A brighter spotlight on family offices

Global industry players seeking to expand in Hong Kong hope the city leverages its special relationship with the Chinese mainland to broaden cross-boundary financial market links and offer diversified investment solutions and risk-management products. Oswald Chan reports from Hong Kong.

The Hong Kong Special Administrative Region government unveiled its policy road map in March for developing family-office businesses in eight strategic directions, including offering tax concessions and other financial incentives, nurturing talents, promoting art storage facilities, developing philanthropy, and expanding business networks. The objective is to help at least 200 family offices establish or expand their operations in the SAR by late 2025.

In the same month, the government organized the Wealth for Good in Hong Kong Summit - a high-profile event connecting more than 100 global family-office decision-makers, and showcasing the city's unique advantages as an international-asset and wealth-management hub.

"Since the summit, we have received over 100 inquiries from global family offices on the Chinese mainland and in the Middle East, the Americas, Europe and Southeast Asia. About one-third of them intend to set up shop and expand their businesses in Hong Kong," said Jason Fong Chin-kong, global head of family offices at FamilyOfficeHK - the business arm of Invest Hong Kong that is geared to promoting the city's family-office operations.

FamilyOfficeHK will organize roadshows, workshops, seminars and other events in markets such as the mainland, Southeast Asia and Europe as it seeks to get more family offices to set up branches in the SAR.

In June, Invest Hong Kong launched the Network of Family Office Providers, with more than 100 company representatives and C-suite top executives collaborating in and identifying business potential and opportunities.

Enhancing collaboration

Although progress has been made in attracting global family-office decision-makers to Hong Kong, stakeholders in the private wealth management sector say five strategic directions are needed to propel the industry's development.

First, the SAR should maximize its unique relationship with the mainland financial market as a niche to expand family-office businesses, in addition to the city's traditional strengths in the private wealth-management sector, such as a simple and low tax-rate regime, a common law legal system, freedom of capital flow, deep capital markets, the presence of an international workforce, and protection of business activities.

"As a global financial center, Hong Kong is unique in the sense that it enjoys a special relationship with the mainland, which no other financial center has," says Peter Stein, CEO and managing director of the Hong Kong Private Wealth Management Association.

In a research report in March, the association and the Global Family Business Research Center at Tsinghua University's PBC School of Finance urged financial regulatory authorities in Hong Kong and on the mainland to promote freer flow of wealth from the mainland and abroad.

The two institutions proposed raising the bidirectional quota potentially to 1.5 trillion yuan ($209 billion) each way by 2035, and further relaxing channels, quotas and types of products for investment in the Hong Kong market by mainland investors, in order to shape the SAR's role as the convergence point of global wealth.

Stein suggests that Hong Kong and mainland financial regulators should consider refining certain aspects of the Cross-boundary Wealth Management Connect Scheme, such as raising the investment quota for individuals, enhancing the range of investment products, and allowing advisory services to be included among activities that can cement Hong Kong's value proposition as a wealth management hub.

The PWMA believes that the connect program has been fairly limited so far in terms of offerings. For example, cross-boundary advisory services currently are not allowed.
Stein says relaxing the provision of cross-boundary investment advisory services can be done on a pilot basis in some cities in the Guangdong-Hong Kong-Macao Greater Bay Area, and then gradually be extended to other parts of the country. Hong Kong client advisers would then be able to provide advisory services to their mainland clients who already have accounts and funds in Hong Kong, and vice versa.

Kwan Chi-man, founder and CEO of Hong Kong-based multifamily investment service provider Raffles Family Office Group, agrees. "The recent banking crises have shaken the ultra-wealthy around the world, prompting them to take a hard look at their risk management strategies and to explore a broader range of investment options. The crises have forced them to recognize the importance of diversification, including where and how they choose to hold their wealth."

The report, by PWMA and Tsinghua University, emphasizes Hong Kong's role as an asset center, particularly in providing more renminbi-denominated investment channels and financial instruments.

Stein says the provision of investment opportunities in renminbi is "an offering that Hong Kong can do better than anywhere else", adding: "That would be appealing to family offices if they can potentially gain some exposure to renminbi-denominated products."

Improving tax regime

Besides reforming the capital market, providing tax certainty is also important to developing the SAR into a global family-office hub.

"Family offices require a certain tax environment before they commit themselves to making large financial investments in any jurisdiction. Without that, Hong Kong simply cannot compete internationally as a family-office jurisdiction," says Paul Moloney, a partner in corporate and securities practice in the Hong Kong office of global law firm Mayer Brown.

Carrie Tang Sze-kiu, family enterprise leader, private tax leader and business tax advisory services leader at EY Greater China, says the SAR government has introduced a raft of tax concession initiatives. The unified fund exemption regime became operative in 2019, while the limited partnership fund ordinance and tax concessions for carried interest took effect in 2020. The SAR government announced tax concessions for qualified family-owned investment holding vehicles managed by qualified single family offices in 2022, to continuously improve Hong Kong's position as a leading financial center.

The Legislative Council passed the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 in May, whereby eligible family-owned investment holding vehicles managed by single-family offices in Hong Kong are given profits tax concessions for their assessable profits earned from qualifying and incidental transactions, with retroactive effect from April 1 last year. Fong agrees that the amendment will create a more conducive and friendlier environment for global family offices.

However, Mayer Brown notes that there is a very low uptake of asset managers seeking to make use of the preferential tax rate for carried interest. "The Hong Kong government needs to review that regime comprehensively," Moloney says.

Tang says that the profit tax concession has provided a good incentive, and a significant increase has been observed in family-office-related clients from the mainland, Hong Kong, Taiwan, and other Asian markets and Western countries. She suggests that the program could further accommodate the needs and alleviate concerns of family investors if the 5 percent incidental income threshold could be lifted, specifically when it comes to long-term investment for stable returns, such as bond investment.

"Capital is mobile and will gravitate to those jurisdictions that can best meet the needs of the people deploying that capital," says Helen Wang Huiping, a counsel in corporate and securities practice at Mayer Brown's Hong Kong office. If Hong Kong could provide a deep talent pool, formulate clear and consistent legal, tax and regulatory regimes, as well as government support, Hong Kong could compete with Dubai, Singapore and Switzerland as a global family-office hub, she says.

Developing all-round hub

However, Hong Kong should not be complacent as a global wealth management center. If the city really wants to get global family offices to set up operations here, it should consider transforming itself into a full-fledged financial hub in aspects like philanthropy, art trading, financial technology and virtual assets, as well as private equity businesses. Next-generation investors have different investment appetites and views on risks and returns.

Fong says that FamilyOfficeHK will expand into services like facilitating philanthropic endeavors of wealth owners and assisting in education-related matters.

"Next-generation investors have growing interest in digital assets. New policies like the e-HKD (electronic Hong Kong dollar) pilot program represent proactive and strategic visions to enable Hong Kong to continue prospering and thriving as a global financial hub," Kwan tells China Daily.

In May, the Hong Kong Monetary Authority launched the e-HKD pilot program, with 16 firms chosen from the financial, payment and technology sectors to participate in 14 pilot projects covering six categories of potential e-HKD use cases. The Securities and Futures Commission's virtual-asset trading platform regulatory regime took effect on June 1, enabling local retail investors to access virtual-assets trading provided by SFC-licensed platforms in the second half of this year.

Stein also highlights the importance of making some regulatory changes in virtual assets, as there are certain rules in place that are not conducive to dealing in virtual assets for private banks. The PWMA proposes changing the regulation to enable banks to actually accept deposits of virtual assets as long as lenders can show they have the appropriate systems in place.

Nurturing talents

Talents specializing in the private wealth management business are also inadequate in propelling the industry's development. The PWMA has proposed establishing a Hong Kong Institute of Wealth Management, and introducing a friendlier and more convenient residency policy to encourage mainland wealth management graduates to work in the SAR. This should be conducive to building a deep family-office business talent pool that is well-versed in wealth and risk management.

"We need to do more to try and nurture more talents here for family offices, as well as the private wealth management sector, if we want to make Hong Kong a family-office hub," says Stein.

FamilyOfficeHK and the Financial Services Development Council are trying to establish the Hong Kong Academy for Wealth Legacy to nurture new professionals for family-office business.

Recent developments in the private equity industry should also provide a boon to the family-office business.

In September 2022, the SAR government and the Qianhai Authority of Shenzhen jointly promulgated "18 measures for supporting the linked development of Shenzhen and Hong Kong venture capital investments in Qianhai" to promote Hong Kong and Shenzhen as an international venture-capital cluster.

Kwan says that clients from the mainland and Southeast Asian markets have complex needs for new-wealth and generational-wealth transfers. "Our strategic emphasis is on broadening our investment platforms to encompass diverse alternative options, such as real estate, digital assets and private equity."

He says the rapid growth of industries like high-tech, telecommunications, healthcare, life sciences and new energy in the Greater Bay Area should provide an array of investment opportunities for family-office clients.

According to the UBS Global Family Office Report 2023, 45 Asia-Pacific single-family offices interviewed had the highest allocation of equities and developed market fixed income. But they still favor hedge funds, and private-debt and private-equity investments in technology, healthcare, information and communications, real estate and rental leasing to diversify risks and boost long-term returns.

The report polled 230 single family offices worldwide with a combined net worth of nearly $496 billion.