The Rise of International Financial Centres in the East
By Raymond Wong
For the first time in modern history, the Asia-Pacific now has more rich individuals than North America. The rising wealth in China, India, Indonesia and Thailand has greatly contributed to the number of affluent individuals in the region. According to the World Wealth Report 2015 by Capgemini and RBC Wealth Management, the population of high net worth individuals (HNWIs) across the Asia-Pacific grew 8.5 per cent in 2014 to 4.7 million people, while total wealth increased 11.4 per cent to US$15.8 trillion.
The rapid creation of wealth across the region, a trend that has been prevalent for nearly two decades, has resulted in the growing demand for wealth management services in Asia. A large number of companies specialising in this sector have established their presence in the region. This includes leading global names that are now wooing clients in this part of world, as well as homegrown firms that have the advantage of understanding the peculiar needs and nuances of the region's wealthy.
The growth in the wealth management sector has also triggered the need for strong international financial centres (IFCs). Traditionally, the most well-known IFCs - such as the British Virgin Islands, Cayman Islands, Bahamas and Luxembourg - were located in the Caribbean and Europe, which historically had more HNWIs than the Asia-Pacific.
However, as the global HNWI concentration moves from the West to East and the needs of the Asia-Pacific's HNWIs become more sophisticated, we have seen bigger demand for financial centres here.
Growing Role of IFCs
Singapore and Hong Kong have emerged as the two leading financial centres in Asia. In fact, Singapore is poised to become one of the world's largest wealth management centres. The nation has the highest percentage of millionaires per capita in the world after Switzerland, Bahrain and Qatar, with at least one in every 10 households being a millionaire.
Singapore is ranked second in the world, after Hong Kong, in terms of having the highest density of ultra-high net worth individuals (UHNWIs), as highlighted in the Boston Consulting Group's Global Wealth Report 2015.
Many investors see Singapore's business incentives and its extensive tax treaty network with over 70 countries as big plus points. At the same time, its prime geographical location, coupled with it being a member of Asean - a bloc comprising 10 countries with a combined population of 600 million and a gross domestic product of US$2.5 trillion - is a big advantage. Its stable political environment and regulatory framework have also helped to establish it as a leading global player in the sector.
Meanwhile, Hong Kong has benefited from its stature as a global financial hub that provides a wide range of products and services to local and international investors. Its stock market was ranked fifth largest in the world in terms of market capitalisation at the end of April 2015. It is also one of the world's largest foreign-exchange markets in terms of turnover, and the largest renminbi hub. All these aspects make it an attractive destination for wealth management firms and HNWIs. The fact that Hong Kong is widely seen as a springboard to China due to the favourable tax treaty it has in place with the country further adds to its lure.
The 'Midshore' Alternative
While Singapore and Hong Kong have clearly established themselves as reputable onshore jurisdictions, Labuan International Business and Financial Centre (Labuan IBFC) has emerged as one of the leading "midshore" jurisdictions in Asia.
As a "midshore" jurisdiction, Labuan IBFC offers many of the advantages of traditional offshore jurisdictions, for example structures for holding or financing international operations or assets. At the same time, it has onshore features such as added economic infrastructure and a sound regulatory framework. This distinctive combination of factors allows Labuan IBFC to enjoy greater respectability in the eyes of global standards-setting bodies.
Labuan IBFC, located just off the coast of East Malaysia on Labuan Island, complements Singapore and Hong Kong, particularly in wealth management, by providing vehicles such as trusts and foundations that can be used by intermediaries to better serve their clients. With more family businesses in Asia recognising the urgent need for succession planning, formal wealth management structures are rising in importance. IFCs in the region have come up with a suite of different offerings - from special trusts, private trust companies, family office structures, private foundations and even civil law foundations in the Islamic space - to cater to the specific and different needs of an individual or family.
The Future of IFCs
= The 2008 global financial crisis put the wheels in motion for a more regulated and transparent wealth management industry internationally. There has been an increased demand to improve professional standards, governance and transparency of IFCs.
Financial centres also have to comply with global reporting and regulatory standards. These include the impending Common Reporting Standards (CRS) and the existing Foreign Account Tax Compliance Act (Fatca). While Fatca is already in effect, 2017 will see the implementation of CRS globally. This initiative will effectively change the way wealth will be managed by requiring a higher amount of disclosure which will be made mandatory.
It remains to be seen how these increased compliance requirements will impact the industry in Asia as a whole, and the existence of IFCs specifically. But for now, the wealth management industry and the IFCs in Asia continue to grow and cast an ever-growing shadow on their Western counterparts.
This articles was first published in The Business Times (Singapore) on the 10th of February 2016