The U.K. Treasury plans to publish a new compliance strategy around the overseas entities that wealthy individuals use to conceal their assets, building on what the government called a “substantial progress that the U.K. has made in tackling offshore tax evasion” since the last plan in 2014.
Fighting offshore tax evasion has increasingly become a priority for governments in the wake of public data leaks such as the Panama Papers, as almost half of the companies cited through that leak of 11.5 million documents were registered in the British Virgin Islands (U.K. territory). In addition, the Panama Papers cited almost 2,000 U.K.-based intermediaries that helped individuals or entities to evade tax.
Alongside a new compliance strategy, the U.K. government is seeking to widen its data-sharing powers as part of the fight against tax evasion. Its high-net-worth unit, focusing on the tax affairs of rich individuals, has brought in more than 1 billion pounds ($1.3 billion) since it was set up in 2009.
Guernsey of Increased Attractiveness for Family Offices
Guernsey is increasingly being considered as a base for family offices. David Bowen, Head of Deloitte’s Private Office Consulting practice, commented: “We are starting to see a shutdown of jurisdictions which people would have typically looked to use, and they are relocating trusts or shoring up substance requirements where trusts are involved. The focus is to move away from areas seen as tax havens to areas with a more robust framework, and a real focus and defensibility around using the locations”.
One of the biggest fears for families is to be hacked, which can lead to the destruction of wealth, and these families are looking to protect themselves better from data and cyber protection.
Guernsey’s commitment to tax transparency and sharing information, while still offering privacy by refusing to adopt public registers of beneficial ownership, is very important. Guernsey is already improving its family office capabilities to attract more business, by refining its legal and regulatory approach to provide the most supportive global environment and ecosystem for servicing private capital and wealth, and to meet the evolution taking place in the world of the family offices.
MiFID II and Multi-family Offices
Many MFOs have underestimated the challenges that MiFID II would bring to them. Preparation was last minute at best, at worst nonexistent. Many believed that the directive was not directly relevant to them and that it would only impact larger financial institutions. But of the 9,000 firms affected by Mifid II, 6,500 are small-to-medium enterprises, and many of these are MFOs.
Close to one year after implementation, little has changed. Preparedness remains low among MFOs, in part due to a belief that regulators are failing to crack down on non-compliance; an unsurprising reaction given the wave of criticisms directed at the FCA for its limited interest in fining big banks and asset managers for non-compliance. Just six firms have so far reported themselves to the regulator.
As MFOs often deal with a significant amount of different financial players, their obligations under Mifid II are highly challenging. Amongst the many demands, transaction reporting requires MFOs to keep records of all conversations, activities and communications they have engaged in, storing in a digitised, tamper-proof format to be made available at the regulator’s request within 72 hours.
GCC Wealthy Clients Poorly Prepared for Wealth Transitions
According to a recent survey by Jersey Finance’s new office in the DIFC, 92% of HNWI GCC clients are poorly prepared and inadequately structured for the transition of wealth across generations.
There is an estimated $1 trillion of wealth set to transition between families and generations in the Middle East during the next decade, which provides immense opportunities for wealth management companies in the region. According to the research, prepared in conjunction with Hubbis, there is a growing preference from HNWI clients to professionalize the way succession planning is managed, despite the lack of preparedness.
Offshore jurisdictions that can demonstrate their dedication to transparency, ethics, and quality will survive and prosper in this changing environment. The use of offshore jurisdictions is highly driven by the geopolitical climate and fears of instability (25%) and succession planning (25%) followed by privacy and confidentiality (17%), asset protection (17%), tax efficiency (8%), and diversification of jurisdictions and assets (8%).
According to the findings, HNWI clients in the Middle East understand that the selection of an International Financial Centre is critical, with reputation being the most important factor. As such, there is a clear trend towards Tier 1 IFCs that are noted for their expertise, regulatory robustness and transparency.
The report further said that the more sophisticated HNWI clients in the GCC are concerned about the cost of having multiple structures in multiple jurisdictions, according to one third of respondents. 75% of industry experts agree that clients are looking to increasingly concentrate their assets and structures in one center.
Offshore corporate structures and private trust companies appear to be the preferred options for the core of GCC HNWI wealth structuring, while trust structures are considered the next most important, alongside citizenship and residency planning.
Dubai International Financial Centre (DIFC) Growing Strong
The DIFC is revamping its wealth management offering in the free zone, to attract wealthy families from all over the world to base their family offices and wealth management structures there.
The ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, announced new laws in March that enhance the existing DIFC trust legislation in line with international best practice, including promoting better trust administration and giving greater certainty and flexibility to settlors, trustees and beneficiaries. It also introduces a completely new regime for the market, promoting better creditor protection, succession planning and lifetime private wealth planning for family businesses.
Both form part of the DIFC’s ambitious 2024 growth strategy, by which time it hopes to be the leading centre for private wealth management and one of the world’s top 10 financial centres. In the old days, trusts were seen as a hiding place for assets, but now they are seen as a sensible approach to managing and owning wealth, particularly for the benefit of families.
Sheikh Mohammed also introduced new residency laws in the UAE this year to make it possible for professional expats to obtain ten-year visas, rather than the current three-year ones. The aim is to attract wealthy investors, entrepreneurs and workers to put down roots.
According to BSA Ahmad Bin Hezeem & Associates LLP, adviser to HNWIs and Corporates on UAE and DIFC laws, a lot of people are relocating to Dubai and restructuring their assets internationally, taking advantage of the double tax treaties between Dubai and the rest of the world. For example, the Dubai government has made considerable efforts to attract Chinese citizens in the last 24 months, including allowing visitors to be granted visas on arrival in the same way that European citizens are.
$12 trillion in Sustainable Investing Assets in the US
A recent report by the US SIF Foundation (2018) found that sustainable, responsible and impact investing assets have expanded to $12.0 trillion in the US, about one fourth of the $46.6 trillion in total assets under professional management in the country. This is up 38% from $8.7 trillion in 2016.
Much of this growth is driven by asset managers, who now consider environmental, social or corporate governance (ESG) criteria across $11.6 trillion in assets, up 44% from $8.1 trillion in 2016. According to the findings of the report, the top three issues for asset managers and their institutional investor clients are climate change/carbon, tobacco and conflict risk.
From 2016 through the first half of 2018, 165 institutional investors and 54 investment managers controlling $1.8 trillion in assets under management (AUM) filed or co-filed shareholder resolutions on ESG issues.
Surging Number of Billionaires in China
According to the latest UBS/PwC Billionaires Report (2018), total assets of all billionaires globally increased by almost 20% to $8.9 trillion over the past year:
The number of Chinese billionaires has risen to 373 in 2017 from 318 in 2016. Their assets increased by 39% to $1.12 trillion. The growth rate in the whole of APAC was 32%.
China created two billionaires each week, while Asia as a whole made three new billionaires per week. But as business remains risky in the region, China also lost one billionaire per week (106 new billionaires vs. 51 ex-billionaires).
North and Latin America lagged the world’s growth rates, with an increase in assets of 12%, reaching a total of $3.6 trillion.
Thanks to a strong currency development, Western Europe had strong wealth growth over the past year. Assets increased 19%, while the number of billionaires only rose 4% to 414.
Over the last decade, Chinese billionaires have created some of the world’s largest and most successful companies and hugely raised living standards. Of all Chinese billionaires, 97% are self-made. Last year, 89 Chinese businessmen made their first billion dollars, three times more than in the U.S. and EMEA.
To capture this growth, the big four Chinese banks (ICBC, Agricultural Bank of China, Bank of China and China Construction Bank), have all recently announced establishment of wealth management units within their business operations.
Family Offices Sprouting in Hong Kong and Singapore
The number of family offices in Hong Kong and Singapore quadrupled between 2015 and 2017 according to the Monetary Authority of Singapore which added that those funds can benefit from a number of attractive incentives, such as tax breaks and residency being offered to them.
The family office is a relatively new concept in Asia and, although there is no accurate data available, it is estimated that there are less than 400/500 of such firm in the entire region, compared to thousands in the West where wealth held by the population is of much older origins.
The activity of setting up family offices this year has been substantially more than the previous one, and this growth should continue on the current pace. It is estimated that the number of new family offices in Asia rose by 15% in the first three quarters of this year compared to the same period last year. This momentum was aided by the boom in Hong Kong for initial public offerings which saw record money raised mostly by Chinese tech firms, turning many founders into millionaires and billionaires.
Asian family offices are evolving from being just investment focused to offering a platform for dispute resolution and succession planning, as the new generation in the family-owned businesses expand into newer areas.