Wealthy families are crossing borders, as their members decide to study abroad, to work and settle far from home or to escape geo-political turmoil. Therefore, family offices inevitably work across many different jurisdictions and must be aware of key regulatory triggers in all of them to ensure appropriate and sound risk management.
Very few jurisdictions regulate family offices. But depending on the services offered, they usually fall into one or more categories of regulated financial services and/or financial service providers such as portfolio managers, investment advisors or trustees.
Regulatory triggers in Switzerland
In Switzerland, a family office is not regulated as such but may trigger the application of different sets of rules and regulations. Below we discuss selected key regulatory triggers in Switzerland.
Anti-money laundering
The Swiss Anti-Money Laundering Act (AMLA) applies to financial intermediaries (such as portfolio managers and trustees) as well as to any person who on a professional basis accepts or holds assets belonging to others, or who assists in the investment or transfer of such assets. This includes anyone who carries out credit transactions, provides payment transactions, trades in cash or precious metals, makes investments or holds or manages securities on behalf of their clients.
The AMLA requires intermediaries to register with a self-regulatory organisation, except for licensed and, thus, supervised financial institutions. Additionally, it imposes a set of identification, clarification, due diligence, KYC and notification obligations.
As a general rule, the above activities only trigger AMLA regulations if family offices hold a power of attorney or a signatory right on their clients’ accounts or act as a corporate body (e.g. of a domiciliary company). They do not if family offices hold a power of information (e.g. to ensure integrated reporting to their clients) or only forward their clients’ investment instructions.
Although it is debatable whether single family offices – in particular those embedded in a family’s business – do trigger AMLA regulations, the Swiss regulator has yet to exempt them. However, financial services provided within a group of companies are specifically exempted.
In principle, the AMLA applies to family offices that are either located in Switzerland (or registered with the Swiss commercial registry) or have a factual presence (e.g. branch, offices or staff) in Switzerland.
Licensing requirements for financial institutions
The Swiss Financial Institutions Act (FinIA) applies to trustees, portfolio managers, fund management companies and securities firms.
A family office that acts as trustee or is mandated to manage assets in the name and on behalf of more than 20 clients, in return for more than CHF 50,000 (USD 55,000) gross earnings per year or for more than CHF 5 million (USD 5.5 million) assets, triggers a licensing requirement as trustee or portfolio manager, respectively.
If a family office manages collective investment schemes or occupational pension schemes above certain thresholds or pools clients’ assets in investment funds, it may trigger a licensing requirement as a manager of collective assets or a fund management company, respectively.
If a family office holds or trades clients’ assets or securities in its own name or for its own account, it would trigger a licensing requirement as a securities firm.
However, FinIA exempts single family offices and private trust companies that are, directly or indirectly, controlled by the family, in particular family offices embedded in the family’s business, and financial services provided within a group of companies.
In principle, FinIA applies to family offices that are either located in Switzerland or have a factual presence (e.g. branch, offices or staff).
Conduct regulations for financial service providers
The Swiss Financial Services Act (FinSA) applies, in principle, to anyone who provides financial services on a professional basis in Switzerland or for clients in Switzerland. It defines financial services as including financial advisory and portfolio management but not trustee services.
The registration requirement under FinSA does not apply to family offices that are supervised as financial institutions under FinIA, or that only provide services to professional clients.
In principle, FinSA applies to family offices with a location or physical presence in Switzerland, as well as to non-Swiss family offices that provide financial services to clients domiciled or resident in Switzerland. This includes ‘fly in, fly out’ services or ‘road shows’. Unsolicited inbound cross-border financial services – i.e. services specifically requested by a Swiss client – are exempt. So, non-Swiss family offices only providing cross-border inbound financial services are not regulated by FinSA.
Key regulatory triggers in the EEA
Like Switzerland, many European Economic Area (EEA) member states do not regulate family offices, but the services provided may trigger the application of rules and regulations. Below we discuss what the key regulatory triggers are.
The harmonised regulation MiFID II applies, in principle, to anyone who provides financial services professionally to clients based in the EEA. Each member state has transposed MiFID II into national law. As a result, each has different licensing categories and conduct and organisational rules which reflect the regulation.
While many member states – such as Italy, Cyprus and Liechtenstein – exempt financial services provided within a group of companies, only few member states, such as Germany, specifically exempt single family offices, in particular family offices that are embedded in a family business.
In principle, MiFID II applies to family offices that are either located in or have a factual presence in the EEA. However, non-EEA family offices may also trigger MiFID II regulations if they actively solicit or promote their services to clients domiciled or resident in the EEA. Unsolicited inbound cross-border financial services are exempt.
To sum up, it seems fair to state that multi-family offices lend themselves to a more complicated regulatory treatment than single family offices. They have more regulations to comply with and licenses to obtain for the regulated services they offer.
Strategically, in order to minimise the regulatory burden a family office catering to the needs of a globe-trotting wealthy family may choose to operate through licensed intermediaries or to set up branches. A family office with an international footprint could make complexity its strength and multi-jurisdictional services its core differentiator.