MONACO FINANCIAL CLUSTER Microeconomics of Competitiveness Group 5: Lionel Gresse, Karen Muller, Jitka Šlechtová MBA 2011

GEOGRAPHY Strategic location in the road between Italy and Spain Characteristics Monaco Location Strategic location in the road between Italy and Spain City state 2nd smallest country in the world: 2 km2 Thin band of land on the sea shore Enclave in France Surrounded by mountains: Mont Agel and Tête-de-Chien High density population 32 796 inhabitants (2008) But only 6089 Monegasque citizens (2008) Rich population: GNP is 222 022 USD/inhab. (2008)

HISTORY MONACO Very ancient settlements: prehistoric, Phocean, Roman 1191 Monaco becomes Genoan François Grimaldi takes over Monaco 1297 A strategic position lead to difficult times Independance recognized by France Spanish protectorate French protectorate French occupation Sarde protectorate 1489 1542 1641 Revolution in 1848: Menton and Roquebrune separate themselves because taxes are too high 1793 1815 1848 Rebirth after bankruptcy and near extinction 1861 French protectorate – Menton and Roquebrune sold 1869 Income tax abolished 142 years ago! Rainier III: the builder of today‘s Monaco

ECONOMY GDP Growth GDP by Sector Source: Département des Finances et de l’Économie de Monaco

Additional Information ECONOMY Additional Information Source: Département des Finances et de l’Économie de Monaco

HISTORY OF THE FINANCIAL CLUSTER CHARLES III Sold Menton and Roquebrune to France Cancelled income tax Created the Casino and legalized gambling Created Monte Carlo RAINIER III Strong entrepreneur spirit Build Monaco as a luxury brand (Grace Kelly, F1 Grand Prix, etc…) PRIVATE BANKING SECTOR Until 2000, based on large deposits evading taxes mainly for British and Italians citizens Large deposits of French citizens until 1963 From 2000, based on added value services 2009: Monaco is removed from OECD grey list

PROFILE OF MONACO‘S FINANCIAL CLUSTER Characteristics 1979 - financial center with specialization on private banking 2009 – €2bn turnover, 15.6% of total economy # of Employees – 2771 K The number of players in the financial cluster was unaffected by the financial crisis. Small cluster: about 80 B € in deposit and under management Dual regulation from France and Monaco Banque de France - banking commission and supervisor Commission de Contrôle des Activités Financières – Regulatory body for fund management

TODAY‘S LEGAL FRAMEWORK MONACO’S VIRTUAL TRIANGLE PRIVATE BANKING ALIGNMENT OF MONACO ON EUROPE DIVERSIFICATION OF PLAYERS/INSTITUTIONS The legal framework aims at build a virtuous triangle to develop the financial cluster.

CLUSTER MAP PRIVATE BANKING GOVERNMENT SICCFIN AMAF CCAF MAJOR FINANCIAL SECTORS PRIVATE BANKING FAMILY OFFICES INTERNATIONAL UNIVERSITY of MONACO FUND MANAGEMENT INSURANCE DIVERSIFICATION OF PLAYERS/INSTITUITION RELATED CLUSTERS LUXURY TOURISM SHIPPING

PRIVATE BANKING Characteristics Bank sector in Monaco has focused actively on private banking and wealth management. Monaco has 40 Private Banking Institutions. The real boom in the banking industry came in the year 1987 when the French banking authorities loosened the regulations which hinder the free flow of capital. Private Banking is still seen as not providing sophisticated services – Investor based here don’t want to just deposit their money and Monaco cannot offer the same services as Geneva or London. Private Banking in Monaco switched from a deposit/tax evasion model to an added value service model.

FAMILY OFFICES Characteristics Private company that manages investments for a single wealthy family. Large portion of the financial cluster of Monaco though difficult to quantify. No license requirement. A more aggressive and well-capitalized office may be engaged in: private equity placement, venture capital opportunities, real estate development. Strong development potential. Offers comprehensive financial oversight of all liquid financial assets. Offers daily management of all illiquid assets, such as real estate. Can administer and manage the entire estate with little to no supervision. Charges a flat monthly fee for all family office services. Offers advice free from conflicts of interest and will not sell products

FUND MANAGEMENT Characteristics Management limited to Monaco or off-shore funds. Limited growth potential because Monaco based funds can not be sold in the EU. Only 6 billion € under management in Monaco funds Hedge funds are limited by the lack of supporting industries Fund administrators are really lacking IT services Telecom services Under control of the Principality’s Department of Finance and Economy

FUND MANAGEMENT Venture capital funds face hurdles: Characteristics Limitation of the legal framework, Limited number of local start-ups, They have to invest mostly abroad, Source of fund limited to local residents or private banking customers.

MISSING ELEMENT: INSURANCE Characteristics Typically an important part of a financial cluster. Large source of institutional investment. Missing in the cluster. No insurance can be based in Monaco. French-Monegasque agreement in 1963 for insurance code was never implemented. No law exists on how to license an insurance in Monaco. Insurances need to have a French insurance license. EU based insurances can’t operate in Monaco without a French license. Changing the law presents challenges Risk management rules would be difficult to write due to the size of Monaco. Allowing EU based insurances requires EU membership.

SUPPORTING INSTITUTIONS CCAF: Commission de Contrôle des Activités Financières Authorization & compliance with law and regulations Controls & order administrative sanctions Supervises Fund management activities AMAF – Association Monégasque des Activités Financières Self regulatory association By law, all licensed financial institutions must be a member SICCFIN - anti money-laundering authority IUM Undergraduate and graduate financial education Research center in finance Executive MBA

SUPPORTING INDUSTRIES SOME INDUSTRIES ARE LACKING EXISTING IT services Telecom services Auditors Tax advisors NON – EXISTING Fund administrators Prime Brokers

ASSESSMENT OF REGIONAL COMPETITIVENESS FISCAL SYSTEM PHYSICAL SECURITY No tax on personal income Highest density of policemen for inhabitant in the world 1 policeman for 60 inhabitants IMAGE OF MONACO CLIMATE Living in Monaco is a status symbol World class events attracting the jet society Mild winters Warm summer without excess heat +300 sunny days per year

COMPETING CLUSTERS London GFCI 1 The Financial Services Authority (FSA) is the regulator of the financial services industry in the UK 10% of UK GDP 2009 1.01 million employees (1st half 2010) Geneva GFCI 9 Leader in asset management The Geneva Financial Center is the trade association 130 banks 3,000 billion CHF under management Malta GFCI 55 Emerging financial service center Smallest country in EU (413K inhabitants) 12 % of GPD and growing Regulatory body: Malta Financial Service Authority (MFSA) Promotion done by Finance Malta

CLUSTER DIAMOND GOVERNMENT FIRM STRATEGY & RIVALRY DEMAND CONDITIONS + Improved regulation against money laundering and tax evasion + Oversight from the French central bank - Bureaucracy - The size of the country creates conflict of interests in the administration - No support for higher education FIRM STRATEGY & RIVALRY + Homogeneous cluster + Intensive competition between players - No local cooperation DEMAND CONDITIONS + local wealthy population + Legal financial services - No local sophisticated financial services - No UCITS 3 recognition in EU FACTORS CONDITION + Attractive tax regime for individuals + Physical infrastructure + Consistent with other economic sectors + Very diverse population + Political stability - Limited social life - Small size of the country - Some supporting industries are missing RELATED AND SUPPORTING INDUSTRIES - Dependence on non local suppliers - Small number of research centers - Lack of university cooperation

INSTITUTIONS FOR COLLABORATION AMAF Association Monégasque des Activités Financières Acts as the professional body for authorized institutions conducting banking or financial activities in the Principality AMAF represents 87 companies in the financial sector. 37 are banks, the majority of which are branches of the world’s large banks Jeune Chambre Economique de Monaco Supports young entrepreneurs

INSTITUTIONS FOR COLLABORATION CDE - Chambre de Développement Économique de Monaco Promotes Monegasque companies in the principality and to the international world MVCA – Monaco Venture Capital Association “Monaco Think-Tank” Quarterly informal forums of financial players Initiated by Lee Robinson On invitation only

TRENDS IN THE FINANCIAL INDUSTRY Fight against money laundering and tax evasion New international regulation and cooperation Radical change of the private banking industry Bank and traders taxation Exodus from London Islamic finance Muslim world economies are developing fast Not just petrodollars Non Muslim also appreciate this approach to finance Part of a more global trend to ethical investing

TRENDS IN THE FINANCIAL INDUSTRY Asian financial centers Emergence of Singapore and HK as private banking world class centers IPOs of western companies (Prada for instance) Home of today’s largest capitalizations

RECOMMENDATIONS Increase the local added value in private banking Certification for private bankers External recognition Pushes up local know-how State support for university research centers in private banking Diversify to emerging niche with strong growth potential Identify niches such as: Ethical and green investment Islamic finance Electronic micropayments Identify start-ups abroad and attract them to Monaco Optimize the legal framework if needed

RECOMMENDATIONS Educate high potential talent from abroad Organize contest for middle school student in foreign countries The best students get a full scholarship to study in Monaco from high school to Master Degree Creates a pool of locally trained talent if they decide to stay Creates a network of high potential individuals abroad if they live Attract fund administrators to support the hedge fund industry Engage with CITCO’s management and have them opening an agency in Monaco Assess the shortcoming of Monaco to Dublin and attract fund administrators based in Ireland Administrative bottlenecks Reduce the time needed to establish an investment fund in Monaco