The 'professionalisation' of advice

A recent review that the FCA commissioned, which took in nearly 300 cases from bulk pension transfer advice exercises between 2008 and 2012, unearthed “a risk of customers losing out on retirement income due to poor advice.” Green, who answered Compliance Matters' questions by email, agreed with it on the grounds that the concept of “professionalism” must continue to gain ground in the sector.

“We champion the revised QROPS guidelines that insist that a client’s tax position and risk appetite, amongst other factors, are fully assessed; and that schemes that are substantially underfunded will have the right to refuse transfers. The clampdown will, without doubt, strengthen the sector for all its concerned,” he said. His answers to our questions are below.

Q1. What's the angle here for high-net-worth (HNW) clients?

A: HNW clients are, typically, financially 'savvy' individuals who are aware of the need for tax efficiency – perhaps largely because their tax burden could be extremely high – and investment flexibility and control in order to achieve their long-term financial goals. Therefore, if they reside overseas, or are planning to move out of Britain, it often makes sense for them to consider QROPS as part of their personal finance strategy. Whether QROPS are an option or not will, ultimately, depend on where they want to retire.

Q2. Who organises QROPS for HNWs?

A: It is highly recommended that an independent financial advisor with cross-border expertise and QROPS experience should organise pension transfers.

Since the Treasury announcement this week, only FCA-licensed advisors will be able to give advice about the transfer of British pensions to other jurisdictions. To my mind, this makes perfect sense.

This will clearly result in more compliance procedures for firms such as deVere Group, which offers QROPS and has an FCA licence in the UK, but I believe that it will inevitably drive up the quality of advice, improve standards in the wider financial services industry, protect clients more effectively from sharp practice, make advisors more accountable, and mature the sector further.

Q3. What did George Osborne, the Chancellor of the Exchequer in the UK, do to promote QROPS recently?

A: It is not quite ‘promotion,’ but rather that the FCA, amongst others, has been working diligently to shore up the industry by making up tougher rules and regulations and scrutinising more schemes, as well as the firms that promote them. This is something we support as it is of benefit to all stakeholders, including the clients and advisers, as it is bound to make the sector grow in the long term.

Q4. How many schemes are there? Are any coming off the list and, if so, where and why? Is the list still growing?

A: The number of QROPS has hit yet another new high with 3,416 on the latest HMRC list. The number of pensions tops the previous high of 3,405 QROPS listed on 1st June 2014. There are 42 financial jurisdictions currently represented. This list seems likely to grow longer as the industry becomes more robust and demand for QROPS continues to soar as more clients become aware of their associated benefits. On the latest list, two schemes were removed – one in South Africa and one in Trinidad and Tobago.

Q5. How old is the concept of QROPS?

A: HMRC established the concept of QROPS in April 2006.

Q6. What hoops does one have to jump through to get HMRC to say 'yes' to a QROPS? Is there leeway?

A: Each scheme into which we transfer a pension has to be recognised by HMRC. There is a specific, and increasingly stringent, set of criteria for every scheme to adhere to, should it wish to become an HMRC-recognised QROPS.

Q7. 200 schemes migrated from Guernsey to Malta in 2012. What happened there?

A: In 2012, HMRC guidance notes banned jurisdictions, including Guernsey, from changing local laws to allow residents to be taxed differently from non-residents.

Q8. Is there anything else to say about the offshore angle to the phenomenon?

A: It is a phenomenon that is, without doubt, on an upward trend. This is largely because the world is becoming increasingly globalised. As a result, people are living, working and retiring abroad more than ever. Because of this, demand for pension transfers will continue to soar.

Editor's note: A matter of faith

As with the US Foreign Account Tax Compliance Act regime, the concept of 'good faith' has crept into the QROPS regime. Scheme lawyers or other advisors must tell HMRC if their scheme no longer qualifies for the classification and sometimes they might hold on for too long before doing so. As long as they do so inadvertently, HMRC offers them a 'safe harbour'. Its rules state: “Where the scheme administrator has relied on the fact that the overseas pension scheme is included on the latest published list (and can demonstrate if required that it checked the list no more than one day before the transfer was made) and did so in good faith, this should normally provide just and reasonable grounds for HMRC to discharge any liability of the scheme administrator to the scheme sanction charge.”

The FATCA 'good faith' concept appeared recently and very quietly in a US Treasury side-note and, according to some, threatens to undermine the entire regime. Notice 2014-33 of 2nd May states that the Internal Revenue Service “will take into account” the extent to which certain parties, such as foreign financial institutions and withholding agents, have made "good faith efforts" to comply with their obligations. It does not attempt to define this phrase, which it later couches as "reasonable efforts." Neither does it elaborate on the "relief from IRS enforcement during the transition period" which it promises to such people. HMRC's 'good faith' clause is in the same vague vein, although its QROPS regime does not rely on the credibility of international threats in the same way that the FATCA regime does.