Compliance Doctor
Posted on: 18 Feb 2012 by James Farmer

Lee Werrell, Managing Director of CEI Compliance Ltd, gives his personal round-up of the key issues that are currently shaping the compliance agenda.

 

Swiss Account-holders can keep anonymity, but must pay tax to HMRC

 

The Tax Agreement between the UK and Switzerland in August 2011 is similar to the recent accord between Switzerland and Germany earlier that month and is likely to come into force in January 2013.

 

The Swiss Department of Finance said in a statement that the new agreement not only respects the protection of bank client’s privacy, but also ensures the implementation of legitimate tax claims. Under the pact, residents of the UK can retrospectively tax their existing banking relationships in Switzerland either by making a one-off tax payment or by disclosing their accounts.

 

George Osborne, Chancellor of the Exchequer, said: “Tax evasion is wrong at the best of times, but in economic circumstances like this it means that hard-pressed law-abiding taxpayers are forced to pay even more. The days when it was easy to stash the profits of tax evasion in Switzerland are over.”

 

The one-off levy will raise around £5bn for the Treasury in 2013. Future investment income and capital gains of UK bank clients in Switzerland will be subject to a final withholding tax, and the proceeds of this will be transferred to UK authorities by Switzerland.

 

Future investment income and capital gains should be directly covered by a final withholding tax that has been set at between 27% and 48%.

 

In order to prevent new, undeclared funds from being deposited in Switzerland, it has been agreed that UK authorities can submit requests for information.

 

Meanwhile, to retrospectively tax existing banking relationships in Switzerland, UK residents should be given one chance to make an anonymous lump-sum tax payment varying between 19% and 34% of the assets.

 

The Finance Department said Switzerland and the UK have decided to facilitate mutual market access for financial institutions. The Swiss Bankers Association, which continually stressed the need for privacy to be retained, welcomed the deal.

 

Impact: For advisers of clients that fall into the category for offshore deposits, Switzerland may not now be the best option until it is decided what action to take. Whilst potential loopholes exist, and critics complain about criminal exploitation, the HMRC, and other UK officials can request account details if it has just cause. Existing depositors will have the option of account disclosure or a one off payment in retrospective tax to clear the past.

MIFID II – Legislative Proposal

On 20 October 2011, the European Commission published its long-awaited legislative proposal to revise the Markets in Financial Instruments Directive (MiFID). See http://tinyurl.com/3jzc43k

 

The proposal is divided into two parts, a Directive and a Regulation, both of which are expected to enter into force in 2013. Financial institutions and users of financial services will now need to prepare to negotiate a wider regulatory perimeter, which captures previously unregulated and more weakly regulated business areas. Greater transparency will apply to a broader scope of instruments. Firms should also be aware of the wider potential interventionist powers for EU and national regulators under contemplation.

 

Inducements

Under MiFID, firms are currently prohibited from making or receiving payments or other non-monetary benefits in connection with any investment or ancillary services provided to professional clients or retail clients, unless those payments or benefits fall into a specified exception.

 

There is also a high-level duty for firms to act honestly, fairly and professionally in accordance with the best interests of their clients.

 

An exemption for third-party inducements is available where:

• Clear, prior disclosure of the inducement has been made to the client;
• The inducement has been designed to enhance the quality of the service to the underlying client of the firm, and
• The payment or benefit does not impair compliance with the firm’s duty to act in the client’s best interests.

 

It is proposed that, under MiFID II, accepting third- party inducements will be completely prohibited for portfolio managers and independent investment advisers. This reflects a concern that inducements are incompatible with the provision of the independent exercise of discretion and independent advice.

 

The Optional Exemption

The UK chose to implement the optional exemption in Article 3 of MiFID which provides that firms will not fall within MiFID if they satisfy certain requirements.

 

This optional exemption is being widened so that a firm will be able to fall within this exemption if they provide advice on any financial instruments under MiFID.

 

New requirements to fall within the MiFID Article 3 exemption are that the Firm does not hold client money or securities and that the only investment services that they carry on are:

• The provision of investment advice.
• The reception and transmission of orders in transferable securities and units in collective investment undertakings.

 

Investment advice

There is a little confusion regarding the definitions of independent or restricted advice. In light of recent debates on the quality of investment advice, the draft Directive provides that a firm, when giving investment advice to clients, is to report personally to the client as to how the advice meets the personal objectives and characteristics of the client.  The firm should clearly state whether the advice is given on an independent basis and whether it is based on a broad or on a more restricted analysis of the market.

 

Impact: Inducements will be prohibited from third parties (on the basis that third party inducements are incompatible with the independent nature of the advice provided). See COBS 2.3.

 

MiFID exemption is an option for IFAs, and it must be carefully considered whether this route would be appropriate for the business model and for future developments. You should check whether you meet the conditions of the article 3 MiFID exemption (including having a requirement on your permission which prevents you from holding client money for the purposes of MiFID business). You may wish to check this by reviewing your firm’s details on the FSA Register.

 

If you are out of scope but wish to fall within scope in order to benefit from the right to passport investment business on a branch basis, you need to notify the FSA by submitting both a VOP and a passport application.

 

Investment Advice Procedures need to be reviewed and revised to ensure that the suitability letters include the correct terminology.

 

Part 2 will continue next month

 

Remember: If you have any concerns regarding these issues, please contact your compliance department or an independent consultant who is a member of the Association of Professional Compliance Consultants (APCC), recognised as a trade body by the FSA.

 

Tags: compliance | IFA | rdr