3rd September 2014

FEIFA: The Unknown Risk

Those of us who have worked in this industry for any amount of time have experienced many business risks, and continue to do so. Often we are aware of these risks in advance and are able to mitigate or remove their potential impact; sometimes they are not foreseen and the hazards to our businesses appear to come “out of the blue”. 

A recent preliminary adjudication by the Financial Ombudsman Service (FOS) has perhaps highlighted one of those unforeseen risks.

The FOS ruling was against an unnamed Financial Adviser for failing to advise an emigrating couple on the option of transferring UK pensions into a Qualifying Recognised Overseas Pension Schemes (QROPS) and also for failing to inform them that he would no longer be able to give them ongoing advice once they had left the UK. It is perhaps worth noting that the adviser settled quickly and directly with the client. Perhaps most notably his PI insurer did not cover this claim as it was not included in his policy conditions - so he settled out of his own pocket.

Is this relevant to me?

In the last decade or more we have seen the increasing migration of people across the globe. In the UK this is often highlighted by the sensitive subject of a perceived immigration problem; there is generally far less focus on the rising number of Brits leaving these shores for pastures new, whether temporarily or permanently. This latter aspect is often far greater in magnitude than many people realise. I read recently that last year alone around 250,000 British nationals left the UK to join the many millions already permanently based abroad, with the vast majority relocating into mainland Europe. In fact a survey undertaken by Standard Life a few years ago highlighted that three of the top five preferred expat locations are in the EU.

Thus many, if not most, UK-based advisers will have one or more clients living abroad – or planning to do so. It is thus a potential problem for a great number of the advisory sector.

What are QROPS?

QROPS was a piece of legislation introduced in 2006, predominantly as a response to EU legislation on the freedom of movement of labour and income. It created criteria for a type of pension product that UK pension funds could be transferred into without any tax or unapproved transfer charges. QROPS – the term is now generally used to refer to the pension schemes themselves – tend to be viewed as pension vehicles for UK non-residents, or clients planning to live or retire abroad. They are unregulated by the FCA and, although I am not aware of any plans for this to change, it is always possible of course that regulation covering this area may appear, particularly if there is growing concern that QROPS are being sold to clients for whom they are not suitable. 

So, what’s the risk?

Many UK advisers, understandably, continue to advise clients that move abroad – whether ahead of that move or afterwards, or both. This ruling would seem to lead to a very straightforward conclusion; if you are an independent adviser (or a restricted one that advises on pensions) you need to advise such clients on QROPS or, at the very least, make them aware of these vehicles and assist them in receiving relevant information and/or advice.

It is worth noting that although QROPS are non-regulated products at present, this did not affect the claim being upheld. It should also be stressed that whilst advice on a QROPS itself is unregulated, the transfer out of a UK pension is, of course, very much a regulated advisory activity.

Should you be concerned?

As stated above, given the amount of British expats and the fact that this number continues to grow, despite the recent global economic conditions, more UK advisers than ever have clients that live abroad or are likely to do so in the near future. Thus, much advice is probably provided by advisers to such clients, advice which is perhaps not as complete or relevant as would usually be the case. Although the Brit expat population worldwide is large, in most cases such clients will only represent a modest proportion of a UK adviser’s client base. They may generally be high net worth or higher earners, but still almost certainly only represent a modest ratio of total revenue; thus the risk that they represent may be somewhat disproportionate.

I am a positive individual and thus I wish to finish in a constructive manner. There are two pieces of good news: firstly, there are potentially some fairly easy and cost-effective ways to alleviate, remove or reduce this risk; secondly, I will be explaining these in my next article!

Paul Stanfield is CEO of FEIFA, the Federation of European IFAs, a non-profit trade association that represents IFAs who are based or have clients on the Continent. He can be contacted at pstanfield@feifa.eu or on +44(0)7875 219462.

Regulation