Paradise Papers seen to trigger wealth firm M&A, exits

While no wrong-doings were revealed in the recent data leak, wealth clients will have to get used to the increasing demand for transparency, experts said.
Paradise Papers seen to trigger wealth firm M&A, exits

The so-called Paradise Papers leak is likely to lead to greater regulatory scrutiny of wealth managers in offshore jurisdictions such as Singapore and Hong Kong, which could hasten the exit of smaller or marginal players from the region, according to some experts.

High net worth individuals (HNWIs), meanwhile, will have to get used greater sharing of sensitive financial data as the broader trend of global regulations pushes for more transparency, they said.

“While the leaks show little in terms of actual wrongdoing, the longer-term impact is that there will be increased regulatory scrutiny of the wealth industry,” Andrew Haslip, financial services head of content for Asia Pacific with GlobalData, a data solutions provider and consultancy, told AsianInvestor.

“Regulations may not change per se but compliance norms are likely to become even more onerous for entities operating in offshore jurisdictions,” he added.

That will add to the existing pressures being faced by the wealth industry in Asia—rising costs, increasing regulations and compressing profit margins.

“It’s another pressure point at a time of other existing pressures, leading to greater scrutiny of smaller outposts by head offices,” Haslip said.

He believes marginal players in the offshore wealth market are likely to see the Paradise Papers as a catalyst to reassess their regional businesses, according to a November 13 note.

“Given that recent years have already seen a number of foreign private wealth managers selling their operations in Asia Pacific, the Paradise Papers are likely to prompt some reassessment of any small scale offshore operations in Asia Pacific as well,” he said in the note. 

Haslip told AsianInvestor he expects larger wealth managers in the region will cope better than smaller entities, because they have more resources to handle continually increasing compliance demands. 

Cost-income ratios for the global wealth industry remain high, despite repeated bouts of restructuring and cost cuts in recent years. The ratio measures a businesses operating expenses as a measure of operating income

GlobalData estimates the world's largest wealth managers (with over $100 billion in assets under management) have an average cost-income ratio, of 69.3%, while observers say smaller wealth businesses in Asia have sometimes seen the ratio soar into the 80s or more, as they have sought new staff to claim a portion of Asia's rising wealth levels. 

Huge data leak

On November 10, the International Consortium of Investigative Journalists (ICIJ) published the so-called Paradise Papers—a huge leak of financial documents that reveal how some of the world’s wealthiest people and companies are using offshore tax havens to stash cash and reduce/avoid tax. 

The leaked data covers the period from 1950 to 2016, and GlobalData said information on nearly 13,000 clients from Hong Kong and China was leaked.

These leaks follow the global headlines-making Panama Papers, which divulged 11.5 million documents related to more than 200,000 offshore entities in 2015.

Philippa Allen, founder of Compliance Asia (CA), told AsianInvestor that for wealthy individuals in Asia, the leaks once again highlight the growing tension between the need for rich families to keep certain matters legitimately private and the desire of governments to know whether their citizens are squirrelling away money secretly in offshore jurisdictions to avoid tax.

“Some wealthy families may decide to keep certain information about their financial affairs private to avoid issues such as being targets of kidnapping or because there are other family related complexities at play,” she noted.

While most high net worth individuals (HNWIs) are likely to shrug off this latest round of leaks, these incidents reflect a broader trend of increasing transparency in the previously shadow-clad wealth industry, she noted. “Not all HNWIs fully understand that,” Allen added.

In recent years, governments around the world have seeking to force wealthy individuals to disclose more information in order to reduce their ability to avoid tax illegally by putting money overseas or launder money.

As part of that drive, regulations such as Foreign Account Tax Compliant Act in the US and Common Reporting Standards in Europe have demanded more disclosure about foreign assets and income from wealthy individuals and companies that operate in those jurisdictions.

While the Paradise Papers by themselves are unlikely to lead new regulations, the disclosures—and accompanying public outrage over wealth stashed in offshore tax havens—could well add momentum to the existing regulatory drive towards greater information disclosure, experts noted.

The next frontier

CA’s Allen and other experts believe the next big frontier for wealth regulation will be improving beneficial ownership transparency.

According to the Financial Action Task Force, a beneficial owner is defined as "the natural person who ultimately owns or controls a customer and or a natural person on whose behalf a transaction is being conducted." It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

In the UK, the government is planning a new public register to record information about the beneficial ownership of any overseas legal entity owning, or wanting to buy, property in the UK, according to this report.

Hong Kong’s registrar of companies is also likely to require every firm incorporated in the city to disclose their beneficial owners by 2018, according to a South China Morning Post report in March this year.

Given the cross-border nature of the wealth industry, it would help to have a global registry of beneficial owners that can be accessed any time by any one—which doesn’t exist currently, noted S Suressh, partner at legal firm Eversheds Harry Elias.

“The authorities expect private entities to do the needed checks, but these entities don’t have all the tools they need to do the job,” he noted.

For now requirement forces more disclosure upon all wealth industry participants, from the private banks trying to enforce know-your-customer (KYC) norms to the clients who need to provide vast reams of information about their dealings and sources of wealth.

A recent AsianInvestor report noted that client onboarding times at private banks have grown longer, adding to the frustrations of potential clients in Hong Kong.

All the experts AsianInvestor spoke to also highlighted the fact that the latest round of leaks have not brought to light any real wrong-doing by Asia’s wealthy.

“Setting up an offshore structure or having an offshore account, by itself, is not illegal,” CA’s Allen pointed out.

The GlobalData note also said that wealth managers had little to worry about in terms of fines and direct legal action as a result of these revelations.

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