For the first time ever, Asia has clinched the top spot as the region with the most high net worth individuals, say the latest wealth reports. As the number of Asia’s wealthy skyrockets, so is demand for tax efficiency and trust structures, and – undoubtedly – competition among legal advisors.
The excitement has come to a close at the London Olympics, in which the U.S. asserted its dominance in the sporting arena. In the race for wealth, however, North America has lost gold to Asia for having the largest number of high net worth individuals (HNWIs), says an annual wealth report released in June this year by Capgemini and the Royal Bank of Canada (RBC). The number of Asia-Pacific HNWIs soared to 3.37 million in 2011, compared to 3.35 million in North America, and Europe’s 3.17 million. With a burgeoning wealthy community, Asia’s rich are turning towards the region’s two tax-friendly growing fund management centres – Hong Kong and Singapore – for investment opportunities. Demand for trusts is also surging. Hong Kong’s proposed reform to its trust law is set to make the territory more competitive, but to what extent?
A tale of two cities
“Asia in particular is recognised by many as the only region in the world that is still growing significantly,” says Steven Yeo, senior vice president and Asia chief legal and compliance officer at Manulife. “I understand that over the next decade or so, the global middle class will grow by about a billion people, and 85 percent of those will be in Asia. If the first statistic does not surprise you, the second one certainly makes my jaw drop.”
Capgemini and RBC’s report reveals that the number of HNWIs in Asia has grown at a rate of 1.6 percent in Asia – twice as fast as the global average. Within Asia, Hong Kong and Singapore are quickly emerging as top destinations for private wealth management. They flaunt competitive tax regimes and healthy regulatory frameworks, cultivated by Asian demand, as well as an inflow of funds from the West.
“Over the last few years, there has been a flight of funds from Europe and Latin America to Asia, in reaction to things happening in those regions. Asia is seen by many as a more user- friendly region to hold funds, and Singapore and Hong Kong have benefited from this perception because they are the two main fund management and trust centres in Asia,” says Michael Olesnicky, Greater China tax head and chair of the Asia-Pacific tax group at Baker & McKenzie.
“The Hong Kong market is uniquely positioned for Greater China and North Asia, while Singapore has certainly staked itself out as the key player for Southeast Asia,” says Todd Beutler, wealth management and private client services partner at DLA Piper. “Singapore continues to build itself up, and has created an attractive private wealth industry there, not to mention funds and other financial service industries,” he adds.
In fact, according to another wealth report released by the Boston Consulting Group (BCG) in May this year, Singapore has nearly one in five people that are millionaires – up 14 percent in 2011 from 2010 – while Hong Kong has the highest concentration of billionaire households proportionate to its size.
Driving growth
So, what is driving this growth? In Asia, and certainly in Hong Kong, the outpouring of China’s wealth across the region is noticeable, as the nation’s booming economy bears fruit. The number of millionaires in China is growing exponentially – BCG reports a 16 percent rise over the past year – and is right on the heels of the U.S. Money is also swiftly flowing into the hands of the newer generation and young entrepreneurs. Capgemini and RBC’s report finds that the percentage of inherited wealth in the Asia-Pacific region has more than doubled in a year to 23 percent from 11 percent. “We are definitely seeing clients that have just acquired wealth and are fairly young. A lot of our work for that segment of clients is coming from China in the pre-IPO space,” comments Long, Lee Syin, Asia head of trusts at Walkers in Singapore. “That is an area the professional trustee companies also see as an interesting market.”
Asia’s family-owned businesses and the pre-IPO space are key drivers of growth, agrees Beutler. Compared to the U.S. and Europe, many of the largest businesses in Asia are still privately held. “Even when a business goes public, the founding family tends to retain significant if not controlling stake in the business. Asia will continue to see dynamic growth compared to anaemic growth in Europe and the U.S. – and this will continue to generate significant wealth for the high net worth community throughout Asia,” asserts Beutler.
The taxman cometh
A major selling point of Asia’s flourishing cities lies in their attractive and simpler tax provisions for both companies and residents. The lower taxation rates, fewer regulatory hurdles, and wealth accumulation opportunities in metropolises like Hong Kong and Singapore are enticing the wealthy community abroad to migrate eastwards for an alternate lifestyle. Jim Rogers, the co-founder of the Quantum Fund, and Facebook co-founder Eduardo Saverin are but two examples of many who have recently taken up Singapore as their new home.
But despite the lure of tax efficiency in Asia, experts comment that the issue of compliance – with a big emphasis on tax enforcement – is now coming under the global microscope. The U.S. is leading the charge with its newest Foreign Account Tax Compliance Act (FATCA) rules, which targets compliance involving foreign financial assets and offshore accounts. Asia is responding, with jurisdictions like Indonesia and the Philippines increasing efforts to clamp down on tax avoiders. In China, the focus has generally been on corporations, but some lawyers believe that the government will soon set its sights on individuals as well.
These changes, in addition to several intra-family issues, are spurring Asia’s wealthy to implement full private client structures to address their needs, notes Beutler. “They are not waiting till the last minute now, and that’s probably a function of what you see in the Hong Kong and Singapore papers about some of the fights in the families, families facing tax, or other regulatory issues over the death of a founder. Couple that with the increased tax enforcement and tax transparency being driven by the U.S. and Europe in particular, and it’s causing families that have multinational interests to take care of these issues now,” he adds.
It’s all about trust
Beneficial tax arrangements and high economic growth are certainly swelling the pockets of a number of cash-rich individuals and families in Asia. With all this liquidity, what are Asia’s wealthy doing with it? Legal professionals observe a notable growth in trust-related advisory and contentious work. Trusts are flexible products, and are set up for numerous reasons, including the management of heirs, long-term ownership and security, and to minimise social and political risks. While the concept of trusts is established and has been used for generations in Europe, Latin America and North America, it is still unchartered territory for many Asian clients. “There is a growing market among Asian families on how they can use trusts for their needs. The whole concept is fairly new to them, and there is an education process as well that goes in when we deal with such clients,” says Long of Walkers.
As appetite for trusts grows in Asia, lawyers are noticing a marked increase in the demand for customised trust structures, in line with cultural nuances that may not be present in the West. “In this part of the world, it gets interesting because families here have unique concerns and motivations for wanting to set up a trust. Unlike their counterparts in other parts of the world, the starting point for setting up a trust is not necessarily centred on tax mitigation,” says Long. Instead, what matters is the need for families to consolidate their global assets into a long-term structure that allows the flexibility to manage their assets holistically from a single point of reference, adds Long. “We recognise that the patriarchs we work with have built thriving family enterprises anchored on simple Asian values of hard work, sacrifice and discipline; and coming from emerging economies they are naturally concerned with the need to secure their assets against the threats of political and social unrest and to provide for their dependents. Culture and language notwithstanding, it is extremely important to understand what these families really need, because a large proportion of Asia's wealth is still being held by the first generation wealth creators, and these Asian patriarchs are extremely pragmatic and value practical advice,” observes Long.
“One of the changes in the last few years is that Singapore has skyrocketed as a trusts and fund management centre. The jury is still out on whether it will overtake Hong Kong in this regard, but it is a close call,” says Olesnicky. The two Asian financial hubs continue to jostle with each other for Asian wealth management dominance, whilst striving to remain competitive against the more lucrative offshore financial centres.
“Both [Singapore and Hong Kong] need to continue their trust law reforms to remain competitive with the more-established offshore trust jurisdictions. They need to be able to move fast and adapt to changes in the market,” suggests Beutler.
The most recent move was made by the Hong Kong government, which launched in March this year a two-month public consultation on its draft trust law reform legislation. Buoyed by the positive reception it received from a consultation held in 2009, the reform aims to strengthen the competitiveness of the territory’s trust services industry and bolster its status as an international asset management centre.
The consultation includes amendments to the Trustee Ordinance and the Perpetuities and Accumulations Ordinance. The main proposals include a statutory duty of care on trustees, the power for trustees to appoint agents, nominees and custodians, and to insure trust property against risks of loss, and improve the protection of beneficiaries’ interests.
Finally, the reform proposes that a reservation of the settlor’s investment or asset management powers will not invalidate a trust, and the outdated rules that set time limits on the duration of trusts and the accumulation of income be removed.
The proposed changes will make Hong Kong trusts more attractive, states Olesnicky, who points out that Hong Kong is already a very established trusts centre. “The difference is that trustees in Hong Kong have been successfully managing trusts governed under foreign laws. That hasn’t stopped Hong Kong from developing a very dynamic trusts industry. But hopefully, with these changes, we will see more trusts being established under Hong Kong law,” he says. Indeed, trust law reform is a first and necessary step towards making Hong Kong trusts more effective. But, in terms of building up the infrastructure, a trust can be set up anywhere in the world, and it is where it is managed and controlled that influences where the trust industry is based. This is where several industry experts say Hong Kong has been very successful.
“I think the Hong Kong proposals are much more balanced than what we have seen in some of the more adventurous offshore financial centres. Hong Kong is attempting to modernise the worst restrictive rules, but without going completely overboard,” states Olesnicky.
Furthermore, Olesnicky points out that when setting up a trust, one usually needs a company under the trust. “The problem we continue to face is that it is still not attractive to use Hong Kong companies. So, even if we have a plethora of Hong Kong trusts being set up under this new regime, I don’t think people are going to be rushing to set up Hong Kong companies. Hong Kong’s company law is too restrictive and inflexible at the moment, so I think people will continue to use BVI or Cayman companies until Hong Kong simplifies her companies law,” he says.
Hong Kong’s trust law reform was tabled for the second half of this year, but the recent territory’s leadership change and other legislative priorities suggest with an increasing likelihood that the proposals will be shelved until next year.
Not too bad for business
While Hong Kong and Singapore battle it out for wealth management supremacy, lawyers note the mounting competition among law firms offering private client services in the region. “Whilst the competition in Hong Kong has always been there, and the wealth management industry has grown, especially in Singapore. We are expecting more firms to come to Singapore, and it will be interesting to see how they tap into the market. There is immense potential,” says Long. Although Walkers established a Singapore office in 2009, surging demand for trust advisory services in Asia prompted the firm to open an Asia trust practice last July, headed by Long. It is the same demand that prompted Guernsey and Jersey-headquartered firm Collas Crill to open an office in Singapore last August, recently hiring trust and funds specialists Marcus Hinkley and Leon Santos to grow the practice. Meanwhile, existing law firms are beefing up their own private client outfits – Beutler’s arrival to DLA Piper in August this year bolstered the firm’s tax and trust expertise.
Aside from private client firms, the compliance push in Asia is drawing in several international and local firms, offering compliance and regulatory support to clients, who are looking to invest and want to ensure their interests are well protected. “It is interesting and good for Asia in general, because we are seeing the level of professionalism going up. There is recognition of that, and hence that is why there is so much interest in Asia. I think not just economically, but on the regulatory front too, people are also acknowledging that Asia is not a bad place to do business,” says Long.
Full speed ahead
Looking ahead, private client lawyers and professionals predict a further uptick in wealth management and trust advisory activity in Asia. Long believes that an increase in alternative dispute resolution in the HNWI space may be on the horizon. “We have been seeing interest on that front, particularly in the context of family and trust disputes since there are benefits from a reputational perspective, and it is ideal for clients that generally want to keep their family affairs private.”
To manage conflict between beneficiaries, Long highlights the STAR trust – a Cayman non-charitable purpose trust – as a useful structure for clients to utilise, particularly in cases where the settlor may have wide-reaching philanthropic objectives that may not necessarily qualify as being “charitable” in nature. Such non-charitable purpose trusts typically have no limit on perpetuity, and the settlor has the flexibility of appointing neutral third parties to enforce the trust, while specifying the amount of information that each beneficiary receives in relation to their entitlements under the trust.
Nonetheless, Asia will continue to be the growth engine of the world in a lot of ways, says Yeo of Manulife. “A lot of companies will be growing here, but that also means the competition for expertise and resources will be great,” adds Yeo. Asian clients are becoming multijurisdictional, with family, networks and assets that span across many borders. This stresses the need for legal service providers to have a capable understanding of cross-border awareness and expertise. To meet the evolving and emergent private wealth demands of Asia’s wealthy, law firms will need to carefully examine their business models to tackle the shifting industry landscape, and make sure that they are appropriately staffed for growth in this booming industry.
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