Regulatory, ESG and Crypto legal check-list for family offices post-pandemic
What are some of the key legal considerations that family offices need to consider when structuring investments in a post-Covid world? How have wealth-holder responsibilities and priorities changed within this new era?
For investment professionals working in a family office, ensuring they have the proper regulatory authorisation to provide investment advice is essential. However, they will not be held to the same strict legal obligations as fiduciaries, such as trustees when investing, and family offices are not regulated in the same way as banks and private equity funds. Arguably this may give the family office wider scope to consider different asset classes and investments. Therefore, the emphasis for a family office should be to understand the investment mandate from the principal and family. Once the family office is clear on this, these commitments can be built into legal documents as necessary.
Once the legal documents are instituted—whether these include a trust deed or bespoke articles of association—family office principals will find themselves working within a framework which may contain complex investment rules. Every structure is unique, and if a family office fails to follow the procedure within a trust deed or other instrument (for example, if a required consent is not obtained for a particular transaction), the family office will be accountable to the family.
In certain scenarios, family office principals may also find themselves in positions of authority, such as investment adviser or chief financial adviser, in some cases with fiduciary duties, so could be at risk of a breach of trust if they fail to follow investment procedure. In other cases, family office principals may be subject to contractual provisions on investments in their employment contract.
Implementing good governance within the family office is also key. That might include ensuring the family office takes the right advice from a third-party expert if it does not have the relevant in-house investment capability. Also, the family office should maintain an appropriate overview of the investment strategy, which might mean getting third-party assistance to give an impartial view. Overall, this means properly balancing in-house and external management.
Post-Covid considerations for the family office
If the pandemic has required significant changes to investment strategy and/or has impacted the level of returns, the family office should meet the principal and family to manage their expectations. Also, the family office should consider whether any re-structuring may be appropriate for tax and/or other jurisdiction-specific reasons if asset values are low.
Looking forward to a post-pandemic world, family offices will likely want to review the existing investment strategy. Jurisdiction-specific responses to the pandemic may have affected assets—for example, rental income or the ability of underlying businesses to trade may have been impacted by social distancing and lockdown measures—how will this affect investment strategy if and when these restrictions are eased?
Conflicts in the post-Covid world: ESG vs Crypto
The post-pandemic world has brought new subjects centre-stage. ESG (environmental, social and governance) is an increasingly important priority for some families, and many G2 and G3 family members have recognised that, in their lifetimes, they will have a moral duty (and potentially a legal duty, in due course) to structure their family's investment policy in an ESG-friendly way.
Most banks have already adopted ‘green’ platforms. Family offices, while more private and less regulated, may come under increasing pressure from the public (if not the law) to play their part, so many will feel they need to be “ESG ready”.
Crypto-assets provide an interesting example of where ESG and investment objectives could come into conflict. Some families will have considered whether to take crypto positions in the post-pandemic digital world. However, they must also square the environmental impact of crypto investment with their ESG policies. The current energy-intensive method by which most blockchains run—namely “proof of work”—presents real questions as to whether crypto-assets are compliant with ESG policies. Other families may decide to wait until blockchains have migrated to the more environmentally-friendly “proof of stake” systems before investing, or limit investment to “green” crypto platforms such as Cardano.
Crypto is just one example of a sector that could present ESG dilemmas. Others, from aviation to oil and gas to mining, will raise similar issues.