How do you balance compliance and creativity? Michael Giraud and Jo Gorrod discuss the perils of growing a fiduciary business
Fiduciary is changing and a degree of realism has entered the private client trust industry. The days of organic double-digit growth from the traditional trust markets – on the back of simplistic but highly effective tax planning – have been consigned to the past. Unfortunately for trust companies, the problem of reduced growth is compounded by reduced growth of its existing business. This rate is increasingly driven by legislative changes in traditional jurisdictions, greater international regulation, the move to global tax transparency, higher administration costs and structures being wound up on account of existing planning simply becoming redundant.
So trust companies are under greater pressure to look at new territories and diversify their services. As the number of opportunities recedes in established markets, trust companies are increasingly targeting at least one developing market. Consequently, it is more and more common for trust companies (and not just the larger ones) to have dedicated new business professionals supported by more generous new business and marketing budgets than before.
Growing a trust business invariably means exposure to greater fiduciary, reputational and business risk. It is important that the business is in a position to manage and control these risks. A trust company’s board will need to agree the business risk parameters and the compliance procedures, which are then implemented and policed by the respective departments. It is no surprise that the push into developing regions is causing anxiety for risk and compliance departments and, to an extent, regulators. Success in these markets can lead to a greater increase in risk profile for the business compared with that associated with traditional territories. This makes implementing the agreed risk parameters and policy and the compliance procedures all the more important.
Trust companies trying to establish footholds in these new markets will face an uphill battle once they have successfully sold their firm’s services. Families and local advisers often fail to appreciate the level of due diligence required by offshore trustees not only at the onset, for example by identifying the source of funds, seeking tax advice and collating all other relevant ‘know your client’ documents, but also through the relationship, for example transaction monitoring, periodic reviews, etc. Therefore, risk and compliance departments will advocate caution when approaching new markets and gathering due diligence on the principals. Finding out where funds come from is critical and there are many points for potential trustees to consider, such as:
- What is the reputation of the jurisdiction from which the funds are sourced or where the settlor is resident?
- Where was the wealth earned?
- What is the jurisdiction’s human rights record?
- What is the perceived level of corruption in the jurisdiction?
- How reliable is the due diligence received?
- Have any of the principals been involved in criminal activity? If so, was the conviction forced by a corrupt government?
- Who is providing the tax advice?
- How aggressive is the planning in the home jurisdiction?
- Will the trustee have control and certainty of ownership over the assets?
- What is the value of the structure?
- Do the principals understand the concept and the structuring?
Any weakness in the new business process that fails to properly identify relevant parties and the related risk can have serious repercussions for the trustee and the reputation of its home jurisdiction. Given the greater regulation and changing global legislation, it has never before been so important to ensure that the business being won is right for the trust company and the home jurisdiction.
In addition to overcoming the challenge of collating due diligence, the structure must be correctly priced. When working with a family based in a developing region, there is frequently fee sensitivity and negotiation in relation to the set up and ongoing administration fees. Getting the fee structure right is important. It will ensure the correct reward for the fiduciary, business and reputational risk associated with a structure, that the take-on is thorough and that the day-to-day administration is correct, in line with procedure and carried out by a team that is suitably qualified, technically aware and has the right level of experience.
Extreme care must be taken for a number of factors that cumulatively contribute to the fiduciary, reputational and jurisdictional risks of the structure. It is important for all parties to understand that it is only through implementing strong due diligence and risk management procedures that these risks can be managed and controlled. However, the overzealous adherence to procedure, without due appreciation of a family’s varied and unique circumstances, or the bespoke nature of fiduciary structures, can be particularly frustrating for new business professionals.
This is especially true if a lucrative piece of new business is at stake because of business inflexibility and the potential short sightedness of risk and compliance departments, who may not fully understand the structuring or fiduciary risk and just tick boxes. If this happens, it is more than likely to result in strained relations between risk and compliance teams and new business teams as they try to introduce opportunities. Cultivating an environment that encourages new business and expertly manages and maintains robust processes for assessing and mitigating business and fiduciary risk will negate this. Awareness of issues and an open and flexible approach from both sides is encouraged to alleviate tensions. And it is better to review the merits and risks of a potential structure on a case-by-case basis rather than applying a one-size-fits-all approach.
Development v risk
New-business professionals should heed the caution advocated by their risk and compliance colleagues. They should have sufficient experience and technical knowledge in their own right to recognise and understand the fiduciary, business and reputational risks that may accompany a structure. The take-on and risk management procedures must effectively control or mitigate the risks, but they also need to have sufficient flexibility to allow the new business person reasonable room for manoeuvre.
Business growth needs to be managed carefully and a partnership approach is essential with each team member drawing on the skill and experiences of the rest of the team. It is also important for a company to be realistic with its growth targets. Anything too aggressive will encourage short-term thinking. Striking the perfect balance can, understandably, prove to be a challenge. If new business and compliance/risk functions are able to embrace the inherent tensions within their relationship and appreciate the balancing act required by a modern trust business then they will be well positioned to thrive in this brave new world.
Michael Giraud is head of new business development and Jo Gorrod is director at Investec Trust (Jersey)