Alan Morgan-Moodie, chairman of the Association of International Life Offices, was quoted as saying last year, (with reference to growing disquiet in the QROPS industry):
“I have seen no evidence at all of mis-selling.”
He added: “The adviser is the agent of the client not the insurer. In Europe you are so regulated as an adviser the probability of mis-selling is near impossible. It’s no longer the case of someone shooting around the world with a suitcase. The chance of someone ignorantly entering into some unsuitable Qrops arrangement is highly unlikely.”
My open letter to Alan is this:
Dear Alan, which planet are you on?
If ever there was a mis-selling scandal of huge proportions bubbling under the surface it is the transfer of UK pensions into QROPS by untrained barrow boys and ice cream salesmen recruited and turned in five days into cold calling, script learning, referral demanding, sharp suited direct salesmen who haven’t got a clue what they are doing.
And yes Alan they can sell them in Europe, the UK or anywhere, because a QROPS is a trust and the trust settles the investment and the investment pays the commission and the regulators in Europe have no say in what a Guernsey or Isle of Man trust company does.
Kind regards
Bob
The United Arab Emirates
In the UAE, the situation is far worse than Europe. We recently heard that more than 100 of the 160 plus people globally who transferred into a QROPS that was subsequently struck off HMRC’s list were resident here. In the unregulated UAE anything goes.
Since the introduction of regulation in the UK, pension transfers have been considered an advanced part of the financial planning process. The CII, the PFS and its forerunner the LIA created special qualifications to ensure that advisers were well able to handle the complexities of the market. This required a thorough knowledge of all the old plans – S226, EPPs, S32 Buy Outs, SIPPs, SSASs, COMPs and CIMPs, Final Salary, Pension Clubs et al – it makes the advice process a minefield.
However, for unscrupulous advisers it is a dream market – you are not trying to persuade a customer to invest hard earned cash into a 25 year savings plan. All you are doing is churning old frozen pension money that is languishing away in some dusty unheard of company in the UK, looked after by a bunch of old trustees!
I agree with much of what Sarah Lord wrote in an article in this journal on the 19th November last year. Sarah is a highly qualified adviser working in the Dubai International Financial Centre for Killik and Co.
She wrote that in order for some sort of control to be brought into this vast £500bn plus market: “SIPPs and QROPS providers [must take] more responsibility for the type of business that they accept from the offshore market.”
Self regulation?
However, I have to take issue with aspects of Sarah’s argument. Before anyone – trustees or institutions – are given more responsibility, we would first have to ask the question ‘can we trust them?’ and then we would have to ask them whether they want such added responsibility.
I have often put the question, tongue firmly in cheek, to senior executives of our leading insurance companies ‘why don’t you police the market?’
But of course self interest dictates that they don’t want this responsibility. In the UK in the ‘80s we tried self regulation, it didn’t work then and it can’t work now because self interest gets in the way of best advice.
Offshore institutions do not take responsibility for the business they accept; 25 year plans are good for business – after all they generally last only about seven years, by which time the bulk of profit has probably been made.
Recent events have shown that we cannot trust the banks either, so why should we trust a QROPS provider? The majority of QROPS providers are small independent companies. Their size and lack of financial accountability makes them vulnerable to external forces such as weakening their rules or creating questionable products in a rush to grab a share of this huge market. Furthermore, the lack of understanding and the scale and breadth of expertise in this relatively new market has significantly contributed to the misconceptions that prevail around QROPS.
We do not need to look much further than at recent cases of QROPS providers whose scehems have had their status revoked by HMRC, to see the pitfalls.
Singapore was a major case in point where, because the jurisdiction was apparently allowing 100% commutation, HMRC decided that Singapore schemes didn’t qualify as a ROPS – recognised overseas pension scheme.
Holborn Assets recently commissioned a legal viewpoint from a UK lawyer and highly regarded expert on pensions to help us draft our own in house standards.
Among a multitude of other things, the lawyer drew our attention to the other problem in Singapore. This being that though the country has a regulated pensions industry, it is only for government pensions for Singapore residents. Because its regulator didn’t regulate any other type of pension, the non-regulated pensions couldn’t qualify as a ROPS.
A ROPS is the first step to getting QROPS status; it’s effectively done by self-assessment when applying for QROPS status. That’s why HMRC’s website where it shows the list of approved QROPS, now contains the following statement which every adviser should be acquainted with (note the highlight):
This (approved) list is based on information provided to HMRC by these schemes when applying to be a QROPS. As part of its application, the scheme notifies HMRC that it fulfills the requirements for being a “recognised overseas pension scheme”. Publication on the list should not be seen as confirmation by HMRC that it has verified all the information supplied by the scheme in its application.
If a scheme has been included on this published list in circumstances where it should not have been included because it did not satisfy the conditions to be a recognised overseas pension scheme, any transfer that has been made to that scheme could potentially give rise to an unauthorised payments charge liability for the member (see RPSM14102020).
This is why I part company with Sarah, not only can’t we trust the QROPS providers (or institutions) to police the industry; we can’t necessarily trust that the QROPS provider is going to be around next year.
It isn’t all just Singapore and Hong Kong either. Some of the so called leading providers in the more respected markets of the British Isles and its dependencies are now being questioned – with some controversy currently in the Isle of Man, while the actions of some of Guernsey’s apparently most reputable firms are also questionable in my opinion.
An incestuous industry
We have always been an incestuous industry making self interested decisions behind closed doors, creating committees to protect or increase our market share, hence the reason why self regulation doesn’t work .
One of these committees is dealing with a Guernsey ‘code of conduct’ for QROPS providers. Unfortunately, like all of these types of corporate representations, it will mainly be used by the members to try to protect their corporate position and commercial interests, rather than those of the consumer.
To look at one of the most striking differences between the UK Pension Schemes and the International QROPS we should look at ‘exit fees’. The UK Schemes generally do not have exit fees, or if they do they are very low nominal administration costs. This is because the UK Financial Services Authority (FSA) see this as a key factor in the ‘treating customers fairly’ and therefore include it in the code of conduct.
The FSA and industry understands that the majority of work conducted on transfer is done by the receiving scheme that ‘drives’ the transfer and the transferring scheme therefore has very little to do. In contrast to the UK, some QROPS providers have very high exit fees/penalties, typically a 1% minimum or £2,000 is common.
Alarmingly, it is worth pointing out, en passant, that some advisers are selling QROPS to UK residents and UK domiciled clients who have no intention of leaving the UK thus offering highly unsuitable products to this category of client.
QROPS are taxed on UK source income, at 50% if received direct (rather than via an offshore company). While there may currently be a marginal IHT advantage, that is going soon with the UK pension changes.
Unfortunately, until the marketplace matures and codes of conduct are tightened up on the trustees of QROPS, then certain characters and companies will always see themselves as being above bringing the industry into disrepute and introducers and clients will need to be very careful who they place their business with.
Who then?
So if the QROPS providers cannot achieve what Sarah would like to see, then who can?
The answer, of course, at the moment is no one.
Unless the FSA brings rules to bear on all pension trustees in the UK to prevent the transfer out of pension funds to QROPS providers without evidence of suitability reports from UK qualified advisers who stand to be struck off by a relevant professional body if their advice is found wanting .
This is not going to happen soon; hence we are at the start of the biggest mis-selling scandal the offshore market has ever seen.
Financial planning is about putting the right money in the right place at the right time. Further issues advisers should consider include jurisdiction, taxation and compliance.
But as long as we as advisers are client centred in our thinking, with quality fact finding and thorough education standards, backed by quality, meaningful, recognisable qualifications, then at least some expatriates have a chance.
