Offshore service providers see regulation driving up costs - survey

While demand for offshore services globally and in Asia is projected to remain robust - primarily due to high net worth individuals (HNWIs) seeking asset protection and wealth planning services - regulation is now the key business constraint, according to an industry survey by OIL, a division of corporate service provider Vistra Group.

The impact of the US Foreign Account Tax Compliance Act (FATCA) and the EU's Alternative Investment Fund Managers' Directive (AIFMD) - which are, respectively, intended to make financial institutions more transparent as to the identities of their customers and to improve tracking of how managers market their funds - is already being felt by the private equity industry.

Service providers in the offshore space must also cope with real or proposed measures relating to information exchange, customer due diligence, global standardized systems for reporting and tax accounting, and the compulsory licensing of industry participants.

Asked about the impact of regulation on internal operations, 95% of respondents said the cost of doing business is rising; 82% said it would necessitate more human capital investment, and 76% said there would be increased spending on IT capabilities.

Jonathan Clifton, managing director at OIL, noted that regulation enforcing best practice, as opposed to stamping it out, isn't necessarily a bad thing. "Regulation that balances greater transparency with the need to support companies wanting to expand globally will undoubtedly make our industry stronger and ultimately bring it into the mainstream," he said.

Two thirds of respondents identified regulatory pressure as the biggest driver of industry consolidation. According to market research commissioned by Vistra, the Big Four service providers will see their combined market share rise from 25% to around 50% over the next 5-8 years.

"We have acquired 23 businesses in the last three-and-a-half years," Martin Crawford, CEO of Vistra, said in a panel discussion that accompanied the release of the survey. "A lot of these are smaller companies struggling to cope with regulation and IT spend."

The second-biggest consolidation driver is seen as M&A instigated by private equity owners. Vistra was acquired by Baring Private Equity Asia earlier this year and each of the Big Four has a PE backer. One of Vistra's most significant bolt-on acquisitions was Orangefield Group, which was bought from AAC Capital Partners.

PE and hedge funds - as clients - are expected to be the third-largest growth driver for the industry over the next five years, after HNWIs and family offices. Much of this emerging demand is likely to come out of Asia, notably China and Southeast Asia, as a natural consequence of rapid wealth creation in these regions.

Survey respondents ranked the British Virgin Islands, Hong Kong, the Cayman Islands and Singapore as the four most important jurisdictions for offshore services. By 2020, Hong Kong and Singapore are tipped to occupy the top two spots. This is a function of geographic demand, but also of an increased desire for "mid-shore" jurisdictions - which offer tax efficiency and strong legal systems and business infrastructure - as part of investment structures.

The OIL survey was based on interviews with 320 industry participants globally.

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• Topics
• Advisory
• Financing
• Investments
• Fund administration
• professional services
• Asia
• Offshore
• tax