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Industry Sectors: Offshore

Simon Hildrey
How far the offshore market has developed over the past 20 years is illustrated by an advert which appeared in the late 1980s. It showed two white men standing in a big cooking pot surrounded by witch doctors with the words: ªNot everything in the offshore market has to be this dangerous. º It is difficult to think of an insurance company being able to use an advert lacking such taste today.

The offshore insurance industry has its roots in the Isle of Man’s decision in 1986 to scrap tax on the profits generated by international insurers. The Isle of Man, along with other offshore centres, has now ended the distinction between domestic and international companies but equalised the tax rate at zero.

Insurers followed IFAs into areas where British expatriates were living and working, such as Hong Kong, Saudi Arabia, Spain and Cyprus. The advantage of the offshore portfolio bond was that it allowed assets to be held in one jurisdiction while the expatriate moved from one country to another. Offshore bonds also have gross roll-up, meaning that the investor only pays tax on investment gains when the bond is partially or wholly cashed in.

The offshore market in the 1970s and 1980s was like pioneer country as IFAs used to travel to Dubai, Spain or Hong Kong, for example, from the UK and set up shop in a local hotel for two or three days to meet existing and potential clients. One common technique was to talk to the pilot and the rest of the flight crew while they were flying to try to sell them insurance policies. This would certainly not be allowed today.

It was gross roll-up that created a market in the UK for offshore bonds, says John Allison, marketing consultant for Royal London Group and subsidiary Scottish Life International. When the top rate of tax hit 83 per cent for income in the UK between 1974 and 1979, which pushed investment tax up to above 90 per cent, tax deferral became an attractive feature for UK investors.

By the 1980s, the top rate of tax had fallen to 60 per cent but banks and building societies proliferated during this decade because deposit and saving accounts paid interest gross. This meant the investor declared the interest payment in their next tax return and the few months’ delay in paying the tax helped their cashflow, says Mark Waterhouse, corporate and key account manager at Alliance & Leicester International.

The offshore trust industry for the UK market developed on the back of what were known as freezer trusts in the 1970s and 1980s. UK investors could place private company shares in an offshore discretionary trust and keep any gains from selling them tax-free in the trust until they brought the money into the UK. This form of tax planning was brought to an end in the 1991 UK Budget and led to a gradual shift by the trust industry away from UK-resident and domiciled individuals.

If location, location, location is core to the property market, then regulation, regulation, regulation has been central to shaping the offshore industry, as shown by the closing of the freezer trust loophole. Regulation has increased since 1997 and accelerated after the terrorist attacks in New York on September 11, 2001.

Even though it was illegal, many investors moved money of fshore from the UK without declaring it to the Inland Revenue. However, the introduction of far more onerous disclosure and anti-money laundering rules over the past few years has made this much harder, with institutions being given responsibility to submit information as well.

The EU savings tax directive will take this a step further as there will be automatic exchange of information with a customer’s local tax authority or a withholding tax of an initial 15 per cent. Tax advisers can also now go to prison for not reporting a client, if the adviser knows they have evaded tax, even in another country.

In 1998, the Inland Revenue changed the rules on which assets can be held in an offshore portfolio bond by UK resident investors following a famous legal case brought by Hong Kong lawyer Peter Willoughby against the Revenue. The changes created two categories ± offshore portfolio bonds and personalised portfolio bonds. Investors can hold authorised unit trusts, UK investment trusts, shares in open-ended companies, cash, life policies, non-UK unit trusts and interest in a collective investment scheme in a portfolio bond.

But from 1998, personal assets such as private companies, pictures and antiques can only be held in a personalised portfolio bond. The Revenue has levied a 15 per cent annual tax charge on personalised portfolio bonds if held by UK residents.

Regulation has also impacted on IFAs and offshore insurers writing business around the world. Instead of tripping from the UK, IFAs began to settle in locations such as Hong Kong, Dubai, Cyprus and Spain. They thus began selling to the local population and non-British expatriates. In many countries, there were no regulations governing the sale of offshore products, which were known as grey markets. Insurers could not market their products in these countries but could sell them if investors requested them.

But over the past decade, various countries have one by one introduced regulations and begun to license IFAs and product providers. Some countries such as Saudi Arabia simply put IFAs in jail if they catch them selling products.

After the technology bubble burst in 2000 and regulations around the world began to proliferate, a number of offshore insurers closed or decided to only concentrate on the UK market.

The latest example of regulation is the EU insurance mediation directive which came into force in January 2005 to govern IFAs. The EU is seen by offshore IFAs and product providers as one of the key markets in the future. Europe opened up to international insurers with the passing of the third life directive. This enabled insurers to sell products cross-border from an EU member country, including the UK and Dublin. Interestingly, 50 per cent of sales by offshore insurers still come from the UK, despite their global expansion overthe past 20 years.

Richard Lloyd-Jones – Managing director, Contract Marketing Services
I have to say that I can remember the first issue of Money Marketing quite clearly. There were two wellestablished monthly publications but it is difficult to believe now that there was no weekly newspaper aimed at this market.

Was it possible for a controlled-circulation free publication to maintain any sort of editorial standard and attract the advertising to pay for it?

The answer, as we all know, is that it has been a resounding success. Financial advisers immediately welcomed it and, on most criteria, Money Marketing has retained its market-leading position over two decades, despite intense competition.

Over the years, changes in the financial services industry have, I am sure, caused consternation behind closed doors. Even Money Marketing’s use of pink paper caused problems at one point when the Financial Times felt that it had an exclusive franchise on it.

My personal contribution runs for a mere 15 years and has involved writing, almost exclusively, on the offshore side, mostly for International Money Marketing (previously Offshore Money).

I was originally asked by Offshore Money editor Fennel Betson to write a specific product analysis piece on an early structured product. This led on to a series of such articles, culminating in putting together the offshore product news.

As editors and publishers changed, so did the approach to international and offshore markets. At various times, there were plans to make the Money Marketing publications pan-European and even, at one stage, a plan to go global.

In 1995, we did our first Quantitative Offshore Business Survey and tied it in to a conference. In subsequent years, the international side managed to support exhibitions linked to conferences and awards dinners.

It was always a pleasure to be associated with these events, even if the stress levels were sometimes extremely high. Over the years, we normally did the research behind the international awards and for some years produced attractive but expensive glass trophies. These were sourced from a temperamental French artist who would invariably contribute to the stress levels by delivering them at the last minute ± on one occasion after the awards dinner had started.

The international side now benefits, of course, from being part of the main Money Marketing publication. As a contributor, I can attest that the professionalism and approachability of successive generations of staf f has remained constant through the years.

At some time or another, most of the leading financial services journalists and editors have done some time at Centaur. Money Marketing seems to have been at the centre of the retail financial services market since it started two decades ago and I hope it will remain there for another 20 years.

John Allison – Marketing director, Scottish Life International
In the spring of 1985, my old mate Roger Anderson phoned me to say that he was launching a new weekly trade publication – Money Marketing.

My own financial marketing consultancy traded under the same name. I thought: ªWhat a cheek and what a blatant act of name theft.º A suitable legal letter was fired off and tongue-in-cheek threats of plagiarism produced the desired result, as I was suitably refreshed by the new paper’s publishers, and so began a love affair with Money Marketing that continues today.

In one of the first editions, a product we had designed for Scottish Mutual was hailed as ªa breakthroughº in the search for the investment Holy Grail of risk control for investors. This comprised our three risk-graded managed funds of safety, growth and opportunity, which certainly caught the imagination of the new Money Marketing IFA reader. Record industry sales of £80m were achieved in six weeks and the funds spawned a host of imitations.

We basked in the glory and even introduced a unit trust version for the Royal group, which again broke all industry records with almost £500m sold in the three-week offer period in 1987. Oh, such sweet joy.

But this is when the wheels came off with devastating consequences. The Royal unit trusts were launched on Black Monday ± October 19, 1987 ± and everyone lost up to 28 per cent on that first day alone.

The flaws in our simplistic solution to risk management were laid bare for all to see and the industry that had followed like lemmings had been dealt a very bloody nose. Consumers were not interested in the managers’ attitude to risk but were only concerned about the risk to their original invested capital. They left the market in droves.

Did we learn from this humbling experience? I certainly did and I am still using derivatives and other instruments in my continuous product development search for an investment Holy Grail.

At the first sniff of a bull market’s nether regions, the great investment marketing industr y’s Starship Enterprise sets course to boldly go where no average UK investor in his right mind would have gone in the first place if they had they understood the risks. How else do you explain the headlong visit to the planets Technology and Split Capital? Will we ever learn?

Why do we moan over a poor Isa season when we collectively encourage investors to take risks such as those promoted to the extreme in 2000?

As I plan my retirement from corporate life in October, I hand what I have of the route map to the risk Holy Grail to others in the hope that the new tools at their disposal from Ucits 3 and the disciplines imposed under the Myners review will give them the impetus to finish my quest. Until we provide the option of such risk-controlled investment vehicles to the public in a way they can fully understand, then the savings gap will stretch to Grand Canyon dimensions.

The baton has been handed over and surely, after 20 years of headlines in Money Marketing bemoaning a lack of consumer confidence in our products, we can now all see what needs to be done.

Perhaps Roger Anderson got the paper’s title wrong all those years ago and he should have called it Risk Marketing, for that is exactly what we have all been doing since launch in 1985.


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