Hong Kong has long been renowned as a key international wealth management centre, but a number of recent developments – such as the GBA Wealth Management Connect – has solidified its status. And lawyers specialising in private wealth have found themselves very busy too.
In spite of being battered by U.S.-China trade tensions, social unrest and more recently, COVID-19, Hong Kong’s private banking and wealth management industry has stood firm. The most recent Asset and Wealth Management Securities Survey from the Securities and Futures Commission (SFC) has found that 32 industry assets under management was HK$9.1 trillion ($1.2 trillion) in 2019, an increase of 19 percent from HK$7.6 trillion (US$ 1 trillion) in 2018. “While these figures pre-date the onset of COVID-19, wealth managers’ financial results for 2020 have also shown significant growth,” says Big Four firm KPMG in a report. “Furthermore, despite recent perceptions or predictions of capital outflows from Hong Kong, the city has experienced continuous inflows.”
Lawyers working in the private wealth space in Hong Kong have also witnessed its resilience over the past year or two and point to a number of key factors that work in the city’s favour. “There has been a 20 percent increase in UHNW individuals in China in the past three years, of which more than a fifth are based in the Greater Bay Area,” say Simon Green, Jeffrey Lee and Ray Ng, international partners at Charles Russell Speechlys (CRS). “Hong Kong is a unique gateway to Mainland China. Clients who are keen to transact with Chinese counterparties prefer to do so with the familiarity of the common law system in Hong Kong.”
The three lawyers add that the trans-parent tax regime in line with global standards and a proven track record of a business-friendly environment, “for example, immigration policies,” are reasons behind Hong Kong’s robustness as a wealth management hub. “Hong Kong also has an extensive network of double tax agreements both with China and the rest of the world. This adds to the many factors why Hong Kong remains Asia’s largest cross-border private wealth management centre, second globally only to Switzerland,” say Simon Green, Jeffrey Lee and Ray Ng. “There has been significant development in terms of the relative ease for Chinese companies to list in Hong Kong as opposed to, for example, the U.S.”
Kevin Lee, head of the private wealth practice for Greater China at Stephenson Harwood, points out to some recent factors in favour of Hong Kong. “On the policy side, we see Hong Kong regulators catching up with Singapore in taking steps or introducing incentives to attract family offices and onshoring of funds. Hong Kong regulators are also working hard to make the city an ESG financial hub,” he notes. “On the market side, more PRC companies are moving their IPO back to Hong Kong due to perceived U.S. antipathy, and also pressure from China such as the regulatory scrutiny on Didi following its listing in the US. China Securities Regulatory Commission (CSRC) may be less rigid about Hong Kong listing in terms of cybersecurity and other related concerns. In terms of the wealth management sector, pre-IPO or post-IPO planning and employee benefits structuring would be very important for lawyers. But for the broader wealth management industry, the heavy IPO activity would have more of an impact after the lock-up periods.”
EVOLVING NEEDS
The ongoing COVID-19 pandemic has complicated lives for many, and HNWIs are no exception. “From a practical perspective, the restrictions on travel and general mobility (as a result of conservative quarantine measures in Hong Kong) have raised concerns about how easily wealth can be accessed,” say Simon Green, Jeffrey Lee and Ray Ng at CRS.
“Diversification of asset location is now balanced against considerations around challenges associated with access to assets held in wealth structures several time zones away. It usually requires more logistical planning to attend a board meeting in such jurisdictions and this additional layer of administration can raise significant tax implications stemming from central management and control. This has resulted in clients favouring simplification when designing asset protection structures.”
They add that departing from mere income generation, clients are also reviewing their personal affairs and in particular, stress-testing their succession plans to ensure that they are fit for purpose in what can be a volatile environment.
This is part of a broader trend of the evolving needs of HNWIs and family offices in Hong Kong and Greater China. “There has been stronger emphasis on the succession plans of individuals and their family offices in recent years,” say Simon Green, Jeffrey Lee and Ray Ng. “Wealth creation without wealth protection is a recipe for disputes and litigation, and this current shift of focus from creation to protection represents progress along a learning curve that is already strewn with hard lessons.”
Kevin Lee of Stephenson Harwood points out that the next generation HNWIs are increasingly interested in sustainable investing and ESG. “It’s an evolving market and the practice team and the firm as a whole are building up our ESG focus,” he says. “Next-generation HNWIs also seem to be increasingly interested in digital assets which we also focus on. We work very closely with trustees on issues such as custody and succession of digital assets, how to safeguard passwords when the owner of the digital assets is mentally incapacitated, and so on.”
In terms of actual disputes, Simon Green, Jeffrey Lee and Ray Ng say that the fact that a significant proportion of Asian wealth is held via offshore trusts and structures means that disputes are often litigated in court proceedings in BVI and/or the Cayman Islands, either exclusively, or in parallel with arbitration and/or court proceedings in Hong Kong.
“Since we are one of very few onshore firms in Hong Kong who can also provide offshore advice and representation, we are able to undertake both the Hong Kong and BVI/Cayman law aspects of any such dispute,” note Simon Green, Jeffrey Lee and Ray Ng. “Although half of the global 100 law firms have a presence in Hong Kong, there are fewer than a handful that provide private client advice, and even fewer with our experience and pedigree. In addition to advising HNWIs and family offices directly, we are very fortunate to receive regular referrals from private banks, trust companies and other law firms that recognise the value that we can add to their clients’ succession plans.”
As part of building out adjunct services to private clients, CRS now has a 360º property capability that focuses on both residential and commercial property. “Importantly, and uniquely, we are able to advise on local as well as UK property matters, both from teams within our HK office,” the lawyers add.
LOOKING FORWARD
In the coming year or two, Kevin Lee sees more activity in Hong Kong and Singapore arising from global minimum corporate tax implementation and the need for economic substance, potentially driving some businesses away from offshore to mid-shore. “As a firm with offices in both locations we will have the benefit of offering both Hong Kong and Singapore as the structuring centres for our clients,” he says. “And because we work with many closely-held corporations and controlling families, we expect to see more requests for structuring advice from such businesses moves.”
Meanwhile, Simon Green, Jeffrey Lee and Ray Ng note that clients are increasingly concerned with the fragility of the global business environment and are seeking good advice, early. “There will be greater focus on simple, yet robust and flexible wealth structuring,” they say. “In recognition of this demand and to keep pace with progressive concepts of relationships and family, key jurisdictions are likely to update their trust and other wealth-planning legislation. BVI has already pioneered this response with its recent amendment to the trust firewall provisions of section 83A of the Trustee Act.”
They add that disputes and litigation will continue unabated, as progress along the learning curve continues to expose vulnerabilities in older and less robust wealth-planning arrangements and structures. “From a property perspective, the appetite for investing in and holding real estate (whether locally or internationally) as part of a balanced portfolio of assets is unlikely to dissipate and we expect to continue to be busy supporting our clients on such transactions,” say Simon Green, Jeffrey Lee and Ray Ng.
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