Birth of a New Era in Private Wealth

By Nigel Rivers, Global Head of Private Clients, TMF Group, Hong Kong (16/06/2015)

As the financial world continues its march towards a more transparent and open environment, regulations governing private wealth are under scrutiny. The traditional is changing for good while new players emerge.

Once was a time, not too long ago, the words “Swiss bank” conjured up evocative imagery: secret deals; bank vaults full of gold bars; designer suits and Rolex watches against a backdrop of mahogany and marble.  The alpine country in the middle of Western Europe was seen as a haven of secrecy, and the centre of the private wealth universe.

Of course, that all started to change when the acronyms came along - GFC, FATCA, SEC, BEPS, etc... Switzerland started to move towards greater transparency in April 2009, accepting a post-financial crisis protocol shift led by the G20 and the OECD. A major settlement between UBS and the US authorities signalled a changing of era, and the world of private wealth continues to reconsider the future.

Today, Switzerland as the ‘sanctuary of secrecy’ is fast disappearing, and Swiss banks are ‘cleaning up’ their act. Issues like the recent HSBC leak only hasten change. Banks have thrown out massive amounts of business in non-declared funds, especially from the US. There are fewer people using Switzerland for the wrong reasons – hiding ill-begotten funds, evading tax – and those who are encouraged to come or are coming to the country are clients genuinely seeking the best for their legacy.

No doubt the reputation of Switzerland has taken a hit, but it is still attractive for private wealth. The benign tax environment is just one benefit; Switzerland is a place where families come on holiday, may have property and can check in with all of their legal, investment and wealth advisors in one place. There is a transition underway towards a ‘new Switzerland’ where transparency and cooperation are the mantras, backed by the existing expertise, professionalism, stability and reliability that Switzerland is also famous for.

Yet the reputational impact, those questions from over the Alps, have left their mark, just as media witch-hunts over ‘tax havens’ have left a mark on Jersey, the Cayman Islands and BVI. Change, in the form of transparency and accountability, is with us and gathering momentum very quickly. Some private wealth clients have begun to venture from the traditional and seek newer horizons.  

Where the Wealth Is

Though it waited a decade, the Swiss government ratifying the Hague Convention on the Law Applicable to Trusts and their Recognition (1985) was a big signal that the jurisdiction was willing and able to change to meet the new world order.

It is a respected onshore jurisdiction and that famous neutrality means it is on no black lists. Political and economic stability, independence and dedication to the preservation of confidentiality (not secrecy for secrecy’s sake) thrive in one of the world’s biggest financial centres. High-end banking, legal, accounting, fiduciary and insurance services cater to the unique needs of the high net worth individual, and having it all in one place facilitates an effective wealth management platform.

The fact that one-third of the world’s private wealth is managed in Switzerland speaks volumes.

The Swiss don’t control the whole market in the west, though. It is the transformation in the industry that sees Jersey continue to be a preeminent jurisdiction for private wealth trust services. Its business day begins before Tokyo closes and continues well into New York trading time, while its close proximity to Europe is coupled with independence from the EU, making it an all-round global player.

Historically, Jersey’s political stability, strong links with the UK and robust legal system made it an attractive place for the wealthy to place their assets. It has been attracting deposits and investments from institutions and private clients across the world for half a century.  But as pressure grew in the 1990s on what was then referred to as ‘tax havens’, Jersey - in view of its dominant position in the market - found itself under the spotlight.

In response, Jersey decided to differentiate itself firstly by introducing anti-money laundering legislation in the late 1990s and then by introducing regulation in the financial services sector in the early 2000s. Initially these moves were seen by competitor jurisdictions as Jersey bowing to international pressure and the thinking was that the increased operational costs associated with compliance and running a business in this new world would put clients off.

In fact, the opposite was true, and quality business has continued to come to Jersey.  In many instances, clients are actually attracted to the high standards of professionalism and regulation that has come about in the last 20 years.

Jersey targets ultra-high net worth individuals who require complex, transparent structuring and continues to lead the way in terms of compliance with international standards and expectations.

Asia Rising

There is also a dominant duo in the east. As Asia’s thriving financial centres, it’s no surprise that Singapore and Hong Kong figure highly in private wealth management. They also take compliance and transparency seriously: Singapore designated a range of tax crimes in 2013 as money laundering predicate offences. It requires financial institutions to conduct customer due diligence, monitor transactions and report suspicious transactions with regard to the identification and assessment of tax-related risks.

While its development as an international financial centre began in the late 1960s, today Singapore is home to more than 2400 financial institutions both local and foreign. The head of the Monetary Authority of Singapore – its central bank – has called the island a ‘kindred spirit’ to Switzerland, and it could yet overtake the alpine region as the world’s biggest wealth management centre with the value of assets under management in the city-state are at record levels.

To the north, Hong Kong aims to give Singapore a run for its money, and its proximity to one of the world’s largest economies, China, gives it an edge. It, too, has a simple, low and predictable tax system; is a leading IPO centre; and is the most important gateway for capital flows into and out of China.

Though relatively young in its private wealth management (less than 50 years, compared to more than 300 in Europe), more wealth is being created in Asia, and faster, than in any other region at any other time. Since 2010, Asia has accounted for half of the growth in global wealth, with China the second-top contributor after the US. By 2020, the estimated number of millionaires in Mainland China and Hong Kong together will be 3.7 million, with an accumulated wealth of US$14 trillion.

As the industry in Asia matures and the region’s wealth starts to pass on to the next generation, the need to preserve, protect and transition wealth is becoming a key focus in the region – particularly as Asian jurisdictions are not exempt from the increased regulation and push for transparency that has hit its European counterparts.

New Horizons

But it’s not all about the timezone-friendly Europeans or the newer Asian tigers; as technology makes the world smaller and increased regulation makes traditional avenues trickier to navigate, new players are emerging in the private wealth industry. While hardly at top of the mind when you hear the words ‘private trust’, New Zealand is growing in prominence as an international trust jurisdiction.

With tax neutrality towards ‘foreign’ trusts, and economic and political stability, New Zealand is a respected OECD and FATF member jurisdiction with a solid commercial, professional and judicial framework. It also has an extensive network of international tax treaties.

Well situated for those Asian wealth powerhouses, New Zealand is also attracting an increasing number of clients from Latin America, a region not traditionally known as a hub of wealth.  It has also been at the forefront of IGA negotiations for FATCA.

The Shadow of FATCA

Yes, that acronym has been dominating debate and compliance in the financial world since it was first introduced into the US House and Senate in 2009. Requiring financial institutions to report financial accounts of United States citizens, including individuals who live outside the US, to the IRS, FATCA has resulted in a slew of IGAs between the US and jurisdictions favoured by its citizens. Its intention was, at its heart, to oblige financial institutions to report on both resident and non-resident US citizens having financial assets located outside the country, thereby enabling further federal tax revenues and penalties to be identified from a wider global asset base.

The Act created historic client identification, disclosure and withholding obligations as part of that US tax evasion fight. Non-US banks and investment funds were not the only ones affected; non-US trust companies were hit, too. The waters of FATCA are still not 100 per cent clear, but they have forced a scramble in many jurisdictions that previously relied on business from the US.   

Following the global climate of increased transparency and openness, automatic exchange of information is the order of the day; the US now has more than 50 Model 1 IGAs signed and active, with a further 54 Model 1 or 2 agreements under discussion.

Not to be left behind, the OECD is following suit with the introduction of its own automatic exchange of information regime: the Common Reporting Standard.

The Russia Factor

The wealthy of Russia are facing a challenging time, too, with the Russian government setting its sights on the offshore business of Russian entities and individuals.

The concept of ‘deoffshorization’ is similar to the US approach with FATCA; it introduces significant changes to the rules governing the reporting and taxation of participation interests by Russian tax residents in controlled foreign companies (CFC), resulting in the profit of a CFC being imputed as taxable profit of a Russian tax resident controlling such a CFC at the usual Russian tax rate (20 per cent for legal persons; 13 per cent for natural persons). The legislation has any foreign-controlled entity in its sights, which means trusts set up by high net worth Russians to manage their wealth must comply with the effects of deoffshorization wherever they are housed.

Global Families, Global Business

In a post-financial crisis economy, the world’s powers have been looking to boost coffers in any way they can. The independently wealthy of the world are getting swept up in the wake.

As investment returns became difficult to achieve domestically, wealth globalised. The globalisation of the trust follows the globalisation of families, as generations spread their wings and move their own bases overseas. It means that the traditional family office, based in one jurisdiction, has had to become more flexible and mobile. Working with partners who have multiple offices in all key jurisdictions is increasingly the direction the sector is moving.

In reality, the world of private wealth in 2015 is not a straightforward one. Increased regulation and scrutiny hits not only multinational corporates, but anyone who has wealth to invest. Families are no different. The trend of increased globalisation of families is predicted to continue, as well as a move towards a more institutional approach to wealth and risk.

The family office is more and more mirroring those corporates, and in turn they must adapt more formal governance structures, implement risk management programs and embed more rigorous controls. The days of all eggs in one basket are gone; in their place rises a sector with sophisticated approaches to fraud, cybersecurity and risk. Change is coming at a much more rapid pace than during the global financial crisis as family offices realise those with strong risk management frameworks are often better prepared to withstand market disruptions and other threats – and, of course, the ever-moving tax scrutiny from organs looking for more revenue from savvy investors.

And to diversify that portfolio, to ensure the legacy, the family is going global.