x Abu Dhabi, UAEWednesday 21 February 2018

Emerging financial centres show competition between law and lifestyle

Abu Dhabi, Dubai and Kuala Lumpur are vying to be the next global financial centre and doing their best to attract international firms. But when companies decide where to base themselves, which do they care about more: regulation laws or lifestyle?

Financial centres have been very much in focus over the past 12 months.

From the new Abu Dhabi Global Market (ADGM), planned to be open next year, to the continuing success of the Dubai International Financial Centre, through to the launch of a brand new financial centre in Kuala Lumpur, Malaysia, the race to create the next global financial hub is hotting up.

But what are the key ingredients of such a marketplace? How important is regulation, for example, as compared to liquidity or trading volume? And how significant are other more general factors, such as cultural aspects and quality of life, in determining the success of a potential financial hub?

The two new centres I had the opportunity to study in detail in recent months – the ADGM, and Malaysia’s TRX – put a different emphasis on these factors. Abu Dhabi put the regulator right up there as one of the three pillars of a successful centre, along with an efficient listings authority and a dedicated courts system.

In Kuala Lumpur, while the planner building the TRX over the next few years highlighted the country’s stringent legal system and common-law heritage, other factors seemed more important: the quality of the TRX as a working environment and its physical location close to the heart of the existing business district.

In Dubai, the DIFC authorities pride themselves on their regulatory and courts system, which they hold up as a model for the region.

But there is a cynical school of thought that holds that no investors or financial professionals are attracted to a location purely because of the quality of its regulatory regime or its courts system.

Infrastructure, both in the hard urban sense and the soft cultural sense, is regarded as potentially more important in this view. Good hotels, malls and schools are the clinchers when it comes to a decision by a bank or broking firm as to where to locate its regional or global headquarters. Lifestyle is as important as law.

A new piece of research from the regional leader in financial market research, the Dubai-based Insight Discovery, sheds some new light on the issue. The company’s regular investment panorama publication is compiled in association with some of the biggest firms in the Middle East, with insight from fund managers, bankers and other financial professionals.

The top line of the report seems to confirm the view from the regulatory camp: Lack of transparency is seen as the single most important challenge faced by the financial services industry across the GCC nations.

“Positive regulatory developments in Saudi Arabia and Qatar, and similar changes elsewhere in the region, are expected to considerably improve the situation,” the report says.

That seems pretty conclusive, but when you get to the nitty-gritty of the report it is apparent that financial professionals are just as pre-occupied with other matters outside the regulatory orbit.

More than 90 per cent believe the Middle East would benefit from an association promoting financial advice, for example. That conclusion seems to overlook the fact that there are already two such outfits based in Dubai alone: the Middle East Investor Relations Society and the Financial Services Association.

About the same portion, 90 per cent, have other priorities. They say that fund ratings on potential investments are just as significant when they are deciding where to invest funds. More than half invested through global emerging-market funds, followed by single-country funds and then regional funds.

So while market professionals flag up transparency as the key issue, when it actually comes to doing business they are far more inclined to be swayed by more technical factors such as the detail of how clients get referred to investment funds, and market technicalities such as the forthcoming inclusion of UAE and Qatar in the emerging market indices run by a United States investment bank, Morgan Stanley.

So which is it, law or lifestyle? My own view is that the financial industry will follow financial performance. If the returns are good in a lightly regulated market, they will head there and turn a blind eye to regulatory defects.

For the regulatory school, however, the trick is to convince financial professionals that good performance follows good regulation.