Published by ThoughtLeaders4 Private Client Magazine
A definite theme to emerge from the interactive roundtable sessions on inter-generational conflict that took place during the 5th July TL4 Private Client / ConTra conference on ‘The Modern Trust – Contentious Trusts in a Changed Social Landscape’ was that of reputational risk, particularly the next generation’s increased – and increasing – awareness of and sensitivity to the potential for criticism and public censure. Many advisers had experienced the effects of this increased risk-aversion in a number of different ways. On a macro-level, some advisers have seen clients re-domiciling, so as not to be connected to a jurisdiction that rightly or wrongly, they perceive, or perhaps more accurately fear others perceive, to be in some way problematic. Another shared experience were clients who were reluctant to use trusts or other sensible wealth-structuring vehicles at all, fearing that their use would create a perception that they were shirking their duties as global citizens. At the investment portfolio level, a greater focus by younger generations on CSR, and disinvesting from sectors or companies deemed for example to be ‘climate-change denying’ has already been widely-discussed in the industry literature. Another area of discussion was client sensitivity to the reputation of their advisers. This was brought to the fore last year by comments made in the course of debate in concerning the situation in Ukraine, and the UK’s response to it, which were reported more widely in the press.
It is probably uncontroversial to attribute much of this increased sensitivity to reputational risk to the increasingly transparent world in which clients and their advisers are living. In large part, this is being driven by legitimate concerns on the national and supra-national level, primarily co-ordinated actions being taken to combat terrorist-financing and money-laundering. At present for example, further changes are being implemented by the UK and other jurisdictions in response to 5MLD, and in March 2022 the global Financial Action Task Force amended its Recommendation 24 to require member countries to strengthen the way in which they collect information on beneficial ownership of legal entities. It is also currently reviewing Recommendation 25, which deals with the beneficial ownership of legal arrangements other than legal persons. But there are also other, arguably less legitimate means by which organisations and individuals are pursuing transparency – the various ‘leaks’ facilitated by the International Consortium of Investigative Journalists is a very important example. However, even social media campaigns may also play a part – in the United States for example, the Twitter user calling himself MrMoneybags has seemingly made it his life’s mission to harass Brian Sheth, co-founder of Vista Equity. All these factors represent changes that mean that rather than affording wealth-owners more privacy, complex wealth-holding structures with many different parts across multiple jurisdictions can now actively compromise it.
Reputational risk management has long been an important consideration for corporations. There is now a growing industry seeking to provide reputational risk management services to private clients, but it is also something that should be factored in by more traditional private client service providers. In my experience as a trust litigator, private wealth disputes are often caused or made worse by structures in which there has been too great a focus on asset protection without a sufficient counter-balancing of other considerations. Increasingly, differing attitudes to wealth-structuring based on different approaches to reputational risk are leading to tensions within family structures, particularly between the generations. How might advisers rise to the challenge of providing solutions that achieve a structured and orderly devolution of family wealth and business interests, minimise the potential for breaches of privacy and reputational risk and are capable of accommodating different tolerances towards such risks within a family?
First, in general, slimmer, flatter, and less complex structures minimise the amount of reporting required and therefore the concomitant risk of leaks. In streamlined structures with less complexity, there is less potential for things to go wrong.
Second, structures should be stress-tested to ensure that they are flexible enough down the line that they can react quickly to friction points, and can be disaggregated or broken down into sub-structures to respond to changing fiscal and family circumstances or opinions.
Third, as well as these general principles, the reputational profile of each individual client must also be scrutinised and thought about both at the outset of a professional relationship or piece of work, and on an ongoing basis. Are there elements unique to that individual that might turn an otherwise fairly standard and unremarkable investment or piece of tax-planning into a public relations nightmare for them? One example is the criticisms of hypocrisy levelled at Justin Welby in 2018 when the Church of England’s investment in Amazon was reported in the media following a speech he had made criticising zero-hours contracts. More recently, considerable public censure was directed towards Rishi Sunak on account of his wife’s, Akshata Murty’s, non-domiciled status. Whilst undoubtedly being Chancellor of the Exchequer is a unique position with its own unique challenges, in the aftermath the same method of attack was subsequently employed for example by anti-SNP Twitter trolls to seek to discredit public (albeit not political) figures supportive of Scottish independence, such as Irvine Welsh, Alan Cumming and Martin Compston.
Here are just three suggestions to start. Given the rapidly evolving situation in terms of transparency, reporting and risks and other changes, such as societal attitudes to various different issues, there are clearly scope for more ideas. The key however will be, as always, to adapt those ideas and general principles to the circumstances of individual families and clients.
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