Guernsey FSC To Introduce Stringent Rules On RATS

by Robert Lee, Tax-News.com, London

23 July 2009

Guernsey's Financial Services Commission has announced proposals to overhaul regulation to enhance protection and oversight of Retirement Annuity Trust Schemes.

Retirement Annuity Trust Schemes (RATS) have been available as a form of personal pension provision in Guernsey for many years. Recently, with other options such as retirement annuity contracts becoming less widely available, RATS have been formed in larger numbers.

Their flexibility in relation to how assets may be invested, and benefits drawn on retirement, makes them useful in many circumstances. However, the same flexibility gives rise to the risk of RATS being used in circumstances where they are not the best solution or are not fully understood by the member.

The Commission fears that due to the cross-sectoral involvement in the schemes, regulatory framework, which applies to the firms which operate in different sectors but provide services in relation to the same structure or product, needs revision to set broader, more effective, guidelines.

In late 2008 the Commission circulated a discussion paper on RATS, highlighting some concerns about the present position. This arose from discussions with a group of practitioners across the relevant sectors of finance business. The problems identified by the group included:

  • The quality of initial advice: there are concerns that not all firms involved in RATS understand the specific factors and requirements which apply to them. There has sometimes been insufficient analysis of existing pension arrangements and the merits of transferring out of those into a Retirement and Annuity Trust Scheme.
  • There has sometimes been inadequate disclosure of fees and charges. Those have a particular significance with RATS because they are comparatively expensive to administer and clients need to be able to factor that into their decisions. There have also been problems with the disclosure of commission and investment performance, it informed.
  • There have been issues with the expertise of some firms to advise on suitable assets to ensure that Income Tax requirements for RATS are met, and that the investments are suitable to allow benefits to be drawn down on retirement.
  • A particular problem relating to investment policies pursued within RATS has been the use of heavy gearing (borrowing) by trustees of RATS, with the serious risks involved not always being clear to the RATS’ members.

The Commission reportedly received some very helpful responses to the discussion paper. It was clear to the Commission, both from the number, and the content of those, that there is widespread concern about the above areas within firms across all sectors of the finance industry.

As a result, the Commission produced a consultation paper summarizing its proposals for improving the regulatory framework under which firms provide services relating to RATS.

The Commission’s proposed rules include:

  • Training for those advising and acting as trustee of or administering RATS;
  • At set up stage, a trustee accepting trusteeship must be certain that the RATS and the proposed investment and investment strategy is a suitable form of retirement provision for the member;
  • Before transfering funds from a defined benefit pension scheme to a RATS, the trustee must produce an impartially verified report showing that the RATS would be more financially beneficial over the existing set-up;
  • Trustees must make the member aware of the risks of using gearing to enhance investment, and the trustee must get the member to sign a copy of the statement, stipulated within the Commission’s guidance note, underlining that they understand the risks;
  • Trustees must report full financial reports of the RATS financial standing to the member at least annually;
  • The trustee must ensure that, once income starts to be drawn down and paid to the member in the form of an annuity, the trustee can demonstrate that the level of payment is appropriate to secure a satisfactory provision for the retirement of the member, but also that reviews are carried out to ensure that the amount annuitized remains appropriate with respect the amount remaining in the RATS, and the life expectancy of the member;
  • A trustee must make fully transparent what its fees and commissions are, with regards assets at any level, including not limited to trustee’s own fees and fees or commissions payable from the assets to the trustee, any independent financial advisor, other intermediary, investment or fund manager or adviser.
  • No financial services business licensed by the Commission shall inaccurately or misleadingly advertise or promote RATS, or investments or investment strategies (including gearing) for use as part of retirement provision involving RATS.

The Commission's proposals are listed comprehensively on its site, where responses will be welcome until September 2, 2009.

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