Recent trends in offshore trusteeship
Mark Fleming, Director, Private Client
Mark Fleming looks at recent trends in oﬀshore trusteeship and their impact on compliance best practices. To download and read the PDF, click here.
- What is the issue?
The changing private client world and new expectations of industry professionals have placed competing demands on oﬀshore trustees.
- What does it mean for me?
The recent trends in oﬀshore trusteeship aﬀect any practitioners dealing with compliance measures as part of their business activities.
- What can I take away?
A timely update on the need for trustees to be forward thinking in their work in the private client industry now and in the future, with specific regard to compliance and transparency measures.
Over the past ten years, the role of the trustee has changed beyond recognition. The way we work, who we work with and the regulatory environment in which we operate continue to evolve, and trustees now have to keep abreast of an increasingly complex web of tax compliance, regulation and disclosure. Below are some key areas in which we have seen the industry change and adapt.
The ownership model for trust services providers has evolved. Law firms, accounting firms and bank-backed trustees have moved aside in favour of private equity (PE), specialist boutiques and listed trustees. A key driver of this shift has been the impact of risk and regulation.
Bank-owned wealth managers continue to scale back or sell oﬀ their fiduciary operations due to perceived risk, and PE firms have been happy to fill the gap. PE firms recognise the strong annuity income streams in this space, as well as the consolidation opportunity to drive efficiencies. An even more recent trend is the listed service provider, which oﬀers a more permanent solution than some other ownership models and a market capitalisation that may appeal to some clients.
MERGERS AND ACQUISITIONS
The expectation is that there will be further consolidation of service providers as the cost of compliance continues to increase and owners of some smaller boutiques approach retirement. In addition to achieving scale, many firms see this trend as an attractive way to access new products and geographical markets – especially where they would struggle to achieve scale organically.
TYPES OF CLIENTS
Trust services providers have traditionally worked on a high number of trusts for UK resident non-domiciled clients, often received via UK intermediaries. As UK tax legislation has developed, running such trust structures has either become uneconomic or is no longer attractive from a tax perspective.
To diversify away from an over-reliance on the UK, most service providers have established global development strategies, looking at new geographical regions and greater breadth of service beyond thetraditional trustee.
Increased compliance costs have changed the type of clients using oﬀshore structures. Generally, trustees now work with fewer clients, but these tend to be higher value and more complex. A combination of increased complexity, scarcity of returns and families becoming increasingly international has resulted in a rise in the use of family offices. These often utilise a service provider to service part of the structure for underlying families, as well as supporting their own operation with non-fiduciary work, such as accounting.
A top priority for trustees is to maintain regular dialogue with the settlors, protectors and beneficiaries of the trust structures they look after. They also need to allocate time to fiduciary decision making, both of a routine nature and in relation to transactional work. More than ever, there is a need to clearly demonstrate management and control in the oﬀshore jurisdictions to ensure that the integrity of the structure is maintained, and there is a great focus on ensuring good governance.
As the geographical spread of clients increases, so has the need for trustees to travel to diﬀerent parts of the world to meet with existing and prospective clients, as well as their advisory network. Services providers are consequently looking at ways to embrace technology to help make certain administrative tasks, especially compliance-related ones, more straightforward. This investment will no doubt continue to drive further advancement in the industry.
In recent years, there has been a move from governments to increase their tax take and, going further than this, to more ably understand where and how wealth is held. The Foreign Account Tax Compliance Act (FATCA) was enacted by the US government with this target in mind, while the Common Reporting Standard, largely based on FATCA, has subsequently come in and has been adopted by over 100 jurisdictions around the world.
Transparency is very much the watch word, and an increasing number of governments are committing fully to exchange of information to ensure greater tax compliance. Accompanying this has been a greater push to drill down into the beneficial ownership of trusts and companies and, more recently, we have seen the introduction of the UK trust register and the register of persons with significant control (PSC) in the UK.
There have been a wealth of regulatory changes that trustees have had to deal with as part of this drive towards increased transparency.
There is now a drive to establish publicly accessible registers of beneficial ownership of companies in the British Overseas Territories by the end of 2020, which is very similar in nature to the PSC register. The Crown Dependencies do not currently plan to follow this action, but, given the expectation to adopt best practice in this area, they might ultimately follow suit.
As the transparency agenda continues, the erosion of privacy has raised concern among some high net-worth individuals, as information may be misused, especially if it gets into the wrong hands.
The EU’s General Data Protection Regulation (GDPR) was introduced on 25 May 2018. In most cases, the trustee will likely be seen as a ‘data controller’ under the terms of the regulation, and so there has been close analysis as to how GDPR impacts the administration of a trust structure, where sensitive information has traditionally been kept confidential.
REQUIREMENT TO CORRECT
The Requirement to Correct (RTC) was introduced to taxpayers as part of the UK Finance Act 2017 and initially gave them until 30 September 2018, unless a notification was made by this date, with a further 90-day extension permitted to complete the exercise to correct any relevant non-compliance in respect of their oﬀshore tax aﬀairs.2 This formed another compliance-related project for trustees to work on throughout 2018 and centred on reviewing the existing advice on the trust files to determine whether there was a need for it to be refreshed. The RTC reinforces the need for client structures to be well advised and receive regular tax health checks.
The Corporate Criminal Oﬀence, under the Criminal Finances Act 2017, has also been introduced and is targeted at firms that fail to prevent the facilitation of tax evasion. As such, trust services providers need to review their policies and procedures to ensure they have the right control framework in place, including the training of staﬀ.
There have also been numerous changes in tax law in respect of property ownership, which have resulted in a great deal of ‘de-enveloping’ (the process of shifting residential properties out of companies into direct ownership). Although companies are still used to house properties where there are privacy considerations, there is a drive to transparency in this area, too, and in 2021 the UK government is planning to enact a public register recording the beneficial ownership of UK residential properties in all legal forms, although trusts are expected to be excluded.
5AMLD AND BEYOND
The data leaks behind the Panama Papers and Paradise Papers have undoubtedly played a part in the drive towards greater transparency and, coupled with recent terrorist activity in Europe, further registers around bank accounts and trusts are on their way through the EU’s Fifth Anti-Money Laundering Directive (5AMLD), adopted by the European Council on 14 May 2018. Member States will have until 10 January 2020 to transpose the provisions of 5AMLD into national law.
Given the trend of recent years, the expectation is that there will be further consolidation of fiduciary services providers as the compliance burden increases. Given the move towards transparency, one can see a scenario where confidential compliance will likely become the norm. This would see registers continue to be maintained, but with certain information being publicly available, with more private data maintained at governmental level and exchanged where necessary.
The use of technology and embracing the changing world, as well as having the right level of infrastructure, will be key steps to success when servicing clients and dealing with compliance matters in a transparent and cost-efficient manner.
All businesses or industries are subject to any number of forces that require them to update and adapt, and oﬀshore trusteeship is no diﬀerent. Ultimately, it is down to the individual trustees to balance their time between the activities outlined in this article with the occasions through the year where a more involved juggling process will likely be required to keep all matters moving in the right direction.