The financial services industry has been subject to accelerated regulatory change since the financial crisis. Trust and estate practitioners, who advise families on inheritance and succession planning, are no exception, the annual STEP Cayman conference last week showed.
Tax reporting under FATCA and the Common Reporting Standard, beneficial ownership registers, stricter anti-money laundering rules and due diligence are only some of the initiatives that had to be implemented and that have added cost to trust services in recent years.
Then in 2019 “things really started to ramp up”, said Jennifer Parsons, a regulatory lawyer at Appleby, citing amendments to the Securities Investment Business Law, new data protection legislation and new economic substance rules, which demand a greater physical presence of companies in certain industries on island.
Speaking in one of several panel discussions that touched on regulatory change during the two-day conference, Duncan Nicol, the director of the Department for International Tax Cooperation in the Ministry of Financial Services, said that the changes have come in response to outside developments and were “not something that government has dreamt up”.
But he noted that those changes had come quicker and were broader in scope than anticipated.
Outside standard setters are not only demanding new legislation and amendments to existing rules at an ever-increasing pace, they are also assessing the changes in real time as and when they are implemented.
“What we are seeing now, and this is a particular challenge for us and the industry, is an increasing importance on testing the effectiveness of the implementation,” Nicol said.
Rather than using peer reviews that first determine whether legislation has been put in place and then at a later stage if it does work in practice, the effectiveness of new rules is evaluated right away.
There is some concern that while new rules may be right from a regulatory perspective, they may not work for the industry or can lead to practical ramifications that hamper business disproportionately. The danger is that lawmakers become myopic in addressing the regulatory issue of complying with international standards without realising the potential indirect, unintended problems that regulatory changes might bring in other areas.
It is when the framework does not make sense that the industry could end up with a patchwork quilt of different legal amendments rather than coherent legislation, Parsons said. It also makes it more difficult to explain the new rules to clients for whom “regulatory fatigue is a real thing”.
Delivering a coordinated approach, however, is difficult when different policy rationales by international standard setters are at play and “start to merge and cross-fertilise”, Nicol said, adding that some of the initiatives Cayman is faced with are planned, whereas others develop “organically”.
The director of the department that oversees Cayman’s compliance with international tax transparency and economic substance standards said engagement with the OECD, the EU and others was key to ensure that new rules were “fit-for-purpose in Cayman”.
Asked how much influence Cayman can really exert in international forums, Nicol said it is difficult to stop an initiative or push back against a standard but at the working group level the practical effects of new rules can be addressed.
“We don’t always get what we do want,” he said. “But we end up with less of what we don’t want.”
New opportunities in Asia
For trust and estate practitioners, the industry is changing as regulation and cost increase. The simplified offshore structures from two decades ago, which targeted mainly Anglo-Saxon and Western European clients, are often no longer economically viable.
Alan Milgate, a partner at Rawlinson & Hunter, noted there is no shortage of threats. “We get so distracted by those threats, when there are massive opportunities in front of us,” he said. “I think the opportunities are really rich for those of us who can figure this out.”
The opportunities have grown disproportionately in Asia, especially in China. As wealth generation has geographically shifted to the East, the advisors of wealthy families started to follow.
But simply overlaying Western structures on Asian clients will not work.
Offshore law firms have traditionally set up base in Hong Kong and Singapore and focussed on corporate structures and “old wealth” associated with Hong Kong- or NASDAQ-listed companies.
Miao (Echo) Zhao, a partner with Beijing-based firm Anjie Law, said her clients represent the “new wealth” of the so-called A-shares of mainland-China companies that trade on the Shanghai and Shenzhen stock exchanges.
Not only are there 3,700 “China-listed” companies compared with about 300 companies listed in Hong Kong or the US, the valuations of these companies, at 20 to 40 times earnings, are also much higher than those of the “overseas” companies.
Zhao explained that China is getting both rich and old very quickly.
About 60% of the controlling shareholders of the mainland China stock market-listed companies are between 50 and 70 years old. “So the need for succession planning or [structuring] the transfer of ownership of the company interest is really pressing.”
China’s one-child policy is also affecting the transfer of wealth. As many clients have only one child, complex trust or foundation structures designed for larger families may not be appropriate.
From a tax perspective, Zhao said, “China is still a paradise.” There are no intergenerational transfer taxes or wealth taxes.
As a result, tax is not a major concern for the ultra-high-net-worth Chinese families, who are more interested in privacy and asset protection.
The need for cross-border solutions and planning typically arises when children are educated abroad or live overseas or when company owners want to transfer some of their China-based wealth overseas. This is where her clients are no longer bound by traditional geographies but consider solutions all over the world, including Cayman, the Channel Islands and even the US, Zhao said.
Because trusts are a new concept in China, Milgate said, practitioners have to build trust and knowledge and move from corporate-structuring concepts to one of sophisticated wealth planning.
At the same time, the trend of wealthy families becoming more global means that “we have to look at ourselves as global practitioners”, he added.