24
CROSS-BORDER FOCUS THE UK OFFSHORE LIFE MARKET
“
The arrival of
the major brand
players has added
respectability to the
sector, even if the
levels of business
written to date
by some of these
entrants has yet to
match either their
potential or the
performance of
the established
market leaders
”
KEY POINTS
The UK cross-border life
market has undergone
numerous changes in the
past decade, yet maintained
its chief selling point as a tax
mitigation provider.
Among the notable changes
has been a move from
fettered bonds to portfolio
bonds and life companies
devolving an increasing part
of their business to what
might be called investment
administration, rather than
product provision.
a mainstream, low-margin
commission rebate product,
often used to structure
tranche offerings from
banks and a near-cash
offering for IFAs. But as
the decade drew to a close,
cash bonds appeared to
have had their day, with
the proposed widened
scope of the ESD the final
nail in the coffin.
l Asset diversification
As highlighted earlier, the
decade also saw a move
away from fettered investment
bonds, containing
mirrors of popular asset
manager funds, to unfettered
portfolio bonds. This
reflected a growing trend
in using such products to
access alternative and nontraditional
investments.
Although onshore products
in the UK improved
their access to a diverse
range of funds, the portfolio
bond became the vehicle
of choice for HNWIs.
This was largely because
the portfolio bond offered
true open architecture, and
the cross-border life sector
had experience of administering
the more exotic,
non-retail assets that were
frequently requested.
Advisers focusing on
asset allocation and diversification
strategies for
high net worth clients took
advantage of being able
to invest the money into
alternative assets in a convenient
wrapper form. As
a result, cross-border life
firms became more focused
on the suitability of external
fund links than on the performance
of funds within
products they had a more
direct role in constructing.
It can be argued that many
cross-border life companies
forgot they were product
providers, and effectively
became asset administrators
instead.
l New entrants
The ’00s also saw ‘offshore’
become ‘cross-border’ and
an accepted part of the
mainstream UK financial
services landscape, at least
for IFAs. Many of the UK’s
largest domestic life offices
competing for IFA investment
business but with
no offshore option in their
product portfolio duly rectified
this during the decade.
But it was Dublin rather
than the Isle of Man or
Luxembourg that became
the jurisdiction of choice
for selling back into the
UK, while keeping options
UK key player changes
2000 2010
for EU passporting open.
The arrival of the major
brand players, as shown
above, has added respectability
to the sector, even
if the levels of business
written to date by some of
these entrants has yet to
match either their potential
or the performance of the
established market leaders.
Despite the new entrants,
the number of firms competing
as mainstream players
in the UK market has
remained largely constant,
around 12 to 13, mainly as
a result of parent company’s
M&A activity.
l Distribution channels
While the independent
adviser remained the dominant
channel of distribution
for the cross-border
life sector, the last ten
TAX MITIGATION REMAINS KEY
Although the shape of the cross-border life business changed in
the ’00s, the underlying proposition that drove the sector’s growth
throughout the period was the market’s appetite for tax mitigation.
The key generic benefits that make cross-border products
attractive to IFAs and their clients are primarily the combination of:
■ virtually tax-free investment growth;
■ the 5% deferred tax withdrawal facility that allows investors to
effectively turn their existing capital into a tax-efficient income
stream; and
■ greater control over how much, and when, tax is paid.
Underpinned by this fundamentally attractive proposition, the
sector proved adept at adapting to tax changes, such as POAT (preowned
assets tax) and more recent changes to capital gains tax and
non-domicile taxation.
Inheritance tax mitigation remained a mainstay of the sector
across the decade, boosted by the nil-rate band lagging considerably
behind the growth in property prices, encouraging advisers to use
packaged or bespoke combinations of trusts and cross-border bonds
to achieve effective wealth protection and transfer planning.
years has seen a broader
base of advisers emerging.
In the UK, discretionary
managers are now a key
source of single premium
business for cross-border
life companies.
Distribution was also
affected by regulatory
changes as UK regulators
made continual changes
in the rules governing
the provision of financial
advice to consumers.
Arguably the biggest test is
yet to come with the implementation
of the Retail
Distribution Review from
2013 – although the crossborder
life sector seems
better placed than most to
cope with aspects of the
impact of the RDR such as
fee-based charging.
And, as a result of a
number of steps taken
by international organisa-
tions over the course of
the decade, culminating
in the co-ordinated clamp
down on banking secrecy
in 2008-09, the crossborder
life sector ended
the decade as one of the
few remaining methods of
achieving legal and fiscally-compliant
tax planning
in many markets.
Over the decade the
tax status of many of the
traditional fiduciary structures
associated with
cross-border life products
were altered to the point
that they no longer performed
their core function.
Nevertheless, the application
of fiduciary structures
such as trusts and foundations
remains a core competence
of the sector and
its wealth management and
transfer properties.
Today, the cross-border
market is more efficient,
flexible and transparent
than at any other time,
offering clients better value
for money, and benefitting
from a wider base of
introducers. Over the past
decade, providers have
reacted tactically to events
and, where necessary,
reinvent their services. The
next 10 years are unlikely
to be any different.
INTERNATIONAL ADVISER [www.international-adviser.com] FEBRUARY 2010
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