Member Update 1st March 2019
Written on 01/03/2019

Test Question

What is the new NHS Pension Scheme proposed employer contribution rate from 1 April 2019?

a) 20.6 percent

b) 16.2 percent

c) 26.6 percent

d) 22.2 percent

answer at base



Brexit perspective from Dublin

The enthusiasm of EEA countries to blackball the UK from their club is astonishing.  A Norwegian friend asked me last week, why the UK was making such a fuss about Brexit.  Works fine for us, she said!

While the FCA is busy telling us how to trade in the EEA, Ireland seems more focused on telling us how not to trade in their countries, rather than helping their own brokers trade in the UK!  Here is what the Central Bank of Ireland put out this week: and note the complete absence of any guidance for Irish firms trading abroad.

“After the withdrawal date of 29 March 2019, the UK will become a third country (non-EU) …

In the event of a “hard” or “no deal” Brexit, UK insurance intermediaries must put in place the necessary registration in order to continue operating in Ireland.  Where the required registration is not in place by 29 March 2019, those firms must cease providing services into Ireland on a Freedom of Establishment and/or Freedom of Services basis. “ article here

You can sense their glee!

The Irish will also allow UK brokers and underwriters to continue to administer ongoing insurance contracts – ie ongoing claims and those with late renewals.  This will be for a period of three years after the date of the withdrawal of the UK from the EU. 

The Bloodstock insurance industry is reeling as local agents in Ireland now are being contracted to attend as observers UK brokers meeting stud managers to renew their routine insurances.



Mifid Disclosure update – review published this week 

FCA review of Mifid has found shortcomings.  

If you pay attention to IFAC audits, follow what IFAC say and implement changes IFAC recommend, you hardly need to worry about these missives from FCA.  IFAC have you covered! 

However, on a “need to know” basis of management…..”you need to know.”

So here is your two minute guide to the FCA Mifid Disclosure review.

FCA looked at the costs and charges disclosures of a sample of 50 firms in the retail investment sector.  They wanted to understand if firms were complying with the new rules.

FCA found firms fell short when disclosing third-party costs and charges.  That means not enough disclosure of underlying UCITS and DFM transaction costs – ie the costs of buying and selling.  For instance, while most OEICs will churn up to 100% of their book annually at, say ½ per cent bid offer spread for each stock, this adds the same ½ per cent to the annual management costs – but is rarely disclosed.  But you need to disclose it!

MiFID II came into effect on 3 January 2018. Since then, firms have had to change costs and charges disclosure in annual suitability reviews. See the IFA templates on the doc library - search“guide to mifid charges”


FCA looked at IFAs, DFMs,  direct-to-customer investment platforms and other investment managers (who don’t actively advise themselves).  They looked at websites (a particular favourite of theirs) and your communications to your clients in SRs and statements.  

As a reminder, firms must give clients information on all costs in good time before arranging the deal. 

This is the ‘ex-ante’ (before the event) disclosures. 

And then again ‘ex-post’ (after the event) disclosures must be made annually.

As usual, there was confusion in the market and no consistent interpretation of the rules.  But it was clear that “most of them had given this serious consideration and were trying to comply with the rules.”

FCA found examples of good practice that they particularly liked

  • Some firms have provided training for staff and testing their staff's understanding of these rules – yippee to the BAT financial exam system!
  • Firms that offered non-MiFID products (pensions and insurance bonds) were often applying the MiFID II disclosure standards to these products – Bravo to those leaders!
  • Some firms had interactive sliding scale pop-ups and hyperlinks showing the impact of charges on investments over adjustable investment amounts and timescales on their websites.  Clever dicks! 

FCA focus in the near future is here: 

  • Calculate and disclose ‘transaction costs’ of buying and selling shares, even inside portfolios.
  • Generic advertising of low cost doesn’t make the grade.  Fine to advertise low cost, but not if it doesn’t match the final result, of “not-quite-so-low-cost-after-all-that-advice-you’ve-just-had”.   FCA told those firms to change their disclosures.  On a more granular level, this is probably just the difference between your client agreement and your letter of engagement.
  • Some  IFAs still do not always include charges as both cash amounts and percentages.  How far behind they are – what have they been doing all this time? 
  • Some firms told us that they were leaving out transaction and incidental costs and charges because they could not get the necessary data.  So they estimated the costs as zero.  FCA do not approve.


FAILS ON MIFID are own goals

Since one of the key worries the FCA have is that the market is not price sensitive, and there is almost no competition among IFAs, it follows that these fails are really just own-goals!


 PPI - What next?

Now that the PPI scandal is coming to a close more and more attention is being devoted to other claims.  We have written before about Pure Legal claims against interest only mortgages, and more is to follow from other sources.


Finance agreements for vehicles is an emerging issue– in particular the contentious calculation of the ‘balloon’ payments at the end of agreements.  This could spread into agreements for office equipment.  

For this reason IFAC believe that IFAs should apply to upgrade their FCA licences from April 1st onwards, to enable them to act as claims management firms – in effect managing claims for individuals.  This also allows you to take a cut.  Put in your request by reply. IFAC do not charge members for that service.



Brexit – new options open up immediately.

The legal exemptions to enable you to do so post March No Deal Brexit are now contained in two key exemptions.   After all these years of trying to comply, now for the fist time a regulator tells you about the exemptions!

First exemption is called “Reverse solicitation.”  

With sufficient evidence, the UK IFA can say it is providing the relevant service at the exclusive initiative of the EEA client, therefore exempting them from local licensing requirements.  

But this being Brexit, we also get exemptions from the exemption:  including that the IFA does not solicit, promote or advertise, any new products or services (in any way) to the EEA client.   That is a shame if you are advertising or running client newsletters.  

Worse still this clause although “recognised”, is not “harmonised”.   So, the boundaries of permitted and prohibited marketing still vary massively across the EU and whether a given firm could rely on reverse solicitation would likely be a matter of local law.   One example is that general branding and image advertising is permitted marketing in France and Germany, but lawyers have stated it will likely trigger licensing requirements in Spain.

There are added complications.  Client coverage behaviour:  IFA work requires “continuous client interaction” through email and phone.  This will make it hard to produce an audit trail to evidence “client initiation” as required.

What to do if you already have EU clients. 

Most clients tomorrow, will actually be your clients today.  (ie Pre-Brexit client contact).  If you the IFA want to evidence client initiation before Brexit, then you had better get on with it!  Ask your client for a confirmation email to state that they are indeed working with you “at the exclusive initiative of me” (the EEA client)

 After hard Brexit this request for confirmation could be seem as a form of solicitation – and so banned! 

So how will you advise clients who have emigrated across  the channel?  There are some 1.2m of these according to the PFS.  

The second key exemption is a clause called Characteristic performance test

The basic premise of the characteristic performance test (CPT) is that a regulated activity should be regarded as carried out at the place where the (characteristic element of the) service is provided. This leads to the conclusion that where the particular service that a UK firm offers is not deemed to be carried out in a member state, the UK firm should not need to comply with the licensing requirements of that member state (for that particular service).  

Thus IFAs may continue to provide cross-border services to EEA clients, without triggering national licensing laws – sending emails and answering the phone and “skyping”.

But this too is open to interpretation.  If you receive an order, in the UK, from a client in France to purchase 100 shares of X plc.   FCA have stated that they would likely view both the act of receiving the client order and its subsequent execution as taking effect in the UK.   So no passport required.  However, lawyers have written that the French regulator is likely to view both (or at least the execution) as taking effect in France.  You could face arrest in France!

Brexit notification of passporting

It has always seemed wrong to IFAC that the FCA have moved their position over the years from “requesting notification” for passporting activities, to “granting authorisation” for the same.  

These authorisation applications are frequently challenged by the FCA where the IFA is unable to justify the need.  A speculative application to trade abroad is no longer accepted on this basis.  Shame on them.

Who regulates data protection?

https://www.fca.org.uk/publication/mou/mou-ico-fca.pdfhttps://www.fca.org.uk/publication/mou/mou-ico-fca.pdf

THIS CAME up in conversation last week….who regulates data protection…and here is a part of the answer…

For you it is the FCA.



https://www.youtube.com/watch?v=8frTP5VLiHc

Video on Family Investment Companies as a replacement for Discretionary Trusts.

Problem:

Trust rates of tax are the highest in living memory. Income tax is 45%, plus exit charges and the 10 year tax charge.

Solution:

Corporation tax rates are now due to go to just 17%.  So put the assets into a company instead and the income is subject to just 7.5% or 32.5% for higher rate payers, (38.1% for Additional rate earners above £100k pa)

Use this instead of trusts as your vehicle to transfer money down a generation. 

So the article in the video encourages IFAs to Set up a family investment company (FIC) to enable funds to be gifted, beyond the nil rate band and retain control with lower tax.  You know about the corporation tax.

Essentially, it’s a private company where the shareholders are the family members. Parents retain control over assets with voting shares, and involve the next generation with non voting shares.  It is better than a trust, because with a trust any transfer that exceeds the settlor’s available nil rate band will trigger an immediate inheritance tax charge.  Not so with companies.  

The cash into the company can also be an interest free loan. It will not be regarded as a transfer of value for IHT purposes and the loan can be extracted from the company later tax-free!

Parents get the voting shares – so they control the operation.  Next Gen who are hungry for their inheritance get the non voting shares – and with that comes the actual ownership – and hence the transfer of value.

Compare that to a discretionary trust where the funds are a PET going in and settlor cannot be a beneficiary.  Not so neat.  You also avoid the ten year IHT charge, and the high rate of dividend tax in discretionary trusts.

Capital gains realised by the company are chargeable to corporation tax at 19% (falling to 17% by 2020). That is not so good.  But remember that if the money was held by an individual the CGT would be taxed at 28%, and surprisingly indexation allowance was available for companies up to the end of 2017.  

When it comes to dividends those received by a UK company (including foreign dividends) are exempt from corporation tax – so no ongoing corporation tax for a share portfolio.  However care should be taken for pooled funds in OEICs.

The company gets a corporation tax deduction for interest on loans taken out against the value of its investments, where the loans are used for the purposes of the company’s business (eg acquiring new shares in the portfolio).  Compare this for individuals who are not eligible to claim tax relief on interest on loans to buy shares.

For the shareholders in the company it’s the same as for any holding of shares in any other private limited company:

  • Income tax on dividends: Nil taxpayers will have no liability, basic rate taxpayers 7.5%, higher rate taxpayers at 32.5% and additional rate taxpayers at 38.1%. Dividend allowance is nil rate up to a cumulative £2,000 of dividends in a tax year.
  • Income tax and National Insurance on any salaries received 
  • CGT on the liquidation of the company – usually at 20% for higher rate taxpayers.


HOW TO PASS CEMAP

Chidi Kalu will be running How to Pass CeMap Courses this next quarter. 

Announcements to follow shortly.

If interested, please let him know. Chidi.kalu@ifac.eu

https://ifac.eu/pages/about.php 


Guide to VCT

Octopus have just written a guide to VCTs.

The market is excellent for tax planning, but the underlying funds don't always make money!

the guide is obviously biased, but you need to keep abrest of developments in VCT in order to remain independent as an IFA.


correct answer is A
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