Changes to Malta regulations regarding UK pension transfers have been introduced to improve the quality of QROPS advice. The aim is to protect customers by ensuring their financial adviser is suitably qualified to advise on investments.
Whilst many of the measures are welcome, there are also unintended consequences to the changes. These can have a negative impact on the level of QROPS advice provided.
One restriction is particularly welcome. Toxic, unregulated funds and alternative investments, such as Structured Notes, are now limited to no more than 30% of someone’s total portfolio with a maximum of 20% allowed in any one fund. Structured Notes are complex investments, suited only to professional investors. Unfortunately, many expats have lost most, or all of their pension in these funds, with little chance of redress. It begs the question as to why such funds aren’t completely banned!
QROPS advice options
Under the new legislation there are now 3 ways of arranging QROPS investments:
- Self-selecting a range of funds with the help of a suitably ‘Mifid 2’ regulated investment adviser
- ‘Buy and hold’ insurance funds where the adviser or client has no influence over investment decisions
- Discretionary Fund Management (DFM) services
The self-selection of a portfolio of funds
Self-selecting has been popular with clients who prefer involvement with their adviser in the creation and management of a personal portfolio of investments. The new Malta rules have almost stopped this practise completely, as many advisers are unable to obtain the necessary Mifid licence. AXIS Consultants are one of the few company’s licenced to provide this level of QROPS advice in France.
Passporting a Mifid licence should be a simple process under ‘Freedom of Services’ legislation. However, the French authorities, for example, do not allow this at present. The unintended consequence of this is that a client of a company based in France, who lives elsewhere, can’t access self-select services. This is indeed a pity, as it only serves to reduce choice for pension holders.
A simple solution exists, whereby the Malta regulator could grant permission for Mifid licences to be passported into other EU territories; this is not possible at present. Companies who don’t hold the required investment licence can offer portfolio management services for pension transfers via Gibraltar based providers. Gibraltar QROPS still allow advisers who only hold an Insurance Distribution Directive (IDD) licence to manage investments on a self-select basis.
Gibraltar QROPS may be less attractive to EU citizens as the Gibraltar tax authorities impose a non-refundable withholding tax of 2.50% on income payments. Pension holders are also restricted to ‘capped drawdown’, whereby 70% of the fund is mandated to provide a maximum income at 150% of Government Actuarial Department (GAD) rates. One of the big advantages of the UK and Malta pension plans is that they offer a ‘flexible access drawdown’ facility to customers. QROPS advice via Gibraltar is much more restricted, offering much less choice and inferior solutions for many.
Managed insurance fund solutions
A limited number of managed insurance fund solutions are available with a Malta QROPS. Advisers and their clients are allowed to access these funds, as the portfolio allocation cannot be influenced by either. This solution is viable for those who are happy to ‘buy and hold’, leaving the investment decisions to an insurance company fund management team. These funds are generally low to low/medium risk and are ideal for those who are looking for good value and are not too adventurous in their investment approach.
Discretionary Fund Management services
Discretionary Fund Management services are also allowed under Malta regulations. DFMs are similar to insurance company funds in that portfolio construction is contracted out to a third-party fund manager. DFMs tend to be riskier than either an insurance company solution or a widely spread portfolio of self-selected funds. Although a DFM manager can access securities on an unrestricted basis, in practice the number actually used at any time is relatively low; a portfolio may consist of only 20 securities. By contrast, a portfolio of self-selected funds would be spread across different markets, fund managers and sectors, which would include hundreds of individual securities.
DFMs don’t always succeed; there have been notable failures in the press recently. A couple of regrettable investment decisions by the one person running the fund can have a hugely detrimental effect on a person’s pension.
QROPS advice: seek qualified and regulated advisers
It is absolutely clear that something had to be done about toxic investment funds and incompetent advisers in the financial services industry. The problem, however, with a ‘one size fits all’ world in terms of the level of QROPS advice on offer, is that whilst some customers are protected from bad practise, many are restricted from being able to make their own decisions and take responsibility for their own finances.
The aim of the Maltese legislation is to strengthen the code of best practise in the transfer of UK pensions to QROPS. Although the new rules limit the scope of QROPS advice, there are still plenty of options available for those who work with properly qualified and regulated advisers. We are here to help!