SEPTEMBER 30 — Single family offices (SFOs) are a new development in Malaysia, and we are in the race to become a leading Asian FO hub.

There is a new special financial zone (SFZ) in Forest City, Johor with a raft of incentives including a 0 per cent tax rate aimed at enhancing investment landscape that will widen the financing support for SMEs and the new economy.

The incentives are offered for 20 years, covering an initial period of 10 years followed by an additional/subsequent 10 years. To qualify, a minimum assets-under-management requirement of RM30 million for the first 10 years and RM50 million for the subsequent period is necessary. Additionally, certain licenses under the Capital Markets and Services Act 2007 are exempted.

The SFZ also provides a concessionary corporate tax rate between 0 per cent and 5 per cent, along with a 15 per cent individual income tax rate for knowledge workers.

Foreign banks will enjoy regulatory flexibilities to open additional branches within the SFZ and also benefit from foreign exchange flexibilities for offshore borrowing in foreign currency and investment in foreign currency assets.

There are three basic SFO types: single, multi and virtual offices.

The incentives are competitive but is it enough to compete or draw FOs from Singapore?

Singapore has a significant head start and as at end of August, had 1,650 FOs. The five-year compounded annual growth rate of wealth management in the region stands at approximately about 10 per cent.

The major draw for FOs in Singapore include a strong rule of law, a robust and predictable regulatory regime, an established ecosystem of wealth managers and professional service providers, as well as world-class education and healthcare systems.

While Hong Kong has no published official statistics, it is estimated to have around 2,700 SFOs as of the end of 2023.

A study indicates that Hong Kong and Singapore together are home to 15 per cent of the world’s SFOs, each managing roughly US$1.3 trillion in offshore assets.

SFO is specifically designed to serve the unique needs of families with significant wealth. It offers wealth and legacy planning advantages over the traditional forms of wealth management. It takes a family’s holistic wealth picture and streamline objectives to align with family members’ collective desires and mission.

SFO can be an expensive endeavour. The staffing, IT, operational, regulatory and compliance reporting costs can be high especially for families with significant tax, accounting and investment complexity.

An international study found that 85 per cent of SFO professionals believe their operations and structures have become more professional but only 18 per cent feel they are in a very strong position to meet complex global regulatory demands.

In 2021 the implosion of Archegos Capital Management drew the scrutiny of several regulators in US. The demise of Archegos dragged the Nikkei 225 Index down by 0.77 per cent on March 30, 2021, triggering a worldwide sell-off in banking stocks. It came to light that SFOs were reportedly "more loosely regulated than other investment vehicles, with fewer disclosure requirements”.

Globally, SFO are tackling ongoing economic challenges and geopolitical conflicts while mitigating risks both internally and externally. Risk management was recently identified as a ‘dangerous’ weak spot in SFO.

Typically, SFO require long-term commitment, often locking up capital for several years and tend to be less liquid than public equities.

Private equity is the top asset class for SFOs. Slow growth, labour issues, high interest rates, inflation, geopolitical tensions, potential recessionary pressures and instability could all dampen fund-raising and exit opportunities.

SFO servicing require accountants, lawyers, bankers, estate and tax planners, investment and operations professionals but does local talents meet the demand? No SFO is the same as each requires a high degree of customised service.

The SFZ is said to potentially become a recognised financial hub like Shenzhen and Dubai.

But bear in mind, the European Parliament has kept the United Arab Emirates on the EU’s list of High Risk Third Countries for strategic deficiencies in their anti-money laundering regulations. Even Transparency International had lobbied to keep the UAE on the European grey list.

Essentially, the projected economic multiplier effect of the SFO initiative is only between RM3.9 billion and RM10.7 billion in economic value over the long-term.

Is it worth the efforts for over the long-term?

Well, challenges can be seen as opportunities.

We need to build a strong and solid runway for the SFO to take-off and the ability to pre-empt, pivot and be ready for whatever the future holds. A strong runway is needed too in the unlikely event of any soft or hard landings.

We need proper screening report on assets invested to avoid money-laundering.

Practice proper governance and disclosure requirements since exemptions are given on certain licenses under the Capital Markets and Services Act 2007.

Are there enough local talents to meet the demand required by SFO? Hiring foreigners may thwart the multiplier effect.

Particular consideration should be given to the ‘very attractive’ incentives, as overly generous arrangements can be seen as overly promoting the ‘ghost city’ at the expense of other cities while subsidies are being cut for citizens. Remember, they may be ‘high-net-worth’ individuals but other Malaysians should not be seen as ‘second-class’ citizens.

By the way, tax incentives are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zones Act 1990 and under the purview of Miti. I wonder why the Securities Commission is tasked on this one.

What say you?

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.