As the economic scales tip in favour of emerging economies – particularly those in Asia – it seems increasingly likely that one of the region's leading financial centres will steal the status of global wealth management capital from Switzerland. The question is, which city will it be?

As economic power continues to swing from West to East, Asia’s key cities are battling for supremacy to provide headquarters for the world's leading wealth managers and investment firms, to guarantee top-drawer standards of regulation, and to provide a distribution hub allowing dissemination of the latest products across a fast-growing region.

The city-states of Hong Kong and Singapore have long been doing battle for this type of business, but creeping up on them is China’s megalopolis Shanghai, and some outside contenders in Malaysia and Australia.

At the same time, despite time zone constraints, existing financial powerhouses are not taking the Eastern threat lying down. New York is re-positioning itself as a centre of expertise in emerging markets. Switzerland's Zurich and Geneva, still reeling from tax and secrecy attacks from the US authorities, which have led to some private client outflows to Singapore, are trying to re-invent themselves as fund management centres.

Swiss descent

“Some shifts in wealth management business from Switzerland to Singapore have already taken place,” says Ray Soudah, founder of Millenium Associates, Zurich-based merger and acquisition adviser to the global investment industry.

Other deals and structures that would have once passed through Switzerland’s banks now avoid the country altogether, following the breakdown of tax-driven secrecy obligations of the private banks and wealth managers, although the banks have an incentive to prevent capital flight.

“Swiss banks have now openly come out against encouraging client flight to Asia for fear of further negative and punitive repercussions from the EU and Swiss authorities,” says Mr Soudah.

Although Swiss regulation is strong enough on paper according to Mr Soudah, who works closely with the country’s government and regulators, its enforceability has been shattered by numerous and ongoing concessions by the authorities in their so-far failed attempt to halt the centre, its banks and their employees from being harassed by foreign tax fiscal authorities, seeking unpaid taxes from their own citizens.

“Our country can be described as being in regulatory limbo at best,” he adds, with Switzerland busy re-focusing on its luxury brand image in private banking, investment management and its reputation as a safe haven domicile. “This transition will take several years and many firms will fail to survive, including some larger ones, both Swiss and foreign owned,” warns Mr Soudah.

On the brink?

The message from Singapore, currently the highest profile of Asia’s financial centres, is not one of glee at Switzerland’s woes, however. It is more a case of 'there but for the grace of God go we'. The country’s bankers and regulators are more wary than ever of international monitoring, continuously re-writing their regulatory menus in order not to fall foul of the global policemen.

“In a technical sense, most financial regulations are probably similar,” says Mr Soudah. “But Asian standards are being continuously upgraded to deter and avoid the challenges and crisis in Switzerland.”

There is a palpable feeling in Singapore’s finance houses that they are at the centre of a success story, but that safety and service must not be compromised if the tiny city-state is to take over from Switzerland as the world’s leading wealth management centre. Currently Singapore’s banks manage client assets worth about $1000bn and research from consultancy PricewaterhouseCoopers predicts it will take over the lead from Switzerland as the world’s premier private banking centre at some point during 2013. This will finally crown a long-held ambition to transform Singapore, Asia’s “little red dot”, as it was once disparagingly referred to by more powerful neighbours, into the 'Zurich of the East'.

Lessons from history

There is a 'never again' feeling in Singapore about two crucial time-points in its short history. First was the Barings Bank crisis of 1995, when the UK-based bank collapsed after the fraudulent trading activities of Singapore-based Nick Leeson. This was soon followed by virtual financial meltdown in 1998; the so-called Asian financial crisis. Both events seem firmly lodged in the collective memory of the Singaporean financial community.

Su Shan Tan, CEO of wealth management at partly state-owned DBS Bank and an adviser to the government and local charities, is a strong believer in eternal vigilance, both in her bank and the Singaporean banking sector as a whole, to maintain the country’s safe reputation.

“In the Monetary Authority of Singapore [MAS], we have a strong, determined Asian regulator,” says Ms Tan. She applauds efforts by the MAS to “stop the crazy mis-selling” of structured products in the lead-up to the latest global crisis and also the country’s very public stance against hot money on the global stage. “The MAS has made it very clear that the Singapore authorities are not tolerant of undisclosed, tax-evasion money,” she says.

For big personalities such as Ms Tan, who is something of a local celebrity, there is an element of doing “national service”, say observers in Singapore. “She has made her money in private banking, in US institutions such as Morgan Stanley. Now she sees it as her duty to serve [Singapore, to] work for the state-owned bank and protect Singapore’s reputation in front of competition,” says one local banking consultant.

In Singapore a major role in the wealth management sector is played by government-owned investment company Temasek Holdings. Temasek, which also set up Singapore's Wealth Management Institute to improve working practice among private bankers, holds major stakes in locally listed companies. Officially, this is to profit from rising share prices of the booming regional economy. Unofficially, it is to maintain standards of business and probity.

“If you look at tax transparency, Asia will be at the forefront of developments. We can learn from Swiss mistakes,” says David Lim, CEO of Swiss bank Julius Baer in Singapore. Swiss banks such as Julius Baer and Credit Suisse are perfectly placed to do this. Julius Baer, in fact, has been unique in describing two home headquarters: one in Zurich and the other in Singapore, although it also has a strong presence in Hong Kong.

Battling it out

Both Hong Kong and Singapore are fighting for fund flows from wealthy investors on the Chinese mainland, although they must not ignore traditional custom in the booming economies of south-east Asia. “Singapore is preparing for huge growth from Chinese wealthy clients,” says Sherrie Dai, head of China private banking for Singapore-based Standard Chartered.

Ms Dai suggests both countries share the same Asian mentality and are on the cusp of a huge immigration movement from China, as its elite population search for better quality schools for their children. There is a also a growing sense that with recent integration of Hong Kong into China, mainland clients feel their affairs on Hong Kong are maybe too close to the prying eyes of regulatory authorities.

Clients will always diversify between Hong Kong and Singapore; this is not a new trend. These things tend to come in waves

Kathryn Shih

Increasing pressure is also being applied by some Hong Kong funds players and bankers to update their country’s professional investor category of regulation, allowing greater diversity of investments and ensuring that Hong Kong does not fall behind Singapore’s more pragmatic approach.

“Clients will always diversify between Hong Kong and Singapore; this is not a new trend,” says Kathryn Shih, Hong Kong-based head of Asian wealth management at Swiss bank UBS.  “These things tend to come in waves,” she says, with Hong Kong and Greater China attracting the top banking and funds talent during 2011, following a vintage year in Singapore in 2010.

A slow shift eastwards?

There are warnings from Europe, however, that rising costs in both jurisdictions, with asset managers and bankers demanding ever-increasing salary packages, could scupper growth in Asian financial services

“Owing to the unsustainability of the Asian costs bases – especially salaries paid to client advisers and investment professionals – and the decisions by the Asian authorities to enforce strict compliance controls and to deter tax evasion, the well-established Swiss banks will tend in future to leverage their Swiss platforms for cost efficiency,” says Mr Soudah at Millenium Associates. “This means many will not further develop their Asian infrastructures.”

Other commentators say that although the centre of gravity in investment management will undoubtedly shift from the US and Europe to Asia, this will not necessarily take place immediately.

“Two factors are currently hampering progress: the ultra-volatile nature of Asia’s stock markets and the momentum-driven mentality of investors,” says Amin Rajan, CEO of strategic advice consultancy Create. 

Concerns about governance structures of quoted companies in both India and China, coupled with the rollercoaster nature of markets in both countries, limit exposure of major global pension schemes to Asia, he says.

Lack of cohesion  

While there has been much talk of a pan-Asian fund passport product, allowing funds to be registered in one jurisdiction and marketed freely across the region, as has been achieved with Europe’s Undertakings for Collective Investment in Transferable Securities (Ucits) funds, fierce competition between centres in their quest for regulatory arbitrage has scuppered the deal. Even Australia, which has re-positioned its economy successfully to profit from trade with neighbours in the Asian region, has put itself forward as a regional funds domiciliation and administration hub.

“The Asian version of Ucits will come later rather than sooner,” says Mr Rajan. “The head-to-head rivalry between Hong Kong and Singapore has worked against a flourishing cross-border trade in funds across Asia. There have been attempts to dismantle the barriers, but we have yet to see any breakthrough measures.”

A high level of protectionism in China has also perhaps restricted the growth of booming Shanghai as a global financial centre. The Qualified Foreign Institutional Investor (QFII) scheme was launched in 2002 by Chinese authorities to permit foreign investors to trade Chinese shares on the exchanges in Shanghai and Shenzhen. This signified a partial repeal of tight capital controls which severely restricted the movement of assets.

Earlier this year, the QFII quota was increased from $30bn to $80bn, although only $25bn of the quota had so far been used. Among the first foreign firms to offer this service were UBS, Nomura, Citi and Goldman Sachs.

This further relaxation has been broadly welcomed by foreign bankers and asset managers. “We have seen an increased number of investors applying and receiving quota,” says Magnus Ward, head of equities at Swedish bank SEB in Hong Kong. “We are moving in the right direction, but as long as there are regulations, some investors will hold off.”

Further twists

Buying into strategies managed by a local investment house in China or elsewhere in Asia may be the logical way forward for investors, but it is not always so straightforward. Capital Generation Partners, a private investment office that manages the assets of endowments and wealthy families, uses only Asian-based funds to invest in the region, believing local knowledge is essential to receive returns.

However, the presence of a well-known fund house in one of the markets is not enough reason to invest, says founding partner Charlotte Thorne.

“One of the issues for investors looking at Asia, particularly in the field of private equity, is that the best deals have already been tied up by local families,” says Ms Thorne. “Even a local fund will struggle to outpace a local private investor, who may have a direct line into these opportunities.”

There are also further, market-led factors that may dampen Asian enthusiasm and bolster the role of traditional fund homes such as New York, with US equities currently flavour of the month among institutional and private investors, as talk of recovery continues to gain strength. “Investors have been clearly favouring the US market for some time and for a number of good reasons,” says Tom Holland, Hong Kong-based partner and head of Asia at Cube Capital, a $1.3bn alternatives investment firm.

Although the US market is looking extended in terms of valuations, and the country needs to deal with the so-called ‘fiscal cliff’, there is much cash still on the sidelines. “A recovering US housing market and the long-term potential from the shale gas boom will provide positive news flow,” says Mr Holland. “With the exception of the Association of South-east Asian Nations countries, Asian markets have been laggards this year – largely driven by the structural slowdown and credit hangover from the 2009 stimulus in China and the ongoing underperformance in Japan.”

Looking ahead to the power transition in China and possibly the US, both in the final quarter of 2012, Mr Holland says it is likely the new leadership in Beijing will stimulate the economy at the same time as a crescendo of noise emerges about the US fiscal cliff. “You may see a change in regional asset allocation around those events,” he warns.

Despite these predictions, Mr Holland draws attention to the fact that Asia has less liquidity than the big developed markets and its developing economies are characterised by poor corporate governance, family control and state interference. As a result, regional fund platforms tend to have less capacity than global platforms and are often of not high enough quality to attract institutional investors. “The alternative funds space is getting consolidated by big players,” he says. “This has led to more flows going to larger platforms, which tend to be based in London and New York.”


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