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Offshore storm

Double standards and negligent distribution strategies of product providers in UK offshore jurisdictions risk the corporate reputations of their onshore counterparts and threaten clients around the world.

It seems to me that one of the best-kept financial secrets of our time is that in order to bypass the systems and controls of a coherent industry regulator you need not go far – just to the islands off our coast.

Indeed, the absence of international regulation can be no excuse for the offshore subsidiaries of very well known UK product providers to adopt distribution strategies rooted firmly in the 1980s.

It is becoming increasingly obvious to professional advisers that the Isle of Man and Channel Island-based providers piggyback the trusted brand of their onshore parent companies and the UK’s reputation as a well regulated jurisdiction with high standards of investor protection.

However, in the absence of any legal requirement to coherently distribute their products, a minority of these providers fail to adopt the basic tenets of treating customers fairly, lack the systems and compliance barriers to prevent horrific advice on their products and are often complicit in perpetuating the misery of their own international clients.

The recent debate regarding the protection afforded to clients investing in cash through offshore bonds in these jurisdictions is just one element of what I believe to be a much wider and substantially more serious problem.

Clients who are resident in the UK get substantially better treatment but the handful of providers in question often have far lower standards for the unfortunate non-UK residents.

The core problem seems to be the providers’ propensity of giving distribution agreements to individuals and companies with no financial qualifications, experience, capital adequacy, professional indemnity insurance, demonstrable track record of delivering coherent and professional advice or even an office.

When the wheels fall off, these “brokers” and “brokerages” simply disappear and the retail client is left with no recourse whatsoever to complain – even if they received close to criminally bad advice on unsuitable products.

The standard excuse given by the provider is that they have no control over the advice process (their own distribution).

However, it is the fact that they choose to distribute their products through financial cowboys and the boiler rooms they run that perpetuates this serious problem.

There is clearly no need to replicate the UK conduct of business rules in other jurisdictions but it seems only logical that the general principles of TCF, prudence, compliance and control must be adhered to in order to prevent international clients receiving terrible levels of advice, unsuitable products and double-digit (hidden) commissions, all of which damages the trusted and well respected onshore brands of UK providers.

The reason for this rather outdated distribution method is that the product providers’ sales directors have high short-term financial targets.

However, it seems self- evident that more coherent distribution strategies must be adopted.

This needs to ensure that the amount paid in distribution commission goes towards the provision of a reputable compliance infrastructure, that longer-term targets replace short-term greed and that client needs are always put first – particularly in light of the Chancellor’s recent attack.

Sam Instone is managing director at AES International

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