The Citywealth International Financial Centre Survey
What the survey shows is that the future of IFCs and their financial services industry is still up for debate. Too add some context, The Financial Times recently said that centres in the West, like Switzerland, have nothing to fear from shrinking private wealth management because money from the East needs a safe home ‚Äì it moves for reasons other than tax planning, so ultimately the vast wealth being created will come back West. Our survey highlights South East Asia more than China.
On the reverse, Citywealth sees one trend rising to the surface ‚Äì shifting operations and people and new offices or locations to do business in because regulation has become detrimental to business growth or to capture international clients. With a finger in the wind estimate of potentially a million people employed in international financial centres, it represents a large population of highly educated people with lifestyle expectations who are staring into a future being shaken about by Western governments. However, the good news is that UHNW client requests are pouring in still and are so diversified that it seems likely the industry has less to worry about than at first it seems.
Q: 2012 has seen increased consolidation and media disdain for offshore islands. How do you see the offshore world in a year’s time?
Most respondents see more of the same, which is increased regulatory and jurisdiction pressure because of media focus, governments “playing to their electorate‚Äù and perceived “tax haven‚Äù status but most believe these problems will also apply to onshore.
“Little has changed over the years‚Äù, was one comment; “It has been a sustained pressure of tax transparency increasing across all jurisdictions.‚Äù Another respondent said, “The US, UK and Europe may see offshore money and its benefits start to flow East to be beyond the control of Western authorities.‚Äù
Some believe there will be more secrecy but that interests in the offshore world are so substantial and international that it will be very hard to dislodge them and that offshore islands are so skilled in tax-planning work that it will be hard to take them out of the equation.
They also believe that it is human nature to look for a deal and that the benefits of tax advantages will remain hard to resist and will continue apace once the political correctness being demanded today subsides.
Many see a considerably smaller number of players and say they are seeing several buy-outs a week caused by the harsh reality of the information exchange and tax-disclosure regulation causing a loss of business across the islands.
Others say the islands must protect their livelihoods more robustly or in ten years the offshore has the potential to see financial services disappear.
Q: What changes do you foresee?
Again the response is increased transparency and compliance to the detriment of the offshore centres, causing an overall contraction with a knock-on effect to the European and US economies because government regulation needs revenues. Service providers will adapt, but it will stifle innovation and confidentiality will reduce. At worst, a large banking licence will go, says one respondent and policing and penalties will increase or be introduced and governments of the larger economies could say anyone dealing with IFCs are immoral or there could be a time when professional investors will have to be invited to work offshore.
Many see more litigation, fewer relevant locations to do business with, trust consolidation, and reduction in the size of offices for investment managers. On the plus side, some will have to come up with more flexible products, while others say smart people will always work out where the benefits are and find them through tax legislation. New offshore centres may appear.
Q: Where will your business find growth in the next year?
Emerging markets are no surprise. The areas people highlight are: Russia, the Middle East, Africa, Asia and South America. Turkey also gets a mention.
One respondent sees UHNW, the Chinese middle class and French looking for a home in the UK and an increase in onshore work because Western institutions are seen as safe and there is scope for international trade using London as a hub.
“We have given up on Europe, Canada and the USA,‚Äù says another respondent. The middle ground was summed up by one respondent: “We will serve client needs and will continue to use offshore locations as long as we make clients aware of the impact of using jurisdictions. We believe it is more about sharing our philosophy of full transparency and compliance within the limits of law and regulations.‚Äù
On the business-management side, growth will come from increased tax incentivised investment opportunities, compliance work and organisations building excellence through leadership and education and focusing on integrity.
Q: Are you adding any new services or businesses to your current operation because of client requests or because you feel it increases your competitive edge?
There were a host of responses which included “not for the time being‚Ä¶‚Äù. The changes include:
• Higher-quality people who understand all the new cross-border tax and regulatory requirements. Positioning as a go-to knowledge leader for the changes;
• Opening new offices;
• Brochures in many different languages;
• Adding wealth advisory, IHT mitigation services;
• Immigration services;
• Asian business group;
• Compliance group;
• Family business consultancy;
• Using performance-improvement consultants;
• Increasing qualifications of staff;
• Re-work business model to lower costs and using more outsourced services for work.
Q: Has the Cyprus bail-in had an effect on you/your business? Does it worry you?
Comments included: “No effect other than to highlight the strength of other jurisdictions and the safety of big brand banks.‚Äù
A common concern was that other jurisdictions might adopt the bail in-philosophy. Also, “Worries and scares the hell out of me. Will be more careful with jurisdictions now.‚Äù
One UHNW client has decided to diversify across asset class, jurisdiction and institution. Another comment was: “Cyprus has always had a bad taste because of the Russian connection.‚Äù
Positive reactions for the Channel Islands came from clients moving money from Cyprus. Those with offices said, “We have endured some particularly hard-line questioning from clients since the bail-in‚Äù.
Another comment was: “Anyone who does business in Cyprus has seen an effect. Confidence in setting up Cyprus structures has gone and less interest in Cyprus companies as a result. However, existing companies are working well as long as the client doesn’t bank in Cyprus. There hasn’t been an outflow of clients from Cyprus despite the EU and clients generally view it as a good jurisdiction as long as they are not banking there.‚Äù
Another respondent said, “The situation was not as bad as anticipated in the end. It affected some clients but we have done work to turn this into a positive opportunity for them.‚Äù
Q: Are you opening any new offices in other countries to counteract a downturn in your own jurisdiction or to enable clients to use you around the globe?
There was a mixed response: 50% said “yes‚Äù ‚Äì these included opening an office in Russia ‚Äì and 50% “no‚Äù ‚Äì if they weren’t opening offices, it was mainly because respondents were in global organisations, while some said they were travelling a lot more.
One respondent said, “It is not about individual offices now but collective performance and passing work between the offices to utilise everyone’s cross-border skills.‚Äù Another said, “Global growth is a natural progression and not a measure to counteract the downturn.‚Äù
Q: What increase have you seen in your operating costs?
Costs are going up in a number of organisations, although not everyone said this was the case and many said costs remained static.
Cost increases were attributed to increased investment in staff, systems and accounting, which are squeezing margins. Also sub-contracting fees are adding to bottom-line costs. With more travel and offices, travel costs are increasing. One organisation said they’ve invested in a forensic and risk management business to get new work from the increased compliance. A financial services operation said: “Our main costs are always the same ‚Äì staff and offices.‚Äù
Q: Have you seen investors interested in your business or other businesses in private client?
The majority of resondents said “yes‚Äù. One said, “We have received three unsolicited letters in a year asking if we are up for sale.‚Äù “Another said, “We have been bought out by a private equity firm and are now on the look-out for other businesses.‚Äù A different respondent said, “We have had many offers for mergers and the like but have so far resisted on this front. We do not need to sell or merge and there is not a single penny of external debt in the whole group. This, I know, is rather unique, but it puts us in a very strong position and helps us to grow organically, rather than growth being achieved through acquisition.‚Äù
Q: What insights can you give us on how your business is evolving?
On staff, one respondent noted: “We have seen lots of movement from partners in the legal world who are worried about the stability of their law firms.‚Äù
There is a greater focus on keeping clients happy, new markets, expansion, and streamlining administration and IT. Respondents are also focusing on training and learning to keep ahead, and increasing focus on profitable parts of the business. Although one said “We focus on our staff always. My motto is ‚Äòculture eats strategy for lunch.’‚Äù The increase in international clients is also causing businesses to adapt to deal with them.
Another comment was: “We have concentrated on legitimate, well-advised, higher-value business as this is the most sustainable sector of the market. Another respondent said, “Someone once told me, ‚ÄòLong and slow gets the dough; hard and fast and it won’t last.’ I like to think I’m in the first category. My business has a solid capital base and has been going 17 years. Things look solid for evolving growth.‚Äù
Q: What do you think of the regulations being imposed on trustees in IFCs and the finance industry?
The replies were split down the middle, with many saying regulations would bring a more professional industry and so were for the good, while others said the moves have been “excessive and harsh‚Äù, and “challenging‚Äù. Comments included: “Bound to happen in this financial environment.‚Äù “You will be smart to be engaged in how the regulations are written and imposed.‚Äù And, “As usual, I suspect a rather large sledgehammer has been taken to crack the nut and missed the entire issue.‚Äù
Q: Do you like working specifically with Jersey or Guernsey in the Channel Islands? What are your reasons for and against?
Some respondents didn’t work with either island, while many couldn’t tell the difference.
Respondents said: “I have a similar opinion of both Jersey and Guernsey, and no particular preference for either. Both have good local court systems to regulate trusts, well-qualified professionals, and are located in a convenient time zone for London.‚Äù
The negative comments included: “My experience is that practitioners in Jersey have become over-zealous in their internal controls which have little or no client sensitivity,‚Äù and, “They are efficient but expensive.‚Äù On the upside, comments included, “Very good infrastructure, well-regulated, long-established professional firms of the highest calibre globally.‚Äù And “Accessible with good-quality professionals who understand UK law.‚Äù
Many respondents said the Channel Islands represented an important part of their business and some did favour Guernsey over Jersey and vice-versa.
Q: What are UHNW clients asking you for and what increases in requests do you see in the next year?
Whilst clients can be categorised as “More bullish, generally‚Äù, it seems there is no single thing that is driving client needs. Below are some of the responses which give a feel for the range of requests:
• Financial planning is increasingly complex and clients need help with it and family governance;
• Confidentiality and estate planning including capital preservation;
• They would like more simplicity: not easily delivered in this environment;
• Reduction in paperwork, more internet/web/application access to information;
• More investment choice, slicker service, security;
• More help developing successful “messages‚Äù in order to increase client sales;
• Private equity and acquisition of assets;
• Tax mitigation, efficiency and transparency;
• Making sure they are fully compliant;
• Creative thinking;
• Banking safely and with banks who understand their client’s demands from overseas clients particularly;
• Effective onshore structures;
• UHNW clients are looking for a broader range of legal advice that is applicable to their interests around the world.
Which organisation or individual in the private client world would you highlight for praise?
Below is a small selection of the names mentioned:
• Rob Laing, Rawlinson & Hunter;
• Paul Craven, Goldman Sachs London;
• Bill Benz and Joe McDevitt in PIMCO, London;
• Rupert Ticehurst, BLP and Mark Bridges, Farrer & Co;
• Kleinwort Benson (Jersey) ‚Äì “I like the people there. They believe in old-fashioned relationships and treating people fairly. This is rare in today’s world and a breath of fresh air.‚Äù
• Richard Hay, Stikeman Elliot.
Q: The Financial Times says Chinese wealth is on the move to the West and is set to increase. Do you think this is right? Please also tell us what is your experience is of dealing with Chinese?
A lot of disagreement on this topic and the majority have not seen Chinese wealth ‚Äì which is similar to Citywealth’s experience. We believe at the moment many do deals around the world but operate from Hong Kong although a recent visit to Cyprus did reveal interest from the Chinese in the Schengen visa but this was thought to be simply to use as a business stepping stone. Some believe new financial centres will emerge to deal with Chinese money which has straightforward demands which include banking and credit. One respondent said, “Personally I have never seen a Chinese client. I suspect that they will stick to themselves in Chinese-based organizations embedded in jurisdictions that are helpful to them, similar to what we have seen with Japanese clients for the last 30 years. They were always very rare in an offshore environment ‚Äì certainly outside Asia.
Another respondent said, “I think the real wealth is going to come from the great resource economies in South America, Africa, South East Asia, Canada, and Australia. However despite the lack of work seen so far, it doesn’t stop the business development. “I’m a member of a group called the 48 Group Club which promotes relations between the UK and China and has strong links to China. My social experience of dealing with Chinese is excellent and I have enjoyed a few jovial dinners/banquets with them. I have yet to do actual business with them, though.‚Äù
However there were some respondents dealing with Chinese mainly from Hong Kong who offered advice. “I think this has been the case for some time now, so is nothing new. The Chinese, as business people, are very astute and shrewd and the cultural differences must be understood before dealing with them; but once you get this right then they can become loyal and trustworthy associates.‚Äù
Another comment: “In dealing with the Chinese keep in the front of your awareness three key ideas: 1) Culturally, their time line is long-term; 2) They do not have the same value/ethics we have grown up with in our “Western Culture‚Äù; 3) At heart, they are risk takers.‚Äù
A number of respondents said that the Chinese are not “easy to work with‚Äù.
A story from a property lawyer in Cyprus underlined this: “They often want to sit in your office for ten hours checking a contract and sometimes will stay through the night. This is on something that would customarily take a European an hour or two at the most.‚Äù
The Citywealth International Financial Centre Awards submission deadline is 12th July.
The awards ceremony is 23rd January 2014.