No-one active in the ‘offshore’ retail investment markets can have failed to notice the structural changes that are now taking place with a number of offshore life companies either closing down completely or retreating to their home markets, writes Bill Vasilieff, chief executive of platform Novia Global.
This follows the same pattern we saw in the UK as, one after another, the life companies closed down and were swallowed up by the vulture life companies. Together with fellow industry stalwart Malcolm Kerr, who was most recently a consultant at EY, we pieced together a list of all the life companies that had disappeared from the UK since the late 1980s (many of which we had worked for, sadly) and the list ran to nearly 80.
Those that survived have had to transform themselves into fund managers, specialists in protection, platforms or sometimes a combination of these.
Fighting a negative reputation
What eventually drove the pace of change was, in my opinion, regulation with the Financial Services Act, which came into being in 1988; although it has to be said the industry had, by then, gained itself a somewhat tawdry reputation and was largely not trusted by consumers or regulators.
Fundamental to all of this was lack of transparency backed up by a product that did not do what it said on the tin, such as the ‘with profits’ concept, which promised high returns together with guarantees but, of course, we know cannot be achieved. The life industry was one that basically consisted of high hidden charges which the customer never really saw or appreciated until it was too late.
Unfortunately, the offshore financial services market, and by that I refer to the largely expat community, suffers somewhat from the same negative reputation. All too often we see negative and damaging reports of the industry in the press, some of it shocking. It is certainly the case that structural change is necessary and is already underway.
As well as life company providers pulling out of the market, there have been a number of Qrops and Sipp providers pulling non-standard investments (NSIs) from sale inside their products following changes in regulation from the Maltese regulator, which are due to come into force in early 2019.
The decision to pull NSIs from sale may be purely a result of regulator activity or it may be as a result of legal claims made in the UK against pension trustees for execution-only business, where the claims are that trustees should have done more to protect the investors.
The trustees will also be aware that the claims management companies in the UK are sharpening their knives and about to make an onslaught against anyone involved in pension transfer business where the investor experience has gone wrong.
Growing regulatory pressure…
Whatever the reason, there is undoubtedly pressure from all sides to achieve better outcomes for investors in the international markets. A number of smaller platforms have been active in these markets for a few years now and it is undoubtedly true that sales to date have been slow, to say the least.
However, Novia and others have seen sales increase over the last year to 18 months and sales levels continue to rise steadily. Just to give a feel for this, gross sales year-to-date in 2018 are 300% up on the same period in 2017, with the number of adviser users up by 250%.
We anticipate that the rate of change towards the transparent, platform style model of operating will increase as regulatory pressure increases and this move is getting well underway and all to the benefit of investors.
But arbitrage is still an issue
Unfortunately, in many of these markets, there is no single regulator for sales of retail products and very often ‘regulatory arbitrage’ is possible where an adviser can sell an investor a product that can be held inside two different tax wrappers where there are different regulators working according to the tax wrapper.
So, in effect, the choice of tax wrapper is driven by the choice of regulator and commission outcome desired. In other words, regulation is often a complete muddle and is not working in the best interests of consumers and until this is sorted out investors will suffer.
For advisers it is better to start making the change to the new model sooner rather than later, as changing the business model brings cash flow challenges; but experience shows that these challenges can be transitioned over time and at the end of it the adviser’s business is in a much healthier state.
Much better to start the change now rather than have it forced upon you in a rush.