A Trustee for emerging markets
What is the issue?
Trustees are increasingly venturing into emerging markets, but few have any real practical experience in dealing with these markets and the challenges presented from a banking, fiduciary, regulatory, cultural and family dynamics perspective.
What does it mean for me?
Any trustee being appointed should be experienced in working with families originating from emerging markets, so that they are able to navigate the inevitable challenges that will arise.
What can I take away?
An awareness of the experience and characteristics a trustee will need when working with a family from an emerging market.
These days, it feels as if the only certainty is change, making the ability to evolve and adapt at every level important for ensuring mere survival.
One change that has particularly affected the trust industry is the ‘de-risking’ of clients by a number of banks, particularly those with stronger credit ratings. These banks, and their trust businesses, are exiting relationships and refusing relatively low-risk, well-advised clients with a clear source of wealth simply because they, or the origins of their wealth, are associated with an emerging market country. However, allowances can be made by some institutions if the client provides sufficient revenue to justify the perceived risk.
This trend is a concern for the finance industry generally, as it directly impacts the competitiveness of both the banking and trust industries. Trustees, as end-users of the banking system, are now faced with a significantly restricted choice when sourcing a banking partner. Bearing in mind how important it is for a trustee to place funds with robust international banks, underpinned by strong fundamentals, this can materially impair a trustee’s ability to administer a structure.
There is a concern among some practitioners that banks’ growing aversion to working with emerging countries may, wrongfully, signal that a jurisdiction is closed for business. Clients, and their advisors, may assume that it is the jurisdiction in which a bank is based that is pressurising the bank to be so risk-averse. In reality, these decisions will almost always be driven by executives based in a remote head office with little or no understanding of the local subsidiary’s business or the strict regulatory environment in which it operates.
An understandable rationale?
The rationale behind de-risking is well publicised. Many banks, and their senior management, have been very publicly condemned, fined and, in certain instances, prosecuted for historic failings. Given global developments around transparency and compliance, not to mention the reputational damage associated with being linked to unsavoury individuals, it is understandable that many banks are shying away from certain markets. The retraction of services offered to these countries is the easiest way for an institution (that is also a brand with a delicate public profile) to ensure that it does not repeat its historic mistakes.
But is this view correct? As we look to the future, a significant proportion of global economic growth is expected to occur in emerging markets. Are the banks’ actions a knee-jerk reaction? And when will their commitment to these markets re-emerge?
As unlikely as this may seem at present, the anaemic growth and saturation of many developed markets does suggest that banks will change their strategy again at some point in the future. As many trustees are now strategically targeting emerging markets to drive their growth, and enjoying improved business flows from these jurisdictions, the timing of this current de-risking could not be more unfortunate.
Like the banks, trustees are regulated businesses with a multi-jurisdictional presence. Is it possible that banks could learn from such companies and consider each potential client on its own merits, rather than resolutely refusing to engage with them? This would certainly be a more ‘common sense’ approach, especially if sufficient experience, controls, policies and procedures are in place to ensure a business is properly equipped to work with such families.
Indeed, the Financial Action Task Force (FATF) itself considered the potential impacts and concluded that de-risking should not constitute an excuse for a bank to avoid implementing a risk-based approach that identifies and assesses risk as the basis for taking commensurate measures to mitigate it. Further, the FATF did not consider that the application of its standards should include the wholesale cutting loose of entire classes of customer without fully taking into account their level of risk and available risk-mitigation measures for individual customers in a particular sector.
It seems unjust to assume that each and every family from an emerging market country has generated its wealth through ill-gotten means, is deviant or is evading taxes in its home jurisdiction. This is especially true when it is mandatory for substantive evidence proving otherwise to be provided whenever one engages with a financial services firm. Emerging countries are attractive to trustees on account of relatively recent wealth generation and ongoing opportunities. This is coupled with the high-net-worth and ultra-high-net-worth families in these countries having similar estate and succession planning requirements as families in developed countries.
In our experience, this is especially true with families who have an international footprint but retain their origins in an emerging market country. It is not uncommon for such families’ wealth to derive from a business that remains closely held by family members (often with business and personal assets co-mingled), and for these families to have genuine concerns around personal and asset security. The monetary values involved can be large, and implementing an effective estate and succession plan can be a challenging and gratifying experience.
For any trustee working with emerging market countries, given the heightened risks, it is especially important to fully understand a company’s limits and endeavour to work to its strengths. It would be foolhardy to rely on elements of a business where known weaknesses exist, or to partner with third-party firms that are not equipped to work with these markets. Policies, procedures and controls need to be in place to understand, initially mitigate and then properly manage risks.
A trustee with expertise and experience of working with emerging countries will always be better positioned than one that is not culturally aware and familiar with the lay of the land. The informed trustee will know which like-minded firms to partner with, and will be more adept at dealing with the local culture and language. They will be able to manage myriad risks by regularly travelling into the family’s jurisdiction, meeting with the wider family and visiting the family business, and will be more familiar with the local legislation relating to the structure/assets.
With this in mind, families and advisors in emerging markets must proceed with caution when selecting a trustee, as experience, familiarity, a strong network of partners and an ongoing dedication to the region are absolutely essential. Proper due diligence, a substantiated source of wealth, and information on any tax reporting and compliance obligations must remain sacrosanct, and this is the only way to operate when building a trust company with strong foundations and a defined long-term strategy.
Despite continuing pressures to negotiate fees to a minimum, and various growth-starved fiduciaries charging reduced fees that do not reflect the work involved, or the business and fiduciary risk being taken on, it is important to ensure that a proper fee is charged for a fiduciary structure. This may mean missing out on opportunities, but ensures that a company is sufficiently selective about with whom it works. By being selective, a trustee is accepting the right profile of client: those who truly appreciate and understand the role of a trustee and the work that needs to be done.
In spite of the challenges associated with emerging countries, and as working with them has become more difficult, we have seen trustees flooding into such jurisdictions. Many have little or no experience in these markets and proceed without any semblance of a coherent strategy. They are often burdened with the weight of achieving aggressive revenue targets that have been imposed on them in an effort to appease a demanding and profit-hungry shareholder. These firms are pursuing a short-term strategy with little consideration for a business’ long-term health. Such short-termism should never be synonymous with a trust business.