Significant changes to the Malta QROPS rules regarding investment management came into force on January 1st 2019. Malta QROPS providers are now legally required to ensure financial advisers are correctly regulated according to MiFID 2 (Markets in Financial Instruments Directive) rules.
Providers were given 6 months leeway to work with advisers who were in the process of completing their applications with their local regulator. If advisers were unsuccessful in securing the new qualification, clients would be told by the Malta QROPS provider to find a new adviser. If that didn’t happen, the QROPS provider would opt to withdraw their services!
It’s difficult to understand how this particular measure will help or protect the client. This is particularly the case where an adviser/client relationship might have been in existence for many years and includes holistic advice that takes account of the client’s complete financial situation.
Essentially, advisers had to hold or obtain an investment license to comply with the new MiFID regulations in order to continue representing their clients. In the past, an Insurance Distribution Directive (IDD) license sufficed. However, the Malta Financial Services Authority (MFSA) decided that this was not enough and implemented MiFID 2 regulations in full for advisers as well as investment management companies.
The new Malta QROPS regulations covered more than simply the regulatory position of the adviser. Welcome rules regarding the type of investments which can be held and restrictions on esoteric and unregulated funds, such as Structured Notes and ‘Professional Investor’ products were rightly implemented. As such, the maximum holding in Structured Notes is now 30% of the portfolio with an extra requirement that no more than 20% can be from any one issuer. This change is long overdue!
Another important element of the legislation is that advisers and Malta QROPS providers are now required to document, and be responsible for, sales of recommended funds in order to ensure that they really do suit the ‘risk profile’ of their client. Regular monitoring is essential given that risk profiles change as individual circumstances evolve. For example, what might be the correct risk profile when accumulating retirement funds will almost always not be suitable in the decumulation phase when income needs to be secured.
In addition, full disclosure of fees and commissions must be provided on the application for new Malta QROPS. Clients will have to agree to, and sign a declaration stating they are fully aware of the total costs and charges associated with their plan. This is also a welcome change. Reputable advisers who are used to conducting business this way will not be affected, whereas those with fewer scruples will either be exposed or have to ‘get with the programme’ and change the way they work.
How do changes in the Malta QROPS rules affect you?
In the first instance, if you have a Malta QROPS and your adviser doesn’t hold the necessary investment license, your provider will write to you insisting you find a new adviser. If you do nothing at this point, you risk losing your QROPS provider and you will no longer be able to use their services. If you want to find a properly regulated adviser in your area, your QROPS provider will be happy to help by sending you contact details of suitable companies.
If you are seeking to transfer your UK pension into a Malta QROPS, you need to check that the adviser holds the necessary permissions. There are a couple of important issues to highlight here as follows:
- An adviser may claim that they don’t need an investment license due to having a relationship with a Discretionary Fund Manager (DFM). Although this is technically correct, you should be aware that your investment options will be severely restricted to a small range of ‘white labelled’ funds only. In other words, as Henry Ford once said, “you can have any colour you like, as long as it’s black”. It should be noted that DFM’s work for certain investors and that they usually offer a range of risk-rated multi-currency options.
- Another potential banana skin to avoid is the claim by advisers that Gibraltar is a suitable alternative to Malta. Theoretically, it is possible to transfer to a Malta QROPS after setting up in Gibraltar. However, the process isn’t clear; there is also no guarantee that the Gibraltar authorities will allow it. A primary reason for an adviser to recommend this route is that Gibraltar does not have the same stringent investment management legislation as Malta. This means that advisers don’t have to declare commissions and don’t need an investment license.
Gibraltar QROPS versus Malta QROPS
There is nothing wrong in principle with Gibraltar QROPS, however, they don’t allow flexible drawdown and impose a 2.5% non-reclaimable tax on income payments. In our view, this makes them unsuitable for the vast majority of EU-based clients. Brexit also poses a significant risk as Gibraltar will lose its EEA status, which would mean transfers would be subject to the UK Overseas Transfer Charge of 25%. Additionally, transfers made for those who have not been out of the UK for 10 complete tax years would be subject to UK tax rules; the Lifetime Allowance limit would therefore apply.
Summary
The legislation changes affect individual investors in different ways. Everyone’s situation should be viewed in context with their overall financial planning objectives.
AXIS Financial Consultants are authorised to act as a “Financial Investment Advisor”, referenced under the number E009199 by the association ANACOFI-CIF and approved by the Financial Markets Authority in France. If you would like more information on how MIFID 2 regulations affect Malta QROPS or wish to discuss your situation with one of our advisers, please contact us at: qrops@axis-finance.com