MONACO FINANCIAL CLUSTER

Group 5: Lionel Gresse, Karen Muller, Jitka ŠlechtováMBA 2011

Microeconomics of Competitiveness

GEOGRAPHY

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)

Monaco LocationCharacteristics

HISTORYMONACO

Monaco becomes Genoan• 1191

1297 François Grimaldi takes over Monaco A strategic position lead to difficult

times

Income tax abolished 142 years ago!

1489

Rainier III: the builder of today‘s Monaco

1869

Independance recognized by FranceSpanish protectorateFrench protectorateFrench occupationSarde protectorate

1861

1815179316411542

Revolution in 1848: Menton and Roquebrune separate themselves

because taxes are too high 1848

Rebirth after bankruptcy and near extinction

French protectorate – Menton and Roquebrune sold

Very ancient settlements: prehistoric, Phocean, Roman

ECONOMY GDP by SectorGDP Growth

2006 2007 2008 2009

-15%

-10%

-5%

0%

5%

10%

15%

3.28%

11.60%

-2.10%

-10.57%

Monaco GDP growth

2006 2007 2008 200942000

44000

46000

48000

50000

52000

54000

46724

5214551049

45653

GDP capita €B

usi

ness

Bank a

nd F

inance

sect

or

Reta

il t

rade

Whole

sale

Mis

ellaneous

Hote

l busi

ness

Real Est

ate

Indust

ry

Inte

rmedia

ries

Post

offi

ce -

tele

com

munic

ati

on

Ente

rtain

ment

and b

roadca

stin

g

Tra

nsp

ort

Public

work

s

Adm

inis

trati

on

02468

1012141618 16 15.8

7.48.6

4.4

7.3

10.5

5.63.9

2.74

2.5

4.86.6

% of GDP by sector 2008

Source: Département des Finances et de l’Économie de Monaco

ECONOMY Additional Information

Indust

ry

Public

work

s &

re

al est

ate

Hote

ls

Bank a

nd fi

nanci

al

act

ivit

ies Reta

il

Tra

nsp

ort

Oth

er

act

ivit

ies

0

10000

20000

3411

116545875

3181 5110 2881

15314

Employment by sector 2009

2006 2007 2008 200902468

1012141618

13

16

10 10

Patents

5.18

61

15.32

8.95

8.6

0.95

% of Monaco Exports 2009

Europe (ex EU)

EU

Africa

America

Asie

Oceanie

5.59

66

6.89

5.8914.97

0.66

% of Monaco Imports 2009 Europe (ex EU)

EU

Africa

America

Asie

Oceanie

Source: Département des Finances et de l’Économie de Monaco

HISTORY OF THE FINANCIAL CLUSTER

• Sold Menton and Roquebrune to France

• Cancelled income tax• Created the Casino and legalized

gambling• Created Monte Carlo

CHARLES III

•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

PRIVATE BANKING SECTOR

• Strong entrepreneur spirit• Build Monaco as a luxury

brand (Grace Kelly, F1 Grand Prix, etc…)

RAINIER III

PROFILE OF MONACO‘S FINANCIAL CLUSTER

• 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

Characteristics

2005 2006 2007 2008 20090

10

20

30

40

50

60

70

Number of financial in-stitutions

Banks Mutual Funds Portfolio mgmt

TODAY‘S LEGAL FRAMEWORK MONACO’S VIRTUAL TRIANGLE

PRIVATE BANKING

DIVERSIFICATION OF PLAYERS/

INSTITUTIONS ALIGNMENT OF

MONACO ON EUROPE

The legal framework aims at build a virtuous triangle to develop the financial cluster.

CLUSTER MAP

PRIVATE BANKING

DIVERSIFICATION OF PLAYERS/

INSTITUITION

PRIVATE BANKING

FAMILY OFFICES

FUND MANAGEMENT

MAJOR FINANCIAL SECTORS

RELATED CLUSTERS

GOVERNMENT

AMAF

INTERNATIONAL UNIVERSITY of MONACO

LUXURY TOURISM SHIPPING

CCAFSICCFIN

INSURANCE

PRIVATE BANKING

• 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.

Characteristics

2005 2006 2007 2008 20090

5

10

15

20

25

30

35

40

45

30

40 4139 39

Number of Banks

FAMILY OFFICES

• 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.

Characteristics

FUND MANAGEMENT

• 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

Characteristics

FUND MANAGEMENT

• Venture capital funds face hurdles:

• 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.

Characteristics

MISSING ELEMENT: INSURANCE

• 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.

Characteristics

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 INSTITUTIONS

SUPPORTING INDUSTRIESSOME INDUSTRIES ARE LACKING

EXISTING

• IT services

• Telecom services

• Auditors

• Tax advisors

NON – EXISTING

• Fund administrators

• Prime Brokers

ASSESSMENT OF REGIONAL COMPETITIVENESS

• No tax on personal income

FISCAL SYSTEM PHYSICAL SECURITY

• Highest density of policemen for inhabitant in the world

• 1 policeman for 60 inhabitants

• Living in Monaco is a status symbol

• World class events attracting the jet society

IMAGE OF MONACO CLIMATE

• Mild winters

• Warm summer without excess heat

• +300 sunny days per year

COMPETING CLUSTERS

CLUSTER DIAMOND

+ Homogeneous cluster

+ Intensive competition between players

- No local cooperation

FIRM STRATEGY & RIVALRY

DEMAND CONDITIONS

+ local wealthy population

+ Legal financial services

- No local sophisticated financial services

- No UCITS 3 recognition in EU

- Dependence on non local suppliers - Small number of research centers- Lack of university cooperation

RELATED AND SUPPORTING INDUSTRIES

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

GOVERNMENT+ 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

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