Hubbis and co-host Jersey Finance invited a group of wealth management experts to a private discussion in Singapore in May to ponder the evolution of international financial centres (IFCs), especially amidst global regulatory proliferation and intensified media scrutiny. Are ‘structures’ still in vogue and can IFCs compete with onshore or mid-shore alternatives that might offer high net worth clients easier, cheaper and, apparently, more transparent alternatives? What do IFCs need to do to enhance their reputations and their futures? Do they pursue niche markets? In the Asia-Pacific region, where will the IFCs source their new clients?
The twin threats of global regulatory proliferation as well as media leaks and revelations of information on offshore structures have presented an existential threat to international financial centres (IFCs). Are IFCs and the structures they facilitate still relevant, and/or acceptable today? Are onshore or midshore jurisdictions winning more business as a result? Or can the higher quality, well managed, robustly compliant IFCs fight back with a drive towards transparency and excellence throughout their product and service lines?
Hubbis and co-host Jersey Finance recently invited a group of wealth management experts to Singapore for the second in a series of high level, private discussions on these, and other, vital matters that will directly impact the future of IFCs and their use by wealth advisers and Asia’s wealth management clients.
The general agreement around the table at both discussions was that IFCs remain viable and valuable, provided the structures they house are correctly assembled and managed and if those are allied to optimal regulatory and compliance practices.
This is a very important period for the industry as global regulation has become far more intense and demanding. With the demands to meet top international standards on the Common Reporting Standard (CRS) and Automatic Exchange of Information (AEOI), reputational excellence for IFCs has become of paramount importance. Accordingly, IFCs around the globe are therefore working hard to positively differentiate themselves in terms of quality and range of structures, services and jurisdictional reputation.
There was also a consensus that the motivation for High Net Worth (HNW) and ultra-HNW clients to go offshore is today largely for privacy, estate planning and tax mitigation rather than for the drivers of secrecy and tax evasion that may well have motivated clients in decades past.
There was general agreement that the best IFCs will also make greater strides towards digitisation, to match the expectations of and interface with the wealth management institutions who bring their clients to these IFCs. Digital excellence, for the front and back offices, is no longer a luxury, it is a necessity.
There is also much work for the wealth management community to do to bring the structures of their current and future clients into the modern era. Secrecy has become a no-go concept, as transparency for the regulators is vital, but some elements of privacy still exist within structures housed in the more reputationally intact IFCs today.
The message coming out of this discussion was that the world does not stand still, and the best IFCs, those that want to both survive and prosper, must continue to adapt to the new regulatory frameworks as well as bringing new structures and products to market.
To do so means the IFCs move in sync with the ever more globalised needs of the Asian wealth clients and also remain in tune with the ever more stringent regulatory and compliance demands.
This might seem like some kind of financial markets alchemy, but despite the many challenges to IFCs, the need for their services – albeit dramatically more transparent, and accountable, than ever before – is driven by the enormous, rapid growth in private wealth, especially in high-growth regions such as Asia, combined with the globalisation of corporate and private wealth.
A central foundation for this entirely off-the-record discussion – the second in a series that began in Hong Kong a month earlier - was the explicit need for HNW individuals and their families to design and execute wealth management strategies that preserve - and build - wealth for the current and future generations.
This is not easy, as, in the past, wealth has all too often tended to erode as it passed through generations. There are many challenges to structuring and transitioning Asian family wealth, which experts at the discussion agreed requires a long-term view and near-term precision. HNW families that think, plan and act with an understanding of how their actions may impact future generations are more likely to manage the process well.
The expertise of wealth management advisers and the skills and reputations of the jurisdictions they use are increasingly in focus, as they work with their clients to devise financial strategies, asset diversification and the appropriate structures to manage what is a highly complex process, with many moving parts.
IFCs and their role in family governance
Successful wealth preservation and transitioning that wealth through multiple generations requires solid family values that might even be enshrined, perhaps in a family office governance statement. It is important for families to base advice about management and succession practice on meritocracy rather than bloodline. Effective family governance requires a keen focus on skills, education and the instilling of communal family values and objectives, while also encouraging diversity and divergence of opinion.
The thrust towards jurisdictional propriety – choosing the right IFCs - and smart HNW family wealth structuring is currently favouring midshore jurisdictions such as Singapore, which are increasingly appealing to advisers and clients based on the dual themes of consolidation of wealth management and consolidation of succession plans into using one jurisdiction.
“In Singapore,” noted one wealth adviser, “the intention of the regulators and authorities is evidently to make this jurisdiction highly robust for families to consolidate in one jurisdiction, while also ensuring that Singapore is reputationally sound.”
From a regional perspective in Asia, Singapore is indeed winning the battle with Hong Kong. “The regulatory environment here is thoroughly responsible, imaginative and provides families with a highly robust venue to manage their wealth,” noted one participant. “A recent article in Bloomberg indicated that people expect that within the next three years the number of family office/single family offices in Singapore will at least double.”
Another panellist noted that Singapore is very focused on reputation, amidst concerns that IFCs such as those from the Caribbean, have become tarnished since the Panama Papers and Paradise Papers exposes and other media-inspired exposés that amount to existential threats to many IFCs.
Fighting back against reputational damage
“The man on the street who is not in our industry believes that offshore jurisdictions are only there to make the rich richer and basically steal money,” noted one participant. As the global regulators are also wary of and increasingly scrutinising activities at many IFCs, those that are to survive and prosper in the future should structure themselves to ward off these twin threats, as well as the rise of onshore and midshore solutions.
“The Singapore Court of Appeal recently issued a decision in relation to a challenge on production notices issued on a number of banks in relation to requests from the South Korean tax authority,” reported one expert at the discussion. “The position that Singapore has taken seems to be very clear, it favours exchange of information because Singapore has set itself up as a legitimate financial centre. Singapore appears to be saying if your money is not clean, we do not want it. I see this as very positive for Singapore.”
“Much of our work these days is very much onshore,” remarked another expert at the Singapore discussion. “For example, dealing with Thai clients, we are setting up fund structures with Thai fund managers and the preferred jurisdictions are Singapore or Hong Kong. They smell and feel more legitimate. Jersey is often popular with North Asia clients who often request it for more conventional trust structures for minor beneficiaries, for beneficiaries who require special support.”
Some argue, however, that the whole onshore, midshore, offshore discussion is somewhat faddish and irrelevant.
“Offshore does not necessarily mean questionable activity, or tax evasion or even mitigation,” a panellist commented. “I would always consider offshore where the rules make sense for the client and it gels with the client objectives.”
One participant injected a note of common sense by remarking that the reality is that a great deal of what is labelled avoidance is actually tax mitigation. “There is a big difference between mitigation actions and evasion,” he stated.
The fear factor
Whatever the localised interpretations – and experts at the discussion highlighted many such nuances - there is still clearly a great deal of confusion over tax matters. “The point is that nowadays many clients are ever more frightened about using what are in fact perfectly legitimate tax planning vehicles because they fear being labelled as a tax evader or avoider,” said one expert. “Moreover, some of the publicity that certain governments are using, and the UK government is one of them, is I believe designed to stop people from using what are legitimate planning vehicles, sort of scaring people away.”
The Panama and Paradise Papers have clearly had a major impact on politicians, as governments and elected officials are under pressure, fearing backlash for their ordinary voters.
The discussion also turned to Unexplained Wealth Orders, new provisions brought in by the UK Government which have had worldwide effect. It has already been used against a South Asian politician to demand how he bought £22 million worth of properties in the UK.
“Anyone [buying assets or holding assets in the UK] can be asked how they paid for this or that, how did you make the money to pay for it,” an expert explained. “And it also extends to anyone who is a nominee, even a trustee may get served with these orders. It is rather clever because the onus of proof is on the person served to prove how they made the money and if they ignore it, they are in contempt of court.”
Returning to basics
Bringing these matters back to the context of wealth management in Asia, a panellist noted that these are all good reasons why it makes sense to return to basics and have everything consolidated in one or perhaps two quality jurisdictions, perhaps Jersey and Singapore, for example. Families increasingly realise that a company works fine in this environment. They can have a shareholders’ agreement, detailed family governance – here the Singapore PTC works well, and for example a non-charitable purpose trust available in Jersey nowadays.
“I have considered Jersey as the default offshore jurisdiction for several decades now,” noted a panellist. “The Channel Island jurisdictions are evolving. More clients are going to Jersey, for example, for fund structuring.”
Jersey law and the legal practice, particularly in the trust side, is one of the best available, according to another panellist. “For example,” she said, “their standards are very good and there are a lot of judges who are very able, they can also call on London judges to opine. This is actually in sharp contrast to Singapore where the depth of legal experience and trust expertise and history is limited.”
Jersey is independent, it is not part of the UK. It is also not a member of the EU. So, in that way, Brexit does not affect Jersey, especially as it already has a third party preferred relationship with the EU, so it has the flexibility to market into the EU through compliant regulation.
“Jersey was early into regulation, embracing it and raising the costs but at the same time filtering out the not-so-good clients,” added another expert. “Jersey and some of the other leading IFCs have had considerable foresight, including about the importance of China for future business origination. As to regulation, Jersey is dynamic and has the ability to evolve and has done so effectively in the past.”
China is of course ever more important as mainland Chinese high net worth individuals (HNWIs) emerge from their intense focus on wealth generation to wealth preservation and even estate transition. “We see a lot of succession planning, particularly in Asia with the transfer of wealth to the next generation,” a panellist reported. “One of the things we are seeing more and more of is money coming out of China, for example, IPO structures as a precursor before companies are floated, putting those shares into a trust and then the proceeds going into the structure.”
IFCs up their game
The Singapore discussion also further developed some themes that had surfaced at that gathering, as well as focussing in greater detail on the issue of what motivates a client to have a ‘structure’ in an IFC today, as global regulation proliferates and as client needs evolve amidst the globalisation of wealth.
Key factors affecting IFCs include the growing importance of reputation, the changing geopolitical landscape, the consolidation of focus on ultra-high net worth individuals (UHNWIs) and families, and the development of growth markets, for example, mainland China. And of course, customer expectations are shifting, not only in the services and products they need but importantly in their digital delivery.
The wealth management community remains largely convinced of the positive value of IFCs, but banks and other advisers are increasingly concentrating their focus only on the jurisdictions with the best reputations. Strong reputations with governments and tax authorities are developed by working with transparency requirements. It is essential nowadays for any IFC that wishes to survive and prosper to present to the world a ‘clean’ face as a transparent and globally compliant gateway for the structuring of new vehicles.
In the medium to longer term, the number of IFCs is likely to decrease. In order to stay ahead of other IFCs, it is vital that an IFC’s proposition leads the way in the industry, and for its potential clients. This entails identifying the emerging and future trends.
For example, implementing forward-thinking initiatives, such as those around impact investment, green finance, and Islamic finance, as well as new trust structures that can also accommodate a new wave of philanthropic objectives.
A core challenge for the IFCs and for the wealth community that avail themselves of their services and products is to counter the negativity that has surrounded so-called ‘tax havens’ since the Panama and Paradise Papers debacles. More can and should be done, for example, to clear up popular misunderstandings about the focus of IFCs, more can be achieved in terms of documentation of inflows and outflows, as well as a greater effort made to explain the role of IFCs as neutral intermediaries for investment flows.
Furthermore, the IFCs that rise to these challenges should make continual initiatives to explain to clients and to governments precisely what their added-value is as an IFC, what suite of products and services they offer and why, and how they set themselves apart from other IFCs.
If an IFC can create and communicate a clear value proposition to set itself apart from other IFCs, the reputational comfort will draw more advisers, banks and end-clients to work with its jurisdiction.
There is unmistakable evidence from some of the leading IFCs and from the banks and other wealth firms that consolidation is ongoing, in other words, that the advisory community is narrowing its focus.
Moreover, the rationalisation and also digitisation of IFCs themselves and the front and back offices of the private banks, universal banks and other wealth advisers also implies a greater focus on the ease of client interface, as well as the ease of regulatory compliance.
Structures - still in vogue… and needed
Hubbis research earlier in 2018 revealed that trusts, foundations and mid-shore vehicles remain viable and often appealing, but the motivation today is more for privacy and estate planning than for secrecy and tax mitigation. The new era of global regulatory rigour demands compliance and younger generations of digital natives know that times have changed from the non-digital days of the family wealth founder-creators.
The ‘old’ days in Asia saw structures such as BVIs and other largely offshore vehicles created predominantly to cloak wealth, but those days are largely gone.
Europe and the US are pushing out their compliance requirements worldwide, also urging governments in Asia to raise their game to ‘first world’ standards. Accordingly, a key challenge and opportunity for wealth managers in Asia need to persuade their clients that they need proper, professional advice for tax mitigation, privacy and wealth transition.
The CRS and technology innovation are both great game changers. Ironically, both are considered as potential catalysts to help wealth managers earn more advisory fees, to help clients overcome the hurdles they present.
In a tougher regulatory world and one where our digital footprints appear largely indelible, the theory is that tight, professionally-honed structures are the way forward.
Moreover, many in the younger generations, those either making or inheriting the wealth today and tomorrow in Asia, often prefer compliance to fear.
Educated in the leading institutions around the world they also increasingly like the idea of social recognition via philanthropy, rather than notoriety through deceit.
Avoiding CRS by jumping to non-CRS jurisdictions, for example, Taiwan can mark clients – and their advisers by association – as ‘high-risk’, making it potentially difficult to return to or operate in the mainstream jurisdictions.”
Views from wealth management experts at the Singapore discussion first focused on the need to understand clients and to adapt to the needs of the full range of generations of clients, the founder-creator generation, the middle generation and even the millennials that are either inheriting or making, wealth in Asia.
“We try to take a holistic view of the entire process and the full range of clients, current and future,” reported one expert at the discussion. “We eschew the concept of trying to push products until we have talked to clients about their investment goals, then deliberated the desired investment strategies and only then can we consider the structures and jurisdictions that will deliver.
Structuring for us is all about delivering the optimal outcome, thereby helping preserve and build wealth, ensuring the succession of estates, providing tax timing control, not mitigation, as well as providing as much confidentiality as possible throughout the process.”
Keeping it simple
A fellow panel member noted that all too often they see advisers who are inclined to design overly complex structures that generally do not work. “For example,” she said, “I very recently saw a structure to avoid estate taxes on property in the UK by housing them in a trust that simply does not do the job. We prefer the simplest and most effective approach that is non-contentious, compliant and transparent for the authorities.”
Privacy, compliance and transparency are words that are on the lips of almost every wealth adviser nowadays.
The new era of regulatory proliferation requires compliance, not only from the client but from the advisory community as well. Transparency is a new watchword for the more astute.
Although data confidentiality is supposed to be enshrined in GDPR, or other initiatives, many people believe privacy is a thing of the past. The ability for countries and their authorities to exchange information under CRS, FATCA or a host of other initiatives is clearly a global effort to boost supervision or surveillance of tax-payers, with the global, wealthy elite perhaps most likely to be caught in the cross-hairs.
The younger generations are perhaps more used to the lack of privacy as they are so intimately engaged in all aspects of social media. Accordingly, they are more comfortable with the possible public scrutiny of their wealth and their activities.
Privacy still a key motivator, especially for older generations
However, for the older and middle generations of Asian wealth, there are grave concerns about privacy. “One of our biggest clients is moving their structure away from a certain traditional offshore jurisdiction, and in this case straight to the US – where there is no CRS - just because they are concerned about privacy,” a panellist reported. “They are literally terrified that people in their own country – here in Asia - will find out how much they are worth. This is a perfectly legitimate reason to have your money in another place that you consider safer than your country.”
What all this means is that many HNW clients need to modestly, or perhaps radically, review and reorganise their assets’ structuring. “The old way of dispersed structures and bank accounts - a BVI here, a Cayman structure over there, a bank account in Switzerland, another in Hong Kong, one in Singapore and so forth – simply will not pass muster nowadays,” observed one wealth adviser.
Another noted that any HNW client who thinks he has his succession planning wrapped up in a BVI company with a pre-signed stock transfer form stuffed in the bottom drawer is fooling himself. “Those days are gone and good riddance to them,” he said. “I am resident and working in Singapore and I create structures, in Jersey, Guernsey, the Isle of Man, Singapore, Hong Kong, but we are always cognisant of CRS. There are fewer clients wanting structures now, but those that do are what we might term ‘better’ quality clients who understand the need for transparency.”
Remedial work required
Tax avoidance was a core motivation for offshore structures and the use of esoteric IFCs.
“Everyone needs to realise it is a short-term solution today, and fraught with potential consequences, including blacklisting from what are considered the bona fide jurisdictions,” one participant explained. “Singapore, for example, has stated clearly that they aim to stamp out tax avoidance. It appears to be a need for those in the wealth industry to emphasise that tax planning and structuring is not illegal or immoral.”
And a fellow panel member explained that a number of his firm’s larger clients are working with them to remediate what they have established historically. “For example,” he noted, “I am in the process of setting up a private trust company for which the trustee recommended a Cayman star trust as the holder of the shares of the Singapore PTC. We said ‘no’, we must simplify things by having a Jersey trust, as well as keeping the bank accounts few and simple.”
Another expert claimed that all these developments and anticipated changes present the wealth management community with a world of opportunity from the planning side. “We all have a lot of work ahead to make sure clients are ready for the new world we all now inhabit.”
The globalisation of assets, globalisation of compliance
The need for HNW families to enhance their focus – and expenditure – on structures and relevant jurisdictions is also driven by the increasingly complex and global formation of people’s lives, assets and families. “They actually need and want structures in different jurisdictions, rather than just in one,” explained one adviser. “That connectivity is something that we are focussing on.”
“Globalisation means assets for the wealthy allocated right across the globe,” added another banker. “For liquid assets, an Asian HNWI wants to diversify both through ownership and also for access to international investments, with the diversification of portfolio risk across multiple markets.”
There was also general agreement that advisers need to drive their clients to achieve this whilst ensuring that the whole edifice remains transparent and compliant, and not tarnished by association to structures or jurisdictions that have become or risk becoming tainted.
History still counts for something…
For many wealthy clients, Switzerland and possibly London are still logical venues for structures as they retain reputational excellence and a wide diversity of wealth and financial services. “London is becoming more interesting because with CRS now in place it is on a more open playing field with Switzerland,” noted one expert.
Another panellist agreed. “We have found the UK is becoming more and more attractive on a relative basis,” he said.
“It has a relatively simple company structure and some of the reasons people want these companies simply to hold certain assets.” Dubai and Singapore are also attracting a lot of the Middle East and Indian money, especially families planning residency alternatives.
“In my view,” said one wealth adviser, “Hong Kong is de facto China and therefore it is not an offshore location, it is not even really a midshore location, it is a China jurisdiction. It really surprises me how many Taiwanese HNWIs still go to Hong Kong for their structures. They and the mainland Chinese should be coming to Singapore or elsewhere.”
Onshore is certainly rising in importance within Asia, as regulators liberalise their financial markets to allow a wider range of global investment opportunities from within those markets. Moreover, global and boutique private banks and other overseas wealth advisers are increasingly active onshore, for example in the fast-growing economies of Thailand, Indonesia and the Philippines, as HNWI wealth escalates and as the interest in global investments expands apace.
Many believe that these developments, combined with the actual, or impending, advent of CRS and AEOI, will lead to fewer HNWIs putting their money offshore and possibly to more bringing money back onshore. Ironically, the bank secrecy laws in many of the regional Asian nations might offer greater security and secrecy to clients than if the money was in offshore accounts. The Philippines is one such country cited as having very tight secrecy laws for the banks to comply with.
Lines in the sand
The discussion neared a conclusion with further debate about the ability of wealth management advisers to be objective, to focus precisely on the client’s needs.
“As an adviser,” a participant noted, “it is not about just giving advice that technically speaking works, it is about implementation. If you think something works technically on paper but that on implementation it will implode, a good adviser would say that, based on my experience and based on the regulatory environment, I advise against it.”
A fellow panel member agreed, but wondered whether HNW clients can obtain anything resembling independent advice amidst the proliferation of regulatory directives and supervision and whilst the private banks or advisory firms they work with are also restraining their teams from potentially over-stepping prudent advisory lines in the sand. “Who these days is brave enough to give their clients advice without worrying about the liability?”, the panellist wondered. Another expert at the discussion contended that even RMs who work for major private banks – where the compliance teams are increasingly powerful – still have the independence and the flexibility to advise objectively and in depth. “But,” he said, “independence is not the key factor here, it is what you can and cannot discuss openly with the client, and where the lines in the sand are that you or your clients do not want to cross. Advisers are ever cagier because of those lines in the sand and the clients can understandably become frustrated and that can then affect their willingness to pay for advice.”
In search of excellence
The debate over the role of IFCs amidst the new standards of global regulation and compliance will continue for many years ahead, as the new directives filter down to affect day to day practices and wealth management psychology.
What IFCs can do today is listen to the regulators, and to the advisory community and their end clients, and strive ever more strategically and energetically towards transparency and excellence.