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Protection pledge

Some IFAs and their clients still have a cliched view of offshore investments as being unregulated and only for the very wealthy or crooks laundering money. For these reasons, many IFAs have steered clear of recommending the offshore market.

But one of the concerns of IFAs and their clients has now been resolved following research conducted by Acuity Consultants on behalf of Scottish Equitable Inter-national. Offshore insurance policies taken out by UK residents since December 1, 2001 are covered by the FSCS which was established under the Financial Services and Market Act 2000 and comp-lies with the rules laid out by the FSA.

Policies sold before Dec-ember 1, 2001 are subject to the rules of the Policyholder Protection Act 1975, which do not cover offshore bonds.

This finding means inv-estors in offshore bonds have the same level of protection as holders of onshore bonds if the insurance company is based in the European Economic Area, Isle of Man or Channel Islands, is unable or is likely to be unable to meet claims against it from policyholders, such as if it goes bankrupt. In such a situation, the FSCS will pay 100 per cent of the first 2,000 and 90 per cent of the remainder of the claim.

The revelation will benefit insurers in offshore centres based in the European Economic Area such as Ireland and Luxemburg as well as the Channel Islands. To qualify, the insurance companies based in these offshore centres must be recognised by the FSCS.

But for insurers based in the Isle of Man, the development makes little difference. Indeed, it could be argued they had an advan-tage before because of the island’s own formal policy-holder protection scheme, in place since 1986.

The Isle of Man says it strengthened its investor protection legislation with the implementation of the Financial Supervision Act in 1988 and again in 1991 when the Deposit Protection Scheme was introduced. Under this scheme, investors are given compensation of 75 per cent of their deposit up to a maximum of 15,000, which covers foreign currencies as well as sterling.

Under the investor protec-tion for offshore bonds, the Isle of Man scheme pays up to 90 per cent of the liabili-ties for individual policies. Unlike the FSCS, this applies to investors based all round the world rather than just the UK. It is funded through Isle of Man insurers setting aside 2 per cent of their funds under management each year in case of another insurer going bankrupt.

Axa offshore investment marketing manager Chris-tine Hall says compensation is not often at the top of IFAs’ lists of questions when deci-ding whether to recommend offshore bonds but the reassurance of the FSCS should help to broaden the potential market.

Scottish Equitable Intern-ational marketing manager Steven Whalley says: “This will have a significant imp-act on the attractiveness of offshore bonds.”

But while Whalley believes the revelation about the FSCS will increase demand for off-shore bonds, he and Acuity Consultants argue that there are another five measures that form investor protec-tion. This is in addition to the strength of the group to which the life company belongs and its willingness to financially support its subsidiary if necessary.

The five jurisdictional measures are reporting, minimum solvency margin, segregation of assets, cust-odian of assets and winding up provision in the offshore centre. These will vary between offshore centres.

Acuity says the main diff-erence between offshore centres is in the area of for-mal compensation schemes. But the extension of the FSCS to include offshore policies has levelled the playing field.

Steel Asset Management managing director Alan Steel says the regulatory regime and investor protection for offshore bonds is not a major issue for clients. He says: “Jurisdictions like Luxem-burg and the Channel Islands are better regulated than the UK. You only have to look at Equitable Life to see that.”

Steel says offshore bonds are primarily suitable for wealthy investors who have utilised all their tax-efficient investments such as Isas and pensions. He says: “Clients like the fact that they can switch between funds in an offshore bond without triggering a capital gains tax charge. The only issue for clients is that they will face an income tax charge when they cash in the bond but they can put it in their partners’ names if they are not earning and therefore use their allowance. Clients also like the certainty that because offshore bonds are enshrined in mainstream insurance legislation, the government cannot change the rules retrospectively. The benefits can only be altered for new investors.”

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