Singapore: Family Offices And Risks

The growth in the number of family offices worldwide therefore comes as no surprise.  In July 2019, Campden Research estimated that there were approximately 7,300 family offices worldwide, a 38 per cent increase from the end of 2017.[i]  In Singapore, the number of family offices doubled in a matter of three months, from approximately 200 Single Family Offices on 5 October 2020[ii] to about 400 Single Family Offices as at end-2020.[iii]

The exponential growth in the number of family offices in Singapore may be in part due to high net worth families choosing a safe haven during the pandemic, but it is contributed no less by the ease with which one can be set up.  The legislation in Singapore allows family offices to engage in fund management and capital market activities without the need for licensing.[iv]  Additionally, there are various tax relief and exemption schemes, such as those under sections 13O or 13U of the Income Tax Act under which income generated from designated investments are tax exempt.[v]

The Risks

With the emphasis on the benefits and potential of family offices, there is a corresponding neglect of the risks inherent in a family office set up.  Given that family offices are intended to preserve and manage the family wealth over generations, the existence of these risks must be addressed.  After all, a chain is only as strong as its weakest link and unattended risks may deprive the family office of any intended benefits.

Investment, business/management risks

The recent spectacular collapse of Archegos Capital Management (Archegos), the multi-billion dollar family office that managed the fortune of veteran investor Bill Hwang, demonstrated the devastating effects of the actualisation of investments risks.[vi]

Archegos had borrowed large sums of monies from banks and invested in various swaps involving underlying stocks in prominently publicly traded companies such as ViacomCBS. The extent of investment was such that Mr Hwang was effectively ViacomCBS’ single largest institutional shareholder. When share prices of ViacomCBS plummeted, Archegos imploded with huge liabilities and various lender banks such as Credit Suisse and Nomura reportedly lost billions of dollars.

After the event, questions were raised as to the family office’s investment policy or whether it even had one.  A clear investment policy statement would have provided a guide as to the investments and a reminder that as stewards of future generations’ wealth, the objectives of the investment professional should be for the family to stay wealthy rather than to take risks to get wealthy.  The same principles would apply to family offices which own and manage operating businesses. 

Fraud risk

To a certain extent, the structure of the family office is a perfect target for fraud.  It is less regulated than the typical fund management company and perceived as less security conscious as compared to regulated entities, with more blind spots.  It tends to be a small office with a few staff who cover multiple roles and is run by family members or “trusted” employees.  The risk of rogue family members or employees must be mitigated.

Succession risk

The initial success of family offices established by the founding patriarch or matriarch who have generated wealth and made all the key decisions can quickly deteriorate after the pivotal moment of their death or incapacity.   The lack of a decision-making body which is acceptable to the family after the death of the founders may lead to power struggles within the family, undermining a common desire amongst patriarchs and matriarchs to have harmony within the family.  The situation can be worsened where the ownership of the family office is fragmented through succession and/or held in corporate structures allowing minority shareholder oppression actions.

The Yeo family dispute (then owners of Yeo Hiap Seng Limited, a highly successful Singaporean beverage company) in the mid-1990s is a case in point.[vii]  In the 1950s, the business was held through a private limited company with family members as shareholders.  In the 1990s, disagreements amongst the members of the Yeo family manifested itself in a court battle which resulted in the family’s holding company being wound up, airing of family matters in the local media, and the family ultimately losing control of the company which bears their family’s namesake.

Reputation and privacy risks

Family offices understandably price their privacy highly.  Information relating to the family can be used to the detriment of the family, and sometimes even as a threat to the safety and security of the family. 

The Panama Papers in 2016 where an unprecedented leak of 11.5 million files from the database of the world’s fourth biggest offshore law firm Mossack Fonseca,[viii] brought much despair to family offices.  The documents released contained highly personal financial information about wealthy and powerful individuals.  Such a “leak” could clearly also occur in a family office with serious consequences - wealth can be stolen, private information opens the family up to the risk of bad publicity and blackmail.

In today’s well-connected world, adverse news can also easily affect the family office, be it a boycott of the family business or aspersions cast on the philanthropic efforts and good done by family.  An example is Jeffrey Epstein’s foundation which was once a charitable powerhouse and a patron of hospitals, universities and film festivals.  After his conviction as a sex offender, many beneficiaries such as MIT attempted to disassociate themselves from his donations.[ix]

The ubiquity of social media is another risk which some family offices grapple with.  A youthful descendant in “sharing” about himself may unknowingly expose another family member or the family to a greater audience than is desired. Unhappy family members may “seek justice” by taking their case to social media undermining the general inclination of family offices to be private.  The unfortunate public spat between Prime Minister Lee Hsien Loong and his siblings over their late father’s will and family home generated much negative publicity in Singapore, with the Straits Times reporting that a majority polled preferred for the dispute to be taken offline.[x]  

Risk Management

The set-up of a family office can hardly be complete with the obtaining of licensing or tax exemptions or the commencement of operation.  The risks which family offices are exposed to cannot be overlooked given the scale of wealth controlled, and how family offices are intended to preserve family wealth for future generations.  Indeed, the lack of consideration in this aspect is curious as the wealth managed by family offices may exceed that of some listed companies.

While the risks of family offices can be mitigated in various ways and these would necessarily have to be customised to each family, we set out below some fundamental considerations for the family.

Effective family governance

Family governance provides a structure and process for families to organise themselves and guide their relationship. The expression of family governance is usually captured in a Family Charter (also known as a “Family Constitution”).  The objective of a Family Constitution is to align the interest of the family members with those of the family and to provide clarity as to the objective and goals of the family, its leadership and the legitimate expectation of each family member. 

In line with the objective, the Family Constitution is usually a document which can include the family’s heritage, culture and ambitions for future success, mission and vision for the future, as well as a shared history.  Effective family governance also provides for leadership succession and decision-making processes such as how decisions are to be made and implemented.  It can also set out the policy and considerations in relation to various aspects of the family or its business such as investment and/or business objectives and directions, its philanthropic or entrepreneurial drivers or even its ethos as to publicity or privacy.

With the engagement of the family members and their acceptance of the leadership and decision-making process, it is hoped that the likelihood of disputes amongst family members is reduced.  Dispute resolution mechanisms can also be hard wired into various family agreements to require resolution through mediation or arbitration which allow family members to resolve disputes in a private setting, instead of costly and potentially embarrassing litigation.  This will go a long way in avoiding embarrassing details about the family being in the public domain.

Corporate governance and infrastructure

Principles of corporate governance in conventional companies can be incorporated into family offices to mitigate fraud and employment risks. These include the requirement for proper disclosure of potential conflicts of interest in related party transactions, and proper checks and balances. Family offices should also rethink the arrangement where family members or longstanding employees have multiple roles and unfettered authority. There should be a system of proper segregation of duties or at least checks and balances and appropriate approval processes for important transactions. 

In relation to the protection of the family’s reputation and privacy, other than inculcating a strong culture of confidentiality, privacy, fidelity, investing in technologies and security to provide adequate protection against information theft and breaches in confidentiality are essential. Likewise with the inclusion of the relevant obligations in the contracts of the investment professionals and/or other employees of the family offices, and the implementation of relevant codes of conduct. 

“Opportunity and risk come in pairs.”[xi]  Family offices in Asia, at least, are in their nascent stage and as we embrace the opportunities and benefits they bring, families will be well placed to be aware of and manage the risks that come with it. 

Footnotes:

[i]https://www.fsdc.org.hk/media/lrej3ikz/fsdc_paper_no_45_family_wisdom_a_family_office_hub_in_hong_kong_paper_eng.pdf

[ii]   https://www.mas.gov.sg/news/parliamentary-replies/2020/reply-to-parliamentary-question-on-family-offices-in-singapore

[iii]   https://www.mti.gov.sg/Newsroom/Parliamentary-Replies/2021/04/Written-reply-to-PQ-on-family-offices

[iv]   https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/FAQs/SFA---FAQs-on-the-Licensing-and-Registration-of-Fund-Management-Companies-Feb-2022.pdf?la=en&hash=65D33047476933707E5A80AADEAE7D6F98D5F9E4

[v]   With effect from 18 April 2022, the qualifying requirements for the tax exemptions have been raised.

[vi]   https://www.nytimes.com/2021/04/03/business/bill-hwang-archegos.html

[vii]   https://www.straitstimes.com/singapore/from-the-straits-times-archives-family-feuds-over-fortunes-and-business-empires

[viii]   https://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers

[ix]   https://news.mit.edu/2020/mit-releases-results-fact-finding-report-jeffrey-epstein-0110

[x]   https://www.straitstimes.com/politics/resolve-dispute-over-38-oxley-road-in-private-say-majority-of-those-polled

[xi]   Bangambiki Habyarimana, The Great Pearl of Wisdom

SIM Bock Eng
Head - Specialist & Private Client Disputes Practice and Partner - Private Wealth Practice. Bock Eng's main practice areas are in private wealth and civil litigation, which include family, matrimonial law, succession, trusts and probate law, mental capacity issues, banking and finance, property and employment. <br> <br>Bock Eng is the winner of 2020 Best Lawyers "Lawyer of the Year" award for Trusts and Estates in Singapore. She is recognised as a leading individual for Private Wealth and recommended in the area of Dispute Resolution in The Legal 500: Asia Pacific – The Client's Guide to the Asia Pacific Legal Profession. More recently, she was ranked by Who’s Who Legal 2021 as a National Leader for Private Client in South East Asia and a Global Leader for Labour & Employment. She is also recognised as one of the Litigation Stars in the Benchmark Litigation Rankings 2021 and was featured in the 2022 edition of Best Lawyers for Trusts and Estates. <br> <br>Bock Eng is the immediate past Chairman for the Society of Trust and Estate Practitioners Singapore Chapter (STEP Singapore) and is also the course coordinator for Wills, Probate and Administration in the Preparatory Course leading to Part B of the Singapore Bar Examinations and Vice Chairman of the committee of the Wealth Management Institute's Global-Asia Family Office (GFO) Circle.

Vincent HO
Senior Associate – Specialist & Private Client Disputes Practice. Vincent’s main practice areas are in civil and commercial litigation, including banking disputes, property-related disputes, shareholder disputes, corporate and contractual disputes, and mental capacity and succession disputes. Outside Court, Vincent also advises private clients on succession and estate planning, as well as both private and governmental organisations on varied matters. He frequently achieves positive outcomes for his clients through various alternative dispute resolution mechanisms.