Global forces drive regional realitiesFILE/EY-global-forces-drive-regional-realities.pdf · Global forces drive regional realities . Global forces drive regional realities 3 The wealth

Global forces drive regional realities The EY GCC Wealth and Asset Management Report 2016

Global forces drive regional realities Global forces drive regional realities2 3

ContentsForeword

Asset management

Pension funds

Wealth management

Asset services

3

4

8

12

16


The wealth and asset management industry in the Gulf Cooperation Council (GCC) region continues to develop rapidly, as the quality of the value proposition available to clients expands. With disruptive influences increasing in the region — from the weak oil prices to global technology trends and generational shifts — we expect to see a step change in the development of the industry as a whole over the coming years.

Last year, in our first EY GCC Wealth and Asset Management Report, we explored the unique evolution and expansion of the industry over the past two decades, across asset management, pensions, wealth management and asset services. Financial services still continue to contribute to the growth of the region’s economy but its shape is changing as the market matures, with significant consolidation taking place among public and private sector banks — most recently between First Gulf Bank and National Bank of Abu Dhabi — and in the sovereign wealth fund space (SWF).

In this year’s report, we look at how global trends are influencing the region. The recent focus on regulation and compliance is giving way to a new growth agenda, as the whole industry embraces technological change and looks for the new business norms this implies. The emergence of disruptive FinTech companies — start-ups offering technological alternatives within financial services — is starting to have an impact in the GCC region. More established companies are also starting to experiment with different applications of blockchain technologies, which simplify transactions through an open access database. They are also contemplating how the emergence of automated advice — known as robo-advisors — will impact the GCC region.

These global drivers are intersecting with the regional realities of lower oil prices, prompting new strategies for preserving wealth during a time of considerable volatility in the GCC markets. In particular, assets under management (AUM) in traditional funds are falling in favor of alternative allocations, led mainly by private equity (PE) and real estate. The specific combination of these global and regional factors will shape the industry for years to come.

I would very much like to thank the industry leaders who took the time to share their insights with us for this report. I am incredibly excited and delighted to release the second 2016 EY GCC Wealth and Asset Management Report.

George Triplow EY MENA Wealth & Asset Management Leader

Foreword

Asset management

1

Traditional inflows are weaker across much of the sector, but new drivers are reshaping the industry.

Asset managers in the Gulf have struggled under a number of headwinds over the past 15 months. The continued outlook for a weak oil price over the medium-to-long term is causing government finances and cash flows to contract through the entire regional economy. There is no doubt that this dynamic is limiting the amount of new money available for investment and has already led to redemptions. Assets under management (AUM) have further declined due to weak equity markets, in which almost a third of managed assets are invested. This weakness is exacerbated by a structural imbalance. Markets are dominated by retail investors and have a narrow sector spread, while the larger proportion of assets — around US$200b — is kept in separately managed portfolios.

These factors explain the decline in AUM among the large traditional asset managers that are dependent on banks’ distribution models (Figure 1). Some of the drop reflects the overall market dip — the Bloomberg GCC 200 Index, for example, which is composed of some of the largest companies across the region, was down by 14% over the year. In this challenging context, it is particularly impressive that Saudi Arabia’s National Commercial Bank (NCB), already one of the largest asset managers in the region, was able to grow its AUM by 40%, mainly due to dynamic product development and growing distribution channels.

As a result of these shifts, managers are increasingly open to join the global debate around active versus passive investment models. With a third of all assets in passive vehicles, there is much to discuss around fees, liquidity, allocations and the longevity of active management.

Figure 1: Assets under management of selected GCC banks (US$b)

–13%–18%

–22%

–6%

2014 2015 Change

–30.0

–20.0

–10.0

0.0

10.0

20.0

30.0

40.0

50.0

14.2

10.5

9.2

4.7

2.9

2.5

1.8

19.9

11.1

8.0

3.9

3.0

2.0

1.7

40%

5% 3%

NCB NBK Samba QNB EmiratesNBD

NBAD BankMuscat

7.0

7.8

11%

RiyadBank

Sources: Annual reports, EY analysis

The asset owner agendaAsset owners in the GCC region — pension funds, social security funds and the SWF community — have realized that change is imperative and are starting to be more open about their thinking. SWFs have reduced allocations to third party managers. The emergence of fiscal deficits in 2015, in some cases the first seen in the 21st century, has caused some governments to draw on their SWF assets or halt new inflows to SWFs. A major Saudi Arabian institution withdrew up to US$70b from external mandates in the second and third quarters of 2015, according to estimates by Insight Discovery, based on information from global asset managers. In addition, a number of major global firms, including Aberdeen Asset Management, Northern Trust and Old Mutual Asset Management, have attributed losses of AUM to the GCC redemptions during 2015. This has led to asset managers examining how best to service large institutional asset owners and allocations on an ongoing basis.

Global redemptions are not all due to fiscal demand. We have seen a long-term trend toward more sophisticated funds managing more assets internally. One major SWF organization has increased the proportion of its assets managed internally from 25% in 2013 to 40% in 2015. The Invesco Global Sovereign Asset Management Study 2015 highlighted this trend as “a decade-long shift to developing in-house asset management capability”. While the exact impact on the GCC region’s asset management industry is still unclear, given the lack of data available, both in-housing and fiscally motivated withdrawals will increasingly affect asset managers in the region and globally.

Looking ahead, many of the region’s asset owners are undergoing structural changes that could affect the size and type of asset allocation they use. While we see a trend toward internal management for the more sophisticated of asset allocators especially around the use of passive vehicles, SWFs will still maintain significant allocations to external managers across asset class.

We watch with interest the development Saudi Arabia’s decision to develop the Public Investment Fund (PIF) as a SWF, initially by consolidating public assets, and then potentially allocating initial public offering (IPO) revenues from oil giant Saudi Aramco, of which is to be floated in 2018.

Global forces drive regional realities 5


What will create opportunities for new and existing funds? The domestic mutual fund market has failed to develop and evolve across the GCC region, despite banks’ expansion of distribution channels in the retail space over recent years. With US$26b of AUM in 2015, mutual funds in the GCC region remain small relative to the size of the regional economy (figure 2) — even in Saudi Arabia, which dominates the region’s industry with US$22b of AUM. In mature markets, AUMs are significantly higher, mainly due to the larger allocations from institutional clients. Even in emerging markets, the share is two to three times higher than in Saudi Arabia. However, in the UAE, the region’s second largest economy, the share is just 0.3% of GDP — considerably lower than that of Saudi Arabia.

Figure 2: Mutual fund assets in the GCC (percentage of GDP and US$b)

% of GDP US$bnQatar Oman UAE Kuwait Bahrain Saudi

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

US$0b

US$5b

US$10b

US$15b

US$20b

US$25b

Sources: Bloomberg, EY analysis

One reason is relative returns. Industry experts suggest that trading families in the Gulf region are accustomed to receiving higher than average returns in an uncompetitive market place through diversified conglomerate type of investments. Many lost significant capital invested in traditional asset classes during the crisis, explaining the post-crisis attraction to products such as private equity that promise better than market-average returns. Collective investments are not particularly interesting to investors in the region; most tend to hold real estate or individual securities, and there’s also a trend toward fixed income and cash to reduce volatility.

There is potential for equity funds to grow over the next few years driven by a renewed rise in the number of IPOs. These peaked at 16 in 2014 (totaling US$11.1b) but came down sharply to 6 (US$1.4b) in 2015 and 3 (US$700m) in the first half of 2016. The positive outlook — throughout the region — is a result of two factors: the governments looking to diversify financing due to the weak oil price by part-privatizing state companies, and family firms taking advantage of looser listing requirements and more liquid markets, due in part to the growing involvement of foreign investors.

Saudi Arabia will set the benchmark with the listing of Aramco, but there have already been significant changes in the market. The Capital Market Authority (CMA) has been encouraging the launch of IPO funds to help reduce price volatility and to allow foreign investors, who are not permitted to subscribe to IPOs directly, to get exposure to listing through these funds. A number of new funds were launched over the past 12 months, such as the Al Rajhi IPO Fund (US$32m), SAIB Saudi IPO Fund (US$19m), and NCB’s AlAhli IPO Fund (US$15m). Saudi Arabia has mooted several other government IPOs including airports, flour mills and the Tadawul itself. Plans were also announced in April 2016 to open a market for small-and medium-sized companies in 2017.

Kuwait has also indicated plans to part-privatize about 20%–30% of four major downstream and oil sector services companies, listing at least some of them. It has also passed a new public private partnership (PPP) law that requires 50% of the equity of project companies to be floated; the new PPP laws planned in Oman and Qatar might follow Kuwait’s example. In the UAE, the Companies Law passed in 2015 cut the minimum free float from 55% to 30% and new IPO regulations are also currently being drafted.

Figure 3: Mutual fund assets in the GCC by class, percentage

Money market

Equity

Commodity

Fixed Income

Mixed Allocation

Real estate

Mutual fundassets,by class

30%

39%12%

10%

7% 2%

Sources: Bloomberg, EY analysis


Free zones support innovation in asset managementIn the UAE, free zones are supporting both foreign investment and innovation in asset management. Abu Dhabi Global Market (ADGM), an international financial center, opened its doors to members in October 2015 and is starting to attract wealth managers, private banks and asset managers. Eshara Capital was the first to set up its headquarters in the center, launching its first mutual fund, designed for international investors seeking exposure to the GCC markets. Other members include Afkar Capital, which launched a UAE-equity exchange-traded fund (ETF) in June 2016, listed on the Dubai Financial Market, which it describes as the Gulf’s “first fully tradable, fully fungible liquid and transparent” ETF. Among international firms, Macquarie Capital and Aberdeen Asset Management have set up offices in ADGM.

In the Dubai International Financial Centre (DIFC), many funds have been launched that make use of the zone’s new qualified investor fund (QIF) legal structure. This is designed to enable fast-track fund registration for flexible investment vehicles designed for sophisticated investors (the criteria include US$500,000 minimum investment and no more than 50 individual investors). TVM Capital Healthcare Partners launched the first QIF in March 2015 — and a second one a year later — targeting emerging market health care opportunities. Other QIFs have focused on the domestic property market, such as the Hometown Dubai Hospitality Fund. The development of more international financial centers in the region creates dynamic opportunities for individual managers and fund regimes to attract assets from different segments to the GCC markets.

Where are the opportunities?

• Partner with asset owners and SWFs to meet their changing asset management needs.

• Prepare for a raft of IPOs in Saudi Arabia and elsewhere.

• Utilize free zones to launch innovative products and funds.

Pension funds

2

Pension reform is becoming increasingly pressing for some Gulf states, given the weak outlook for oil prices and the legacy of unsustainably generous schemes, low retirement ages, and underperforming asset returns.


Gulf states provide their citizens with one of the most generously defined benefit schemes in the world, both in terms of the size of the pensions paid out and the relatively low level of contributions required. Although contributions currently exceed benefit payments in most cases, few schemes are sustainable. The high growth rate of the national population, longer life spans and rises in final salaries during the long oil-boom mean that the assets held by many of the pension funds are insufficient to cover the large actuarial deficits.

These concerns are becoming increasingly urgent. The relatively weak outlook for oil prices in the medium term and long-term technological changes will mean further diversification of the economy away from oil and, therefore, a decline in the fiscal revenue underwriting Gulf pensions. Standard & Poor’s (S&P) warned in a July 2016 report, based on its Global Aging study1, that unless Saudi Arabia takes action to control its pension liabilities, its annual spending on pensions could rise from 2.7% of GDP now to 9.4% by 2050. Financing such a fiscal burden would push up debt levels rapidly and could relegate its sovereign credit rating to junk status. Standard & Poor’s was hopeful that Saudi Arabia would avoid this worrying scenario by taking action over time to ensure the pension system becomes sustainable.

In Oman, the demographic trends responsible for rising pension liabilities are already underway. Oman’s public sector pensioners, split across a multitude of funds, increased in number by 7% in 2015 and their entitlements rose by 13% to US$900m, reveals data from the National Center for Statistics and Information (NCSI). Proportionately, Oman is thought to have the largest pension deficit in the region, equivalent to a sizable share of its GDP, followed by Bahrain and Saudi Arabia.

The International Monetary Fund’s (IMF’s) Regional Economic Outlook in April 2016 urged countries in the Middle East to consider pension reforms to free up fiscal resources to fund growth and job-creating investments. The kind of reforms that could be considered include increasing contributions and reducing benefits, for example by paying a smaller share of final salary, using a career-average salary or capping eligible salary. Benefits could also be delayed by increasing the number of service years required, raising the retirement age and limiting the common practice of early retirement.

Outside the Gulf region, Morocco has pushed through an increase in the retirement age from 60 to 63, given its own large pensions deficit. Within the Gulf, the UAE increased the early retirement age from 49 to 50, continuing a trend in recent years. However, this is very much an isolated case, and reducing benefits more generally will be more difficult. When the Bahraini finance minister, Shaikh Ahmed bin Mohammed, hinted in April 2016 that the pensions system would be reviewed, there was widespread outrage in the local press and on social media, leading the prime minister to clarify

that there were no imminent changes planned. At the same time, Bahrain’s parliament sought to push in the opposite direction, voting again for a bill, which it had first proposed in 2007, to increase the annual pension uplift from 3% a year to 7%. The Shura Council is expected to reject the bill, as it did before.

Change is happening, however. When the UAE, which has greater resources to sustain a generous pension system, started a pensions review in late 2015, there were rumors that it would lead to reforms, but no real panic. Indeed, one prominent Emirati economist, Abdulnasser Alshaali, expressed his support for reform and proposed a shift to a Notional Defined Contribution System as well as a system for additional contributions to private pension pots.

The GCC public pension funds do not publish information on asset size, allocations, policies or investment performance. We have estimated these on the basis of third-party sources (see Figure 4). Like last year, Kuwait, Qatar and the UAE were relatively well-capitalized on a per capita basis, while Bahrain, Saudi Arabia and Oman were facing the strongest pressures. Those funds, which are most exposed to local equity markets, such as Qatar and Saudi Arabia, have declined the most in absolute and per capita terms in comparison to those that are more diversified by asset class and geography. This is obscured when assets are compared to GDP since much lower oil sector GDP has more than offset estimated asset price declines in some cases (especially in Kuwait) — a trend that will continue in 2016.

Figure 4: Estimated public pension assets (end-2015)

% of GDP (LHS) $k/national (RHS)

10

20

30

40

50

60

Bahrain Kuwait Oman Qatar SaudiArabia

UAE GCC

10%

20%

30%

40%

50%

60%

00%

Sources: IMF, Willis Tower Watson, EY estimates

The Gulf pension funds may be trying to become more transparent to their members. In November 2015, the Saudi Arabian authorities responded to criticism from the international Financial Stability Board (FSB) about its reporting by saying that the Public Pension

1. Global Aging 2016: 58 Shades of Grey


Agency (PPA) would disclose some information about returns and asset allocation, although this has not yet appeared. The board of General Organization for Social Insurance (GOSI), which provides pensions for Saudis working in the private sector, has also approved a more active disclosure policy. Such disclosures would certainly fit in with a broader national focus on transparency emphasized in the new Saudi Vision 2030 and National Transformation Program. The Saudi Arabian response to another FSB recommendation, to further outsource portfolio management, noted that over half of the PPA’s assets are already outsourced, but it does intend to put more out to external managers.

Expatriate pensionsThere is a growing recognition that the traditional end of service benefit (EOSB) system for expatriates provides inadequate retirement savings for population who are tending to work for longer time periods in the GCC markets than ever before, including up to retirement. The typical payout, based on one month of basic salary per year worked, generally represents a contribution rate of less than 5% of aggregate income, far less than comparable employer contributions made into social security and private pension funds in other countries.

In response to this, a growing number of employers offer schemes that are enhanced beyond the legal minimum, with features such as higher accrual rates for long-term employees. Just over a quarter of employers offer these to all staff, according to the latest Willis Tower Watson Middle East EOSB Survey2. However, only 10% of firms in the UAE offer a more formal international pensions plan (IPP), including benefits like employee contributions and investments in funds, according to Mercer’s Middle East 2015 Total Remuneration Survey. This number is growing fast, according to Willis Tower Watson’s International Pensions and Savings Plan Survey 2015, which finds that 13% of new plans started since 2013 were in the Middle East, twice the region’s current share of IPP members globally.

Whether the trend toward expatriate savings schemes, both enhanced EOSB and more formal international pensions, continues may depend on how competitive the jobs market is in the next few years. Weaker economies with widespread public sector layoffs of expatriates may dampen the competition and mean more firms choose not to go beyond the legal minimum.

Meanwhile, legislative changes related to pensions in their home countries are also having an impact on some expats. In October 2015, the Reserve Bank of India (RBI) opened up the National Pension Scheme to Non-resident Indians (NRIs). The initial

uptake has been limited, and the Indian Pension Fund Regulatory and Development Authority is looking to make participation easier for NRIs by launching a non-repatriable version of the scheme. In the UK, new rules were introduced in 2015 that permit those aged over 55 to access their pension fund(previously they had been required to purchase UK annuities). On the positive side, this provides British expats in the Gulf with greater flexibility in managing and utilizing their retirement savings in different vehicles. Particularly at a time at a time when there are serious post-Brexit concerns about the outlook for the pound and the solvency of some UK pension funds.


• Provide actuarial assistance and other services to public and savings pension funds.

• Develop products tailored for international pension plans.

2. End of service Benefits in the middle East: 2015 Survey Results


Wealth management

3

Local banks are increasingly entering the private banking space.


Given the sizable numbers of affluent families in the Gulf, the wealth management market in the region is extremely active and covers everything from family offices, ultra-high net worth and high net worth individuals and, increasingly, the segment of the growing affluent.

The European banks have historically had strong market share, serving clients who wished to send money out of the GCC for various reasons. The briefcase banking model has, however, eroded as people begin to understand the importance of an onshore presence, and the European centers have lost attractiveness due to regulatory issues and rising compliance standards. While the trend to have family wealth managed externally had retreated in recent years, the oil price decline and challenging geopolitical situation in the region has encouraged a return to sending money out.

Local private banks have, however, recognized that they need a value proposition across different segments. They have been working hard to compete by recruiting experienced staff, including former relationship manager from their rivals, and tailoring their offering to local needs, from Islamic investment products to tag-on lifestyle services, ranging from advice on philanthropy, to access to premium airport lounges. They also have an advantage in their ability to book locally, and their knowledge and relationship networks facilitate client onboarding.

Although market shares may fluctuate, the region is now arguably overbanked. Some of the larger local players are approaching saturation in their home markets and are starting to venture out. With high levels of protection in the GCC markets, some are starting to focus on markets further afield. Africa, in particular, is seen as an attractive location with Dubai becoming a hub for Africa, as Europe did for the GCC region some years ago. Many African clients own property in the GCC, spend more time in the region and have a strong affinity to many of the brands. The UAE has strong ties to many African markets and a growing number of African firms are using Dubai and the DIFC as an infrastructure hub.

The lack of regulation creates risks for clientsThere is still considerable scope for the retail wealth management sector to mature, but until tighter regulations are in place, the market will remain a good decade behind advanced markets like the UK. Currently the sector has two largely independent components—the local banks, which largely focus their services on the Gulf nationals, and the international financial advisors, of mixed quality, who market their value proposition to locals and to expats. Both components suffer from a lack of transparency and independence. High fees are often hidden in opaque commissions on funds and other products and advice shaped by narrow sales interests.

We see many in the industry who would welcome commission disclosure across all financial products, as we have seen with the retail distribution review (RDR) in the UK. The key would be to provide lower costs, genuinely independent advice and technology-supported portfolio diversification with a focus on passive funds and ETFs, rather than complex structured products.

The bancassurance products such as offshore bonds (investment funds in a life insurance wrapper) and contractual saving schemes offered by many local banks are often inappropriate for investors in the GCC region. They are not transparent and impose hefty penalties for early withdrawals or an inability to keep up scheduled contributions. The dynamic will be tested in the medical insurance market where disclosure of commissions will highlight a similar fee structure.

The digital agendaThe wealth and asset management sector has been slow to embrace the digital agenda in the GCC region, but that is now beginning to change across much of the industry. At the simplest level, there is a growing focus on using online and app-based platforms to improve the client experience. Many Gulf banks have already implemented sophisticated digital tools for retail banking, often with better capabilities than many Western banks. Some are now extending this to wealth management, although so far largely just for

informational rather than transactional purposes. Emirates NBD’s main mobile banking app, for example, currently allows clients to view their investment portfolios, but transactional capabilities will be added in 2017 so that clients can transmit trading requests and communicate with their advisor to review their options for asset allocation and portfolio rebalancing. Wealth managers are also looking at how they can make use of big data to better understand and respond to their customers’ needs.


The industry worries that international best practice on advisory client protection might not be brought in until catalyzed by a mis-selling scandal. If there were to be a regulatory reform encouraging transparency on fees, it would put downward pressure on the cost of advice and possibly accelerate the development of automated advice (see box).

Regulatory change could be on the way since the Isle of Man, where many of the Gulf-based financial advisors are registered, is introducing requirements to ensure advisors disclose their fees to clients. This could encourage change, although advisors might just move their registration to another jurisdiction such as Mauritius without the same disclosure requirements.


• Compete on client service quality, including through enhanced digital offerings.

• Evaluate the potential for an automated robo-advisor service for retail customers.

The cost of adviceImagine a world where wealth managers no longer had to prospect for clients and where financial advisors were no longer remunerated on opaque commissions with embedded fees and poor ongoing performance. Imagine clients actively participating in the management of their current net worth, savings and pensions, and proactively requesting the information they need. As the wealth management market matures and a sizable asset transfer takes place over the next 25 years from baby boomers to millennials, this is the kind of model emerging — one that is central to the client’s needs rather than the product or the provider’s revenue ambitions.

Outside of the GCC region, tighter regulations in the retail sector and an environment of low returns have pushed down the cost of advice in recent years. In the GCC region, this has not yet happened. As a result, private banks tend to compete more on client service than on costs and bank margins in the GCC region are 30–50 basis points higher than in other parts of the world.

This constellation is changing, however. Clients are demanding a better customer experience, and while there will always be the need for the typical structure of relationship manager in certain ultra-high-net-worth segments, we see younger investors — millennials born in the 1980s and later — demanding a shift away from the traditional model of prospecting and referrals.

Matched with an increasing focus on cost and investment performance, we know that 80% of millennials are happy to invest in a passive medium, put off expensive active funds by recent years of volatility and low interest rates. The management of data, whereby firms can monitor who is consuming their output of blogs, social media, research and react to it, provides added value to clients that no traditional marketing budget can quantify.

Across the GCC region, product providers will be increasingly faced with the active/passive debate. Clients increasingly want to see low-cost services that offer reliable passive products such as ETFs. Product providers, on the other hand, fear disintermediation, as clients directly use more dynamic platforms — both automated robo-advisory platforms at the low-cost end and active advisory too, especially in the alternative space, with the liquidity premium required. It is the feared middle ground that will lose out where prices are traditionally high and returns are low.

Many millennials will not simply rely on an advisor for advice, but demand a more active role in asset allocation and selection. In the GCC region, this change could be more pronounced since many in the affluent and high-net-worth segment have adequate exposure to other real assets, such as real estate, infrastructure and private equity.


Asset services

4

The opening of the Saudi Arabian equity market has not had a dramatic impact on the industry yet, but change is on its way.


The opening of the Saudi Arabian equity market to foreign investors, with support for independent custodians, was the landmark event of 2015 for the asset services sector. The amount of new business flowing from this has, so far, been more modest than hoped. This was largely due to the weakness of the Saudi Arabian market, which fell almost continuously for the seven months after it was opened to foreign investors, putting it down by more than 40% at its low point in January 2016.

Just seven foreign firms have registered as Qualified Foreign Investors (QFIs): HSBC, Citigroup, BlackRock, Ashmore, Silchester, La Francaise and Unlu Menkul Degerler, although others, such as Templeton, have expressed interest. These companies and their clients collectively own just 1% of the Tadawul by capitalization. Nevertheless, some custodians report an uptick in assets in custody last year, on the back of foreign inflows into Saudi Arabia, Qatar and the UAE, where companies have been steadily raising their foreign ownership limits to the 49% level that is now legally permitted.

In order to encourage more QFI registrations, the Saudi CMA has lowered the bar, requiring them to have just US$1b of AUM (compared with US$5b previously), effective from September 2016. It has also loosened up ownership limits and plans to shift to T+2 settlement in 2017. This should help with Saudi Arabia’s next bid for inclusion in the MSCI Emerging Market Index, which was rejected for the third time in June 2016.

HSBC has long been the dominant full custody provider. It appears to have established an early lead in Saudi Arabia as well, notably

signing up Ashmore, one of the most enthusiastic early QIFs, in 2015. Other custodians are active in Saudi Arabia too, with Northern Trust, for example, winning the mandate for Muscat Capital’s Saudi IPO fund. There is, however, plenty of scope for other custodians to build market share, as the market recovers, foreign inflows increase as more QFIs sign up and the Tadawul is finally included in MSCI (probably in 2017–18).

Although foreign investors are likely to prefer an international bank for custody, local players are increasingly competing for domestic business. In Qatar, for example, the Qatar National Bank (QNB) had secured 35% of the domestic custody market by the end of 2015, only two years after launching its custody service.


• Support the growing market participation by foreign institutional investors, particularly in Saudi Arabia.

• Further enhance the value proposition to develop collateralization and bundling for clients.

The value of blockchainDigital technology is not just an enabler, but also potentially a disruptor. While the threat of robo-advisors to established wealth managers in the GCC region has lagged behind other markets, the disruptive potential of blockchain may get a head start in the region.

Blockchain is the distributed ledger technology used in crypto-currencies such as Bitcoin, but it has much broader applications across financial services. It presents a unique opportunity to simplify and accelerate private banking and wealth management processes in a more networked, transparent and decentralized way. It may take three to five years before blockchain replaces some of the industry’s legacy operational workflows, but the logic is clear and the momentum unstoppable. It is not a case of if blockchain becomes mainstream, but when. Blockchain technology has already started to impact the worlds of retail and e-commerce, and is now moving into retail banking and payments services. The next step is the shift toward the asset and wealth management segments, where it can be used to streamline clearing and settlement of trades. Banks and wealth managers are already beginning to see how this could improve business processes and change the relationships

between customers, competitors and vendor suppliers, improving customer experience and facilitating “know-your-customer” regulations. It could, however, also open the way for new entrants to deliver smarter and more personalized solutions that are both cost-competitive and more convenient to use. At the very least, the potential for immediate and low-cost peer-to-peer settlement of transactions would destroy the current chain of intermediaries including brokers, custodians, clearing houses and central depositaries.

There is considerable interest in blockchain in the Gulf region. The National Bank of Abu Dhabi was among the first seven banks globally to join the Ripple blockchain platform for interbank payments, launched in June 2016. Dubai Future Foundation launched the Global Blockchain Council in February 2016 as a PPP to investigate opportunities for using blockchain technology. It has started pilot initiatives in areas as diverse as medical records and authentications of diamonds. One of the pilot projects of direct relevance to wealth and asset management involves settlement of trades at the Dubai Multi Commodities Centre (DMCC).


The route aheadMany of the local drivers of growth for the industry are facing headwinds from lower oil prices and the wave of fiscal rethinking that this has brought to the region. Whilst the Wealth Management industry flourishes we see continued market entrants a possible wave of consolidation and the dawn of the digital world. Asset management continues to develop though remains at a cross roads expectant of further developments to stimulate capital markets inflows and product development. Global factors are also starting to impact the industry, challenging its high margins, complicated processes and established players. The most important trends are:

• The importance of client experience and preferences of different segments particularly the millennial generation

• The impact of tighter global and regional regulations

• The disruptive impact of digital technology and automated technologies

These interconnecting local and global factors are bringing new opportunities along with threats, especially since the underlying demand for services continues to grow. In every aspect of the industry — from pensions, to cost-effective advice, to customized asset management products and better client experience — there is room not just to disrupt but to expand.

Beyond the GCC region too, there are markets such as India and many African countries that are open to expansion for the GCC region’s asset and wealth managers. We are living in interesting and difficult times, but those who understand the forces reshaping our industry will emerge from today’s crossroads ahead of the crowd.


EY Wealth & Asset Management team

George TriplowMENA Wealth & Asset Management Leader [email protected]

Gordon Bennie MENA Financial Services Market Leader [email protected]

Robert Abboud MENA Financial Services Advisory Leader [email protected]

AdvisoryPhilip Wheeler MENA Wealth & Asset Management Pension Leader [email protected]

Benjamin Humphrey-Gaskin MENA Wealth & Asset Management Technology Leader [email protected]

Inder Dhillon MENA Wealth & Asset Management [email protected]

Assurance Tax TASAnthony O’Sullivan MENA Assurance Partner [email protected]

Ismael Hajjar MENA Private Client Services Tax Leader [email protected]

Vikash Madhogaria MENA Transactions Advisory Services [email protected]

EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

The MENA practice of EY has been operating in the region since 1923. For over 90 years, we have grown to over 6,000 people united across 20 offices and 15 countries, sharing the same values and an unwavering commitment to quality. As an organization, we continue to develop outstanding leaders who deliver exceptional services to our clients and who contribute to our communities. We are proud of our accomplishments over the years, reaffirming our position as the largest and most established professional services organization in the region.

© 2016 EYGM Limited. All Rights Reserved.

EYG no. 03876-164Gbl ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com/mena

Documents

Global forces drive regional realitiesFILE/EY-global-forces-drive-regional-realities.pdf · Global forces drive regional realities . Global forces drive regional realities 3 The wealth