Private wealth around the world - how did we get here?
In the first of a series of articles asking the big questions on private wealth provision, we explore some of the industry's history. Brian Carey, Director of Private Wealth at Intertrust Group based in Jersey, examines the global relationships that inform the private wealth market, the flow of work around the world and how International Finance Centres (IFCs) have built their reputations.
The story of modern finance is a globe-trotting narrative filled with great visionaries and colourful characters, unexpected plot twists and international intrigue. The interrelationships between the OECD-labelled "unco-operative tax havens" into which capital flows, and the major financial markets into which that capital is deployed, are truly fascinating. However, to tell the whole story of modern finance is too grand an ambition. The tale is a tome, far too thorough to explore in three articles or even three volumes.
Instead, we're going to look at one part of the story - IFCs. By exploring how they started and outlining their successes, we can set the scene for the next chapters, in which we will challenge assumptions and look to the future.
In the beginning...
Our story starts by crossing the seas and oceans; throughout the twentieth century the British Crown Dependencies, Overseas Territories and former British and European colonies - all benefitting from various degrees of legislative independence - recognised that their regimes could be leveraged to offer efficient wealth management services for international citizens. These were the forerunners to the IFCs of today, but some have argued that you can trace the origin of the finance centre further back almost 200 years.
The British example is analogous to what we see around the world today, where wealthy residents look for jurisdictions close to home that share language or cultural characteristics that can offer them favourable conditions for structured investments, wealth management and banking allied to professional expertise.
Europe has Luxembourg, Switzerland, the Channel Islands, Cyprus, Gibraltar and more; Asia has Hong Kong, Labuan in Malaysia, and Singapore; African nations and India tend to favour Mauritius; and the Caribbean Islands and Panama are popular for the high net worth individuals (HNWIs) of the US and Canada.
The IFC classification does, however, extend beyond those jurisdictions you might first think of when you hear the term. Even London is considered by some as having a tax advantage for non-domiciled individuals, not to mention countries like Ireland and Luxembourg, which have benefited from their location within the EU. The US too offers tax advantages to corporates and individuals, for both inward- and outward-bound investment.
Historically, these locations would be chosen for sheer convenience and advantageous tax regimes. But sometimes clients want to take advantage of a niche that a jurisdiction has carved out for itself - think of the Cayman Islands' association with ship registrations, or the Isle of Man's aircraft registry. However, these activities only deal with the private client's luxury assets.
Wealth management is still largely driven by geographic alignment and all the obvious benefits that brings to facilitating business: legislation, time zones, languages, cultural similarities, historic relationships etc. But could this be changing?
The move to mid-shore
One shift in recent years is the rise of the 'mid-shore' finance centres. Increasing regulatory influences, and the frequency of blacklists, so-called 'grey lists', and whitelists (many of which seem arbitrary in their methodology) have created a void that the 'mid-shore' centre has filled.
Recently, Abu Dhabi's ADGM and Dubai's DIFC or perhaps even Saudi Arabia's NEOM financial zone are the most prominent examples of these. But the EU itself is another case and it seems only a matter of time before entrepreneurial nations in Africa and South America seize the initiative and position themselves similarly.
Look to the future
But these are stories for another day. For now, it's sufficient to have set the scene, explored how and why IFCs have been established, and how they continue to evolve. Times have generally been good in the IFCs - even the financial crash of 2008 had a (relatively) small impact on the global offshore business - but can we always expect this to be the case?
Do those who live and work in IFCs just assume the good times will continue, and that the clients will always be there? Has the drive towards regulation and more transparent reporting been beneficial or could it ultimately prove detrimental for many IFCs? If the world is getting a little smaller again (due to travel restrictions and the rise in more protectionist, isolationist governments) could the IFC model as we know it be under threat? Is the global financial system about to go through a huge systemic shock?
These are just some of the questions we absolutely have to ask ourselves. Our story has just begun. Join us for part two next week.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.