Phil Billingham CFPTM Chartered MCSI, director and Financial Planner at Perceptive Planning, takes a topical look at the issues and challenges surrounding mass affluent and HNW clients who need assets and tax planning across several jurisdictions.
Mr Billingham examines how there is added complexity and risk attached to these clients’ affairs - leading to some consumers falling into less than scrupulous hands, and in turn, some very poor outcomes.
He explains how one major advantage of being a CFPTM professional is having a network in many jurisdictions, sharing ethical standards, competencies and accountability to professional bodies. He sets out the issues involved, why this cross border collaboration will increase as clients become more mobile, and the importance of partnering with a CFPTM professional individual or firm.
Main feature: World Citizens: Financial Planning director explains all about serving clients across multi-jurisdictions.
One feature of living in the United Kingdom is the fact that the UK has one of the most internationally diverse populations in the world.
In fact, in 2011, 13 per cent (7.5 million) of the resident population of England and Wales were born outside the UK. These figures include around 220,000 South Africans, 200,000 Americans, 125,000 Australians and 80,000 Canadians.
It is worth noting that these are the ‘official’ figures. How many live perfectly legally I hasten to add - in the UK, but have never emigrated from their home country is almost anyone’s guess. In return, over five million UK passport holders are now said to reside abroad. Naturally, the largest cohorts are in Australia, America and Canada, with over 50 per cent of the total, but South Africa and India also have large populations.(Numbers sourced from the UK 2011 census and Wikipedia).
Taken together, we are not only looking at upwards of 12 or 13 million people who have moved to a country other than their birth, but an increasing number of their descendants, family and heirs who are also affected by these changes. In short, more and more potential clients – especially wealthier people who are more likely to both need and use a Financial Planner – have assets, income or liabilities in more than one jurisdiction.
This subject is close to our hearts, partially because it describes us.
Between me and my wife, fellow CFPTM professional, Shannon Currie, we have lived in Zimbabwe, the USA, South Africa and of course the UK.
So we understand that this increasingly common scenario adds both complexity and risk to these individuals’ affairs. That may be through complex tax rules, or simply the vagaries of currency exchange. It is unfortunate but true to say that this has led to some consumers falling into less than scrupulous hands, and in turn, led to some very poor outcomes. Sometimes this is due to outright ‘scams’ and scaremongering. But some of these have been through a lack of knowledge as well.
For example, we have seen complete nonsense written about those with UK pensions. Such as ‘you have to transfer the pension to access it’, and ‘The UK government is about to tax the pension at 55 per cent, so let’s move it now’.
Some of the schemes we have seen suggested are very questionable indeed, with opaque but eye watering charging structures and high risk funds.
Other, perhaps less predictable outcomes we have seen include:
• Offshore schemes that are tax efficient in South Africa or the USA, in fact now being taxable now the client is in the UK.
• A reluctance of some offshore schemes to comply with UK reporting requirements
• Additional currency risk. For example, Australian or US Dollar accounts for clients whose liabilities are in Pound Sterling. It may work out – but it is an additional risk
• Poor tax efficiency, especially in terms of Inheritance and estate planning.
I could go on. While some of these appear ‘technical’ and possibly minor, their cumulative effect on some clients can serve to reduce the capital by perhaps 20 per cent and often more. This is a high cost for ‘being clever’!
The fact is that it is very difficult for national regulators to deal with the challenges of this cross border activity. After all, if it is a UK asset, and an Australian resident, but with the fund – such as QROPS - based in Gibraltar, the new fund based in Mauritius and the adviser somehow based in Dubai, how does a national regulator manage that? Before it goes wrong? Which, of course, it will, and with no meaningful consumer protection in place. Is ‘buyer beware’ really an acceptable approach in this day and age? If we break the problem down, we have essentially got to consider:
1. UK clients who have moved to the European Union area
This is the typical retire to Spain or France scenario. This group is covered by MiFID and ‘Passporting’ rules apply. We have seen some advisers take the position that as long as they advise the clients from the UK, via email or a UK address, on UK assets, then there is nothing to worry about. Without getting into the detailed compliance conversation, I would question that approach. Unless you are expert enough in the tax laws in the country in question, I would say this was reckless. Let me give you one minor example:
The use of LLP structures for investments in the UK is not that uncommon. How is that structure viewed in Spain, for example? And the opinion I have been given is that as there is no such legal entity as a LLP in Spain, from a Spanish tax and regulatory viewpoint, they see straight through the LLP to the underlying individual, both for tax and liability purposes. So great care is needed here. I’ve picked on Spain, as many of us will know or have clients living there. But what about Slovenia? Or Hungary, for example? The big potential risk with this group is that as we have some familiarity with many of the jurisdictions, we can almost be too relaxed about the client’s position.
2. EU Clients in the UK
In many ways, these clients can be a mirror of 1) above.
It is tempting to just say ‘The EU means Mifid which means UK law applies’. Well, perhaps. The trick here is to be aware of how any advice affects them back in their home country, especially as they may well be UK resident but non-UK domicile. And, of course, they could be a ‘tax resident’ in more than one country at a time. It would be useful if UK tax law remained consistent, but how aware of changes to Greek or Polish tax law are we? No? Funny, I thought that may be the case. So measure twice, cut once as they say.
3. UK Clients elsewhere in the world
I do get asked about passporting for these clients. Of course, EU rules, including passporting, do not apply. That’s the good news. The bad news is that there is no one source of information or regulation. Each country has different rules. These range from the pretty extreme USA approach, where any citizen – note, NOT resident – must declare and pay tax on all their worldwide income or gains and usually, non US ‘wrappers’ such as trusts, Isas and pensions are disregarded. So great care is needed here. But other traps await the unwary. Who knows that UK pensions are taxable once a client becomes an Australian citizen, for example?
And what are the rules about ‘popping down to Cape Town’ to advise long standing clients over a glass and a game of golf? Hint – it’s illegal under South African law. So this is very similar to scenario 2 above. We need to get support, and expert information. By the way, the client saying ‘oh that’s OK; I can do that’ does not count as expert information.
4. Non EU clients in the UK
By now you will have spotted that the big red button is US passport holders. Even if they have dual nationality. Do you remember the trouble our own Boris Johnson got into?
Foolishly he assumed that as he has never lived in the USA, and sold his main UK residence, UK law would apply. Wrong! The USA assumes that domestic US law overrides any other legal system, and so, as gains made on your residence in the USA may not be 100 per cent tax free, then Mr Johnson was presented with a tax bill.
It’s easy to pick on the USA, and it makes great headlines, but what other countries have similar tax laws? No idea? And why should you, unless you have direct knowledge and expertise in that particular jurisdiction.
I hope that it has become clear from the above that the three big issues to consider are:
1. Tax: - how does the ‘other country’ regard the tax position of your client / potential client? Income, Capital gains and Inheritance tax are often treated very differently, for example. We can’t assume that our bread and butter tax breaks, such as pensions, Isas and main residence exemptions will apply in all cases in the same way. Don’t get me started on trusts.
2. Regulation: - what rules apply to your dealings? Should you be registered in the country being considered? Is this even possible? And what protections are available to your client?
Again, assuming that UK rules and regulations cover you may be a bit naive. As will assuming that all products available here apply. One thing to watch is the use of ‘offshore’ funds. And yes, for this purpose, Dublin is offshore.
3. Suitability: - taken together, the two issues above could have a massive effect on the suitability of any advice, which, in turn, has sever implications on the potential regulatory and civil liability of the adviser or planner involved. That will often lead to PI problems, and the reckless disregard of common sense procedures will often raise flags with the FCA as well. So among all of this doom and gloom, what can we do to help the 12 or 13 million potential clients identified at the start of this article?
Well naturally, if you have a succession of clients from Sweden, or who have moved to Canada, then you will develop expertise of your own and that may be enough. But it may not be and when it’s not, what do we do?
One major advantage of being part of the CFPTMfamily is that we have access to a network of fellow professionals in 27 jurisdictions worldwide, who share our ethical standards, high levels of competency and who are also accountable to their respective professional bodies. Based on this foundation, this allows us, as a CFPTM Professional, when we meet clients in one of these situations, to ensure we work with other CFPTM professional Financial Planners in whatever jurisdiction is required.
In practice, this will mean reaching out through our own networks, or via the local equivalent of the ‘Find a Planner’ function, to make contact with a local firm who can help. I even had an approach on Twitter the other day.
Our limited but growing experience is that the fee is not the issue. It’s all about the coordination of advice, so the client gets proper, joined up, planning that is safe and technically sound.