services for the family’s companies. Again, a family office will be exempt from CSP licensing under the Corporate Service Provider Business Act 2012.
f. Captive Insurance Company Management – a captive insurance company can be an excellent way for the family to manage risk while reducing insurance costs for family businesses or assets. The family office will receive an Insurance Company Management licence under the Insurance Act 1978.
Mark Twain wrote “You can go to heaven if you want to. I'd rather stay in Bermuda”.
Bermuda is a small beautiful island of approximately 21 square miles. To preserve the unique charm of the island, immigration has been tightly controlled for decades.
Bermuda recognises that family offices will wish to engage the services of family members or trusted employees. The family office will also need to attract and retain top professional talent.
The Family Office Act will seek to introduce a new Family Office Work Permit Policy (similar to the popular Fintech Business policy) which would allow a family office to receive immediate approval of five work permits. Additional work permits would be available subject to approval by the business plan by the Department of Immigration. These permits would be available for family members, professionals, and trusted advisors and employees. Certain unskilled jobs, such as a front office receptionist, or entry level graduate, or trainee positions, would be closed or restricted positions which would not be available for a Family Office Work Permit (except for family members).
Consideration is also being given to granting permanent residence for family members and key employees.
Advisors involved in the charitable sector recognise that international standards have resulted in dramatically increased registration, reporting, compliance, and public disclosure of the charity’s activities. While there may be justification for such measures for publicly funded charities, the burden often is excessive for privately funded family charities. Accordingly, the Family Office Act will make provision for increased privacy/confidentiality, reduced regulation, and simplified reporting for family funded charitable structures.
Benefit Corporations/Companies – A New Quasi-Charitable Company
A Benefit Corporation is a unique corporate vehicle that merges the traditional for-profit business corporation model with non-profit objectives by allowing social entrepreneurs to consider interests beyond those of maximising shareholder wealth[iv]. A Benefit Company’s directors and officers are required to consider the impact of their decisions not only on shareholders but also on employees, customers, the community, and local and global environment. This allows a socially conscious family to create a for-profit company that generates income for the family while at the same time advancing clearly specified public benefit purposes.
Benefit Corporations originated in the United States, with over 30 states enacting legislation providing for their formation. The structure is spreading to other countries around the world.
The intention is that the Family Office Act would provide for the formation of Bermuda Benefit Companies for those families that wish to adopt this innovative form of impact investing.
The quality of Bermuda courts and legal system are often cited as a reason for the creation of trusts and structures in Bermuda. However, there are times where arbitration may be preferable to a battle before the courts. Some argue that international arbitration offers a number of advantages[v] such as:
There are a number of obstacles to arbitration of trust disputes (which are beyond the scope of this article). To facilitate trust arbitration, the Family Office Act will provide that in circumstances where the trust deed contains an arbitration clause, the clause would be treated as an arbitration agreement between all the parties (including the beneficiaries of the trust) for the purposes of the Bermuda Arbitration Act 1986. Further, the tribunal will have the same power to appoint an independent person to represent any beneficiaries who are unascertained or lack capacity, similar to the power available to the Bermuda courts in court proceedings.
Local Tax Concessions
The Family Office Act would provide for a Payroll Tax holiday for Bermudian hires and waiver of Stamp Duty on international trust instruments where the family office or an affiliate acts as trustee.
The proposed Family Office Act will mark the beginning of a new era, not just in Bermuda but in the entire offshore financial space. As large nations increasingly look inward, international families with international wealth will benefit immeasurably from an outward-looking base in a world where borders are closing like never before. The new role of the offshore centre will not be to extract assets from a particular jurisdiction, but rather to ensure ready and efficient access to assets, investments, and businesses situated in multiple jurisdictions. The Family Office Act will be a key part of this new movement.
[i] “EY Family Office Guide”, in association with University of St. Gallen and Credit Suisse. 2017
[ii] Ibid. and “The Global Family Office Report”, Campden Research. 2018
[iii] “Types of Family Offices”, Family Office Exchange, https://www.familyoffice.com/membership/family-offices/understanding-family-office/types-family-offices
[v] “The Arbitration of Trust Disputes”, Mishcon de Reya, 2019, https://www.mishcon.com/news/the-arbitration-of-trust-disputes
[vi] Payroll Tax Act 1995
[vii] Stamp Duties Act 1976