The trigger for the growing focus on governance is a swathe of local and international regulatory, tax and law changes. But the wider impact is being felt in the increasing professionalisation of operations along with moves to simplify structures and a greater openness to diversification and non-traditional investment strategies.
It’s good news for the family office sector in the region, as the long-term adoption of stricter governance standards will help ensure the sustainability, stability and success of family operations.
However, in the short-term, it means families are having to assess their current situation regarding local and international assets, investments and businesses. That process is bringing long-standing issues to the fore, which require immediate attention and change.
That is a challenge to the traditional approach in the Middle East where family offices often operate within a single decision-maker structure, which in many cases can lead to a conservative mindset focused on maintaining the business legacy and core values. Nevertheless, legal, tax and regulatory developments mean in many cases that the traditional approach may be outdated and could necessitate change.
New laws mean a new approach
The sector is having to come to terms with a wide range of legal, tax and regulatory developments which bring challenges as well as opportunities. On the local front, the Kingdom of Saudi Arabia’s new companies’ law is prompting family businesses to reassess their global holding structures and local structures in the Kingdom.
The new law has been designed to modernise and simplify the corporate code, increase flexibility and attract inward investment which should be beneficial to family offices, as well as the wider economy. It specifically supports the incentivisation of talent within companies, leading to the potential growth of employee incentive schemes and improved management practices.
Similarly, changes in United Arab Emirates’ (UAE) corporate tax and the implementation of Global Minimum Standards are having an impact on family businesses' tax planning strategies.
There are other global initiatives to take into account including Pillar 2, BEPS (Base Erosion and Profit Shifting), global minimum taxation and amendments to the Proceeds of Crime legislation. All of these developments turn the spotlight on transparency and compliance requiring families to adapt their structures to meet regulatory requirements.
Demand for a new approach is rising
Family offices across the Middle East are restructuring and diversifying in response to the international regulatory, tax and law changes. According to Ocorian - a global leader in fund administration, capital markets, corporate and fiduciary research – there is strong growth in demand across the Middle East in general and the UAE in particular for services supporting family offices.
Ocorian reports having seen significant families deciding to onboard with them and a major emphasis on governance with one family working with the firm to develop a governance structure on a par with FTSE-100 or FTSE-250 companies.
The new approach in practice
Family offices across the region are increasingly separating business and personal assets, both domestically and internationally, as well as reducing complex layers of special purpose vehicles (SPVs) in multi-jurisdictional structures.
Businesses in the region are looking to diversify their local investments by making more use of UAE Foundations, which is demonstrated by the surge in popularity of the Foundations since legislation was first introduced in 2017. The number has risen steadily each year since inception jumping from 600 in 2022 to nearly 1,000 this year.
When it comes to international investments, family offices are using new institutional-style structures, such as Private Funds and Cell Companies, to optimise their investment strategies. Some institutional and family-owned structures are migrating to top-tier jurisdictions like Jersey and Guernsey due to concerns over reputation and their ability to attract joint venture investors, and access financial services.
How family offices in the region can adapt
Families in the region considering setting up family offices should make use of the expertise of qualified lawyers and financial advisers. They need to decide between becoming a fully-fledged or virtual family office and consider incorporating holding entities or foundations.
Where family members and assets are based is a key consideration influencing the decision on the location of the family office and how it is managed.
Increasingly, family offices are looking for support in setting up and running family offices, as well as with structuring their wealth. They require support on collaborating with managers, including those based in Europe and the US, who are seeking investors. This link is important as it involves professionalising the family office and aligning with the requirements of international co-investors or managers.
Stronger governance is changing the way family offices in the region operate and will continue to shape the development of the sector. The increasing involvement of third and fourth-generation family members means it is essential.
Nina Auchoybur is Managing Director, United Arab Emirates at Ocorian.