Family offices: to register or not?

As the number of wealthy individuals grows around the world, so does the number of family offices – leading to calls in some quarters for tighter regulation. But is it actually necessary?

Those of us who’ve never had enormous wealth – that’s the vast majority of us – are known, every once in a while, to speculate about what we might do if we came into money. Such conversations among friends tend to include a litany of dreams that include buying property, cars, jewels or businesses. They generally don’t mention family offices.

However, those who actually do have wealth dream of setting up their own family office. And although there’s no definitive figure for the number of family offices in the world, most experts within this area of finance agree that the number is growing.

“All the empirical data we have suggests that there are more family offices than there used to be,” says Keith Johnston, CEO of the Family Office Council. 

A key factor in such growth is the increase in the global population of ultra-high-net-worth individuals. The WealthX World Ultra Wealth Report 2015-2016 claims that, as of 2015, the global ultra-high-net-worth (UHNW) population stood at 212,615, making up more than 160,000 households and holding $30 trillion in wealth. By 2020, there are expected to be 318,000 UHNW individuals, whose wealth will have increased at an average nine per cent per annum to reach a total of $46.2 trillion. 

The problem with finding a figure for the number of family offices is that there’s no single definition of what a family office is.

“One of the key issues that bedevils all aspects of working with family offices is that there’s a huge continuum of what a family office might be – and we see family office clients at all points on that spectrum,” says Marcus Leese, Partner in the Guernsey office of law firm Ogier.

“We see everything from a single individual all the way to highly staffed, highly organised offices of several hundred people. Some are focused on investment advice and are essentially taking the banker/adviser role in-house. Another area is the management and administration of legal structures, replacing an external trustee or corporate administrator. 

Another is for professional advice, providing in-house legal, tax or accounting advice. And yet another area is focused on lifestyle administration – all that travel doesn’t book itself!”

Where to begin

Whilst the media may focus on the lifestyle or concierge role of some family offices, it’s the scale of the investment and asset management sides that’s led some to call for such offices to be regulated. 

But this isn’t as straightforward as it sounds. “Vaguely saying you should regulate family offices isn’t helpful,” says Catherine Grum, Head of Family Office Services at KPMG. “What are you trying to achieve with regulation? I’m not sure where the issues and concerns are – and some family offices are already regulated because of the types of investments they’re making.”

Gillian Browning, Director of Fiduciary Supervision Policy and Innovation at the Guernsey Financial Services Commission, says the regulator already plays a role with family offices. “If [family offices] undertake investment or asset management advice, they would need to speak with us to decide which regulatory regime they best fit,” she explains. 

“It’s possible they might be exempt from financial services regulation because they may not be undertaking specified regulated activities by way of business – simply booking family travel arrangements, for instance.”

From Keith Johnston’s perspective, family offices are already regulated at the level of the activities they perform and by virtue of the regulations under which their advisers work.

“When family offices use lawyers, trustees, bankers, accountants and other advisers, they’re entering a world replete with regulation, including on matters regarding ‘dirty’ money such as anti-money laundering regulations,” he says. “A lot of regulation is focused on protecting customers, which makes sense for banks. Family offices don’t have public customers and are using family money.”

If family offices are regulated when they undertake regulated activities, the question has to be asked: why are people calling for their general regulation?

“There are three main reasons why you might want to regulate the family office itself, rather than just the activities it undertakes,” says Leese. “First, there’s a general trend towards greater regulation of all financial services, which means there’s a drive to regulate more entities. 

The second reason is that the value of assets under the control of family offices is growing by a significant amount. If they aren’t regulated, there’s considerable value not subject to regulation – and to some people and regulators this is a concern.

“The third argument is specific to the US and concerns an exemption from Securities and Exchange Commission regulation when activity is undertaken by family offices. The exemption extends to family and friends, and there’s concern that this exemption is being extended to cover more and more people, which creates an anti-avoidance issue.”

Global challenge

If it were decided that family offices should themselves be regulated, you would then face the problem of defining which types of office to regulate and where to regulate them, given that the family and their interests are most likely based all around the world.

In all likelihood, as the family office will be registered as a legal entity in a particular jurisdiction, the regulation would take place there. But given that it’s the activities that matter, there seems to be little sense in taking this approach.

“The current regime is fit for purpose,” says Gillian Browning. “It focuses on the activity undertaken, and whether this is by way of business rather than simply regulating an entity because it’s called a ‘family office’. 

“There’s no common definition of what a family office does or what services it provides. And that means extra, potentially unnecessary, regulation could have commercial implications and unintended consequences. I believe we have sufficient oversight of those that require regulation at present.”

At the moment, there are no moves in the Channel Islands to specifically regulate family offices. In fact, whilst some people may be calling for their regulation, there isn’t evidence of any jurisdictions following this path. “There are larger problems in the world of financial services than regulating family offices, and I’m not aware of any plans to regulate the industry,” says Catherine Grum.

With or without specific family office regulation, increasing numbers of family offices do seem to be choosing to base themselves in the Channel Islands.

“More family offices are looking to set up in Jersey and Guernsey,” says Grum. “Other international finance centres have targeted a mass-market clientele, but the Channel Islands have particular expertise in dealing with complexity. I’m working with clients looking to move from another jurisdiction to Jersey because of the strength of expertise here.”

As the popularity of the Channel Islands as a location for family offices increases, so regulators are seeing greater diversity in the aims of those offices, including some less traditional requests.

“People do like the status and kudos of being regulated,” says Browning. “If an entity seeks regulation, it must have substance and undertake regulated activities in a meaningful manner – for instance, undertaking that activity at least once a year. 

“If a family office is unsure whether they should be regulated, we would encourage them to seek their own legal advice or contact the GFSC for a chat.”

Perhaps this is where the calls for regulation come from – the family offices themselves. If that’s the case, then there will likely be some disappointed wealthy families out there. Given the activity-based nature of the existing regulatory regimes, there doesn’t appear to be any near-term prospect of family office regulation.