The Geography of Contract in the Global Financial Services Industry

Abstract

Contract is crucial for governing the relationships between asset owners and the many types of agents that underpin the production of financial services. In this paper, we distinguish between discrete contracts for financial services and asset management contracts that are better described as relational in the sense that they are open-ended and subject to renegotiation between the parties. Emphasis is placed upon the significance of risk and uncertainty in financial markets and the ways in which the parties to contracts adapt to these conditions. This provides the backdrop for understanding three different types of contractual arrangements apparent in the investment management industry, bringing to the fore the significance of the choice-of-jurisdiction when writing contracts for investment services. We explain how and why the UK is a favoured destination for European institutions just as offshore jurisdictions, such as the Cayman Islands may be the favoured ‘home’ jurisdictions for certain types of UK and global investment managers. Arguably, at the heart of the relationship between asset owners and asset managers is a fundamental choice: between discrete contracts for services that promise certainty of costs and benefits and relational contracts which provide mechanisms for coping with financial risk and uncertainty. At issue is the market power of asset owners and asset managers in determining which type of contract is chosen and which jurisdiction is the favoured location for formalising these relationships.

Keywords: Contract, governance, investment management, jurisdiction, performance

JEL Classification: D02, D21, G23, G32