Trends in the Private Client Legal Market 2016

As tax avoidance and transparency remain prominent in both the social and political consciousness, a number of issues remain for international clients and their legal counsel. The stream of international regulatory structures introduced in the past few years has given rise to an abundance of compliance work. While issues of transparency threaten to undermine the very essence of private client work in some senses, regulation remains a hoop that must be jumped through and clients are striving to ensure that their tax and estate structures meet any and all new regulations. Contentious matters and philanthropic concerns still take up a great deal of time for many lawyers in this area, ensuring that the practice area is sufficiently diverse and busy. 

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Transparency and Regulatory Compliance

Transparency is now driving the evolution of international tax regulation, with regulators aiming to minimise tax avoidance and ensure that individuals and companies pay their fair share. Fanned by intense media scrutiny, public – and now political – outrage concerning tax avoidance has reached fever pitch, resulting in new international regulations that are due to come into effect in the coming years. Unprecedented phenomena such as the Panama Papers leak – where approximately 11.5 million files of information from Mossack Fonseca’s internal database regarding offshore tax practices were made public – have contributed to an uneasy feeling among private clients and their legal representatives. Market commentators tell us that clients now, more than ever, are “edgy” during planning consultations. As a result, there is pressure on lawyers managing tax structures to ensure not only that assets are protected, but also that their clients are not the victims of undue attention with regard to their tax arrangements.

Global attention on tax avoidance and tax evasion has been front-and-centre of the international political community’s mindset, with the Organisation for Economic Co-operation and Development (OECD) encouraging the international community to adopt measures to ensure that tax avoidance, a major source of lost revenue worldwide, is stamped out. The Common Reporting Standards (CRS) set out the reporting and due diligence standards that underpin the systematic cross-border exchange and transmission of taxpayer information to an individual’s resident country, with the aim of identifying if and where taxes have been evaded. Over 90 jurisdictions have committed to the implementation of CRS and, of these countries, over 50 plan to begin exchanging information in 2017. As such, clients and lawyers alike are scrambling to ensure that tax structures comply with regulations and do not attract any unwelcome investigation from tax authorities across the globe. Market sources were abuzz with comment on the potential backlash and dangers of the new regulations: “CRS and country-by-country reporting challenges legitimate concerns regarding the safety of family members,” remarked one source, alluding to the fact that wealthy clients from the developing world are keen to enjoy privacy, in order to protect their families from the jeopardies associated with financial prosperity, notably kidnapping and extortion.

In the UK, in his 2015 summer budget, then-chancellor George Osborne announced a number of changes to the way in which non-domiciled UK residents would be taxed in the future. Most notably, he announced a shift in the criteria for the payment of UK tax by non-domiciled individuals, requiring them to have resided in the UK for 15 of the past 20 years (down from 17, as was previously the case). Despite the subsequent Brexit vote and cabinet reshuffle, the new chancellor Philip Hammond proved keen to dispel rumours that the government were aiming to do away with the proposals, and in August forged ahead and released the latest round of consultation on the proposed changes to the non-domiciled tax regime. These amendments, due to come into effect on 6 April 2017, introduce significant changes to the way in which trusts are treated, and also touches on inheritance tax issues surrounding UK residential property held through non-UK structures. Despite the fact that there is not a complete set of draft legislation for these amendments as yet, several lawyers reported to us that the proposals were forcing their clients to ensure that their structures complied with these new regulations in order to successfully manage and protect their wealth, as well as causing some to re-evaluate their positions in the UK.

London’s Centrality and the Potential Consequences of Brexit

London is once again highlighted in our research as the chief destination worldwide for private client legal counsel, given the UK’s reputation for the “probity, expertise and infrastructure” that clients need. London-based lawyers remained fairly upbeat about the potential consequences of Britain’s unprecedented decision to leave the EU, despite revealing that they had already fielded a fair number of queries from clients regarding potential tax and residency issues. As one interviewee pointed out, “Britain will not formally leave the EU for at least another two years and it is highly unlikely that any significant changes will take place to Britain’s tax regime in that time.” Some lawyers did, however, mention that the referendum result could lead to some international clients rethinking London as their base in Europe, in part due to the possible future loss of benefits currently accorded by EU membership. That being said, other sources were keen to stress that international clients, particularly those from Asia and the Middle East, would not be deterred from purchasing London real estate and settling in the UK capital given its reputation as a global hotspot. Some even suggested that Brexit could result in an increase in London’s popularity. Ultimately, it is too early to tell what Brexit will mean for private client lawyers in the UK, but clients and their legal counsel will need to monitor the situation closely, with contingency plans in hand, to ensure that they are prepared for all eventualities.

Legal Market

The legal market has remained remarkably stable, with the personalised nature of private client work meaning that smaller private wealth boutiques can compete with the larger, more established firms on a like-for-like basis. One lawyer was quick to mention that “private client work rests on the foundation of strong relationships as well as excellent technical knowledge”, a combination which can often be found in smaller firms in the market. That said, given the increasingly international nature of the market, with international families and cross-border estates to take into consideration, firms with substantial cross-border capabilities are able to offer clients the truly international service that they require. Lateral hires have seen some US and international firms visibly looking to increase their capabilities in the private client area, with rumours that the Magic Circle firms in particular are looking to bolster their presence in the London market. However, more generally, cross-border client needs are evidently beginning to force the consolidation of both legal and fiduciary service providers in an increasingly globalised market.

Disputes

The rise in the number of disputes, and the potential for them to occur, has ensured that contentious specialists are enjoying a positive period. Clients are actively seeking the advice of disputes specialists in order to introduce creative solutions to mitigate the risk both of litigation and the potentially negative exposure associated with certain matters being made public. It was also reported that clients on the whole are more likely to include lawyers in the preliminary stages of a conflict to ensure that, as is so often the case in disputes between families, an amicable, conciliatory solution can be reached.

Philanthropic Concerns

As highlighted once again in our research, private client practitioners reported a healthy flow of work related to philanthropy and the establishment of charitable trusts and foundations. More and more high-net-worth individuals and families, keen to give something back to their domestic economies and also offer their support on international issues, are looking into philanthropic and charitable avenues and, as such, the amount of advisory work in this area has continued to form a steady stream of work. This trend is particularly visible in newer high-net-worth individuals: “Certain self-made individuals or families are proud of their achievements and are looking to teach their heirs the value of money,” noted one source. Therefore clients – wary of how to protect their newfound fortunes – are looking into the establishment and maintenance of philanthropic structures, with the intention of engaging heirs and promoting asset and wealth management. The market has responded to this demand, with the number of lawyers specialising in this field increasing.

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Given the mass of regulatory changes over the past few years, compliance work now seems to form a universal aspect of legal service in this area, as clients seek to ensure that their tax practices remain compliant in the face of a changing regulatory landscape. The focus on transparency which is driving these changes undermines the privacy aspect of private client work in general and can, in some circumstances, place certain family members in physical danger. Lawyers will need to balance legitimate reasons for wanting to maintain a safe level of confidentiality with the need to conform to international regulation. Despite the uncertainties surrounding Brexit, lawyers remain confident that London will continue to draw high-net-worth individuals and their families from across the globe. Lawyers are seeing no let-up in the prevalence of disputes, nor the tendency to involve lawyers at a much earlier stage in disputes, and this will continue to form a mainstay of work in the years to come.

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