Syllabus and Study Notes - GTA University Centre · PDF fileThese syllabus requirements are...

Syllabus and Study

Notes

Revised July 2015

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_______________________________________________________________________________________ Guernsey Insurance Certificate Study Module Version 16 2 © GTA University Centre July 2015

CONTENTS: The Examination Page 5

UNIT A: FINANCIAL SERVICES IN GUERNSEY

Details of Unit A syllabus

Page 8

The scope of the Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended, the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended, and the regulatory framework of financial services within Guernsey

Page 11

Legal Requirements and Guernsey Law

4

Guernsey Taxation

Page 43

Guernsey Social Security Page 58

UNIT B: PRODUCTS FOR THE DOMESTIC MARKET IN GUERNSEY Details of Unit B syllabus

Page 66

Protection Products

Page 69

Savings and Investment

Page 75

Pensions

Page 80

Mortgages

Page 93

Good & Reasonable Practice Page 95

Appendix A:

Retirement Annuity Trust Schemes (RATS)

Code of Practice

Page 99

Appendix B:

Guernsey Practice Notes: Requirements for

Approved Retirement Annuity Trust

Schemes and Approved Retirement Annuity

Schemes

Page 103

Appendix C:


Rules 2010

Page 126

Appendix D:

GFSC Thematic Onsite Visits

Page 133

The Examination

________________________________________________________________________ Guernsey Insurance Certificate Study Module Version 16 © GTA University Centre July 2015

THE GUERNSEY INSURANCE CERTIFICATE The Examination It is mandatory for all Authorised Insurance Representatives and Financial Advisers who advise on long-term insurance business to attain the relevant minimum insurance qualifications. The Guernsey Insurance Certificate is a relevant qualification and the examination is offered by the Bailiwick Insurance Intermediaries Association (BIIA) in partnership with the GTA University Centre. The examination is held online and consists of 100 multiple choice questions to be completed within 2 hours.

The pass mark for the award of the Guernsey Insurance Certificate is 70%. This pass mark is observed strictly and only those candidates achieving 70 marks or more in the examination will be deemed to have passed.

The standard of the examination will be the same as for the Chartered Insurance Institute’s (CII) Certificate in Financial Planning or the Certificate in Financial Services.

It is recommended that before sitting the Guernsey Insurance Certificate, the candidate will have passed or acquired an understanding of the subject content of the CII Certificate in Financial Services or equivalent qualification.

Please note that the examination will be set according to the syllabus headings and not based solely on the information contained in these Study Notes. Candidates should therefore ensure that (i) they are familiar with the additional reading outlined in “The Syllabus and Study Notes” section below, and (ii) they go through the specimen exam questions which will be provided on receipt of a registration form for the exam.

The Syllabus and Study Notes The syllabus consists of two main units: Unit A – Financial Services in Guernsey (page 7) Unit B – Products for the Domestic Market in Guernsey (page 66) The syllabus requirements for each unit are set out at the beginning of the relevant unit. These syllabus requirements are then re-stated in the Study Notes and after each syllabus objective there follows some explanatory text which covers the relevant topic.

It is strongly recommended that these study notes are used in conjunction with the CII Study Manuals for the Certificate in Financial Services or equivalent, as there is no detailed description of the relevant financial products contained in these Study Notes.

The Examination

________________________________________________________________________ Guernsey Insurance Certificate Study Module Version 16 © GTA University Centre July 2015

Details are contained in these Study Notes of the main ways in which the effects of Guernsey legislation impact on the operation of these products in the island of Guernsey. Given that these Study Notes are intended as a guide only rather than a definitive set of teaching materials, the following additional publications are recommended as further reading.

Codes, Rules and Regulations as issued under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 as amended which can be found on the Commission’s website at www.gfsc.gg with particular emphasis on:

Anti-Money Laundering Handbook (Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing)

Insurance Intermediaries (Conduct of Business) Rules 2014 Insurance Managers (Conduct of Business) Rules 2014 Code of Conduct for Authorised Insurance Representatives Code of Conduct for Financial Advisers Code of Practice for Insurance Intermediary Applicants and Licensees

Conducting Business from within the Bailiwick of Guernsey

Social Security Booklets, available from the Guernsey Social Security Authority and on their website at www.gssa.gov.gg

Guernsey Income Tax, personal allowances and general taxation principles: Requirements for Approved Occupational Pension Schemes in Guernsey, available from the Guernsey Income Tax Authority and on their website at www.gov.gg/tax.

These Study Notes have been compiled from a number of sources.

The information in these Study Notes has been provided by the following contributors: Guernsey Financial Services Commission Collas Crill KPMG Guernsey Guernsey Social Security Authority Guernsey College of Further Education Guernsey Income Tax BWCI Group

http://www.gfsc.gg/

http://www.gssa.gov.gg/

http://www.gov.gg/tax

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Guernsey Insurance Certificate Study Module Version 16 7

© GTA University Centre July 2015

UNIT A

FINANCIAL

SERVICES IN

GUERNSEY

Details of Unit A Syllabus

________________________________________________________________________



UNIT A FINANCIAL SERVICES IN GUERNSEY

DETAILS OF SYLLABUS

ELEMENT A1 - The scope of the Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended, the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended, and the regulatory framework of financial services in Guernsey On completion of this element, the candidate will: A1.1 know the extent to which the UK’s Financial Services and Markets Act 2000

applies in Guernsey. A1.2 know how financial services are regulated in Guernsey through the Guernsey

Financial Services Commission. A1.3 know the types of insurers operating in Guernsey for both the domestic and

offshore insurance markets. A1.4 understand how insurance intermediaries and agents are regulated by the

Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended.

A1.5 be aware of the laws applying to pensions. A1.6 be able to apply the Insurance Intermediaries (Conduct of Business) Rules 2014,

the Code of Conduct for Authorised Insurance Representatives and the Code of Conduct for Financial Advisers in the Bailiwick (see Appendices).

A1.7 be aware of current Anti-Money Laundering and Combating the Financing of

Terrorism legislation and the obligations on individuals to be vigilant.

A1.8 know the complaints procedures available to Guernsey policyholders.


________________________________________________________________________



ELEMENT A2 - The Legal Requirements and Guernsey Laws On completion of this element, the candidate will: A2.1 know the principles of the Laws of Succession in Guernsey. A2.2 know the laws relating to unmarried persons. A2.3 know the laws relating to consumer protection. A2.4 be aware of the laws relating to bankruptcy.

ELEMENT A3 - Guernsey Taxation On completion of this element, the candidate will: A3.1 know what taxes are due in Guernsey and the circumstances in which they are

payable. A3.2 understand the methods used to assess and collect Guernsey income tax. A3.3 be able to apply the main income tax allowances and understand the effect that

they have on an individual’s taxable income. A3.4 understand the impact of taxation in other countries and the principles of double

taxation relief. A3.5 understand the principles of domicile and the extent to which Guernsey residents

may be subject to UK inheritance tax. A3.6 understand how life funds are subject to tax in Guernsey and elsewhere.

ELEMENT A4 - Guernsey Social Security On completion of this element, candidates will: A4.1 know the classes of Guernsey social security which apply to individuals. A4.2 know the social security benefits that are dependent on the payment of

contributions and those that are not. A4.3 understand the principles concerning the circumstances in which the main types

of social security benefits become payable.


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A4.4 understand the principles of the reciprocal social security arrangements between Guernsey and the United Kingdom.

A4.5 understand how the non-payment of contributions affects all individuals’

eligibility for benefits.

Unit A, Element A1

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UNIT A FINANCIAL SERVICES IN

GUERNSEY

ELEMENT A1

The scope of the Insurance Business (Bailiwick of Guernsey)

Law, 2002, as amended, the Insurance Managers and

Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002

as amended, and the regulatory framework of financial services in

Guernsey

Unit A, Element A1

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A1.1 Know the extent to which the UK Financial Services and Markets Act 2000 applies in Guernsey

Guernsey is a designated territory under section 270 (for investment business and insurance business) of the UK’s Financial Services and Markets Act 2000. What this means is that Guernsey licensed life insurers may sell their products into the UK.

A1.2 Know how financial services are regulated in Guernsey through the Financial Services Commission

A1.2A Guernsey Financial Services Commission Finance business in Guernsey is regulated by the Guernsey Financial Services Commission which was established under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended, and commenced operations on 1 February 1988. The Legislation established the Commission with both general and statutory functions. The Commission’s primary objective is to regulate the Bailiwick’s finance sector to international standards and, by doing so, to protect depositors, investors, policyholders, other customers and the public. A1.2B The functions of the Commission

The functions of the Commission are defined as “general functions” and “statutory functions”.

Included in the general functions of the Commission are:

(a) the taking of such steps as the Commission considers necessary or expedient for

the development and effective supervision of finance business in the Bailiwick.

(b) the countering of financial crime and of the financing of terrorism; and in this paragraph “financial crime” includes any offence involving –

(1) fraud or dishonesty (2) misconduct in, or misuse of, information relating to a financial market; or (3) handling the proceeds of crime.

Unit A, Element A1

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Included in the statutory functions of the Commission are:

(a) any function assigned to it by or under any enactment.

In the exercise of its functions the Commission may take into account any matter which it considers appropriate, but shall in particular have regard to –

(1) the protection of the public interest, including the protection of the public

against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business; and

(2) the protection and enhancement of the reputation of the Bailiwick as a financial centre.

Full details of the functions of the Commission can be found in Section 2 of The Financial Services Commission (Bailiwick of Guernsey) Law, 1987.

A1.2C The structure of the Commission The structures of the Commission and its various Divisions can be found on its website at www.gfsc.gg.

The Commission’s approach to supervising firms The Commission is evolving its risk-based approach to supervising firms. The Commission’s level of interaction with a firm will depend on the firm’s impact and assessed probability risk. This will allow the Commission to focus its resources where they are most needed. The approach is judgement based and aims to prevent problems by identifying the underlying causes at an early stage.

Impact Impact is a measure of the degree of damage that a licensee, fund, registered entity or group, could cause to its consumers, the financial system in the Bailiwick and elsewhere, the Bailiwick economy and the public were it to (a) fail; or (b) fail to observe proper standards of conduct. Firms have been classified into 4 impact categories; High, Medium High, Medium Low and Low, using calculations developed with actuarial support and based on prudential, conduct and financial crime measures relevant for each business sector. Higher impact firms will receive the most frequent engagement while low impact firms will receive less regular engagement. There will be a strong focus for the higher impact firms on business model analysis, governance, financial risk analysis and regular engagement with the board and senior management. For low impact firms supervision will be more reactive, for example, in response to trigger events. They will also be subject to thematic reviews, AML/CFT visits and other routine visits.

http://www.gfsc.gg/

Unit A, Element A1

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Probability Risk Probability risk reflects the likelihood of a problem occurring. Probability risk is assessed according to 11 risk categories and associated sub categories. These assessments are judgement based. The Commission will focus on the risks pertaining to a firm’s strategy and business model, assessing the quality of governance, the effectiveness of the Board and the culture of the firm.

Risk Mitigation Programmes If a risk at a firm is assessed as being unacceptably high, the Commission will usually seek to agree a risk mitigation programme with the firm. Before discussing the programme with the firm a Risk Governance Panel will generally be held for higher impact licensees. Risk Governance Panels are a form of internal review and quality assurance. The supervisory team responsible for the firm present their findings and proposed course of action to a panel of senior staff and experts who will discuss and challenge the finding before agreeing the final risk mitigation plan with the supervisory team. Risk Governance Panels aim to deliver consistent and proportionate supervisory outcomes across the Commission.

Thematic Reviews Thematic reviews are intended to facilitate identification, and improve the Commission’s understanding, of potential risks. While they will be used across all firms they are particularly relevant to the supervision of low impact firms. Thematic reviews may also be performed in response to a specific trigger such as a high number of complaints regarding a particular product or high staff turnover. The Commission is always prepared to meet potential licensees or their professional advisers in order to discuss matters of policy and practice regarding the establishment of offshore insurers or other insurance matters.

A1.3 Know the types of Insurers operating in Guernsey for both domestic and offshore insurance

A1.3A Local insurers These are Guernsey based organisations (companies or mutuals) writing wholly, or primarily, domestic (i.e. Guernsey) business. There are a number of such entities but it is unlikely that there will be many more in the future.

Unit A, Element A1

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These local insurers are able to underwrite specially for the local market and adjust their rates to account for the generally better risk environment to be found in Guernsey compared with the UK and mainland Europe. Some insurers are part of insurance groups based in the UK and Europe and also write a significant book of captive retrocession business. They are often used as “rent-a-captives” by certain clients. Other domestic insurers are old mutuals first established in the early to mid-1800s which rely heavily upon the London reinsurance market for protection.

A1.3B Overseas insurers and Recognised Insurers There are a number of overseas (including UK) insurers licensed in Guernsey to write domestic insurance business. Recognised insurers include:

1. All licensed insurers (i.e. those who have a physical presence in Guernsey either directly through a Guernsey company or a Guernsey branch or indirectly through resident agents).

2. Insurers who have been designated as recognised by the Commission and

who do not have a physical presence in Guernsey but underwrite Guernsey risks.

Licensed insurance intermediaries may only place business with recognised insurers. Most recognised insurers are defined by description, usually based on the country in which the insurer is regulated. Further information and a list of recognised insurers can be found on the Commission’s website: http://www.gfsc.gg/Insurance/Type-of-Insurance-Entity/Pages/Recognised-Insurers,-Including-Authorised-Motor-Insurers.aspx

A1.3C Types of insurers Other insurers are incorporated in Guernsey to write specific types of commercial insurance business and it is also a centre from which reinsurance and underwriting services are available.

An important part of the offshore insurance sector is the offshore life insurance business.

Such insurers predominantly write life and pensions business for third country nationals on a worldwide basis and those resident in Guernsey have a diverse geographical ownership.

http://www.gfsc.gg/Insurance/Type-of-Insurance-Entity/Pages/Recognised-Insurers,-Including-Authorised-Motor-Insurers.aspx

http://www.gfsc.gg/Insurance/Type-of-Insurance-Entity/Pages/Recognised-Insurers,-Including-Authorised-Motor-Insurers.aspx

Unit A, Element A1

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In addition to the locally incorporated insurers there are branches of EU insurers which have established in Guernsey and write solely or mainly offshore (i.e. non-Guernsey) business.

A1.3D Insurance intermediaries Legislation was introduced in 1998 revised in 2002 and again in 2008, requiring insurance intermediaries to be licensed by the Commission. The legislation states that a person shall not – a) carry on business as an insurance intermediary, b) profess to carry on business as an insurance intermediary, or c) use as a description the term “adviser”, “broker”, or “consultant” in combination

with the term “insurance” or “assurance”, or use any other description which might reasonably be understood to imply that that person carries on business as an insurance intermediary,

in or from within the Bailiwick of Guernsey, unless that person is a licensed insurance intermediary or a licensed insurer; and a person who is remunerated in whole or in part otherwise than by fees paid by clients must not use as a description the term “consultant” in combination with the term “insurance” or “assurance”. All licensed intermediaries are restricted to offering the policies only of recognised insurers.

A1.3E Financial guarantee insurance Guernsey was the second jurisdiction, after New York, to have legislation in place permitting the establishment of financial guarantee insurance companies. A guarantee from a financial guarantee insurer provides comfort to bond holders that they will receive scheduled principal and interest payments should the bond issuer default; for example, the payments due from the issuers of asset-backed securities.

Unit A, Element A1

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A1.4 Understand how insurance intermediaries and agents are regulated by the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended

A1.4A Insurance legislation extended in respect of domestic

insurance business The Insurance Business (Bailiwick of Guernsey) Law, 2002 and the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 were both enacted on 5th November 2002 and subsequently revised in 2008. They enable the Guernsey Financial Services Commission to supervise the market conduct of persons advising on and/or selling insurance products in the Bailiwick. These updated Laws have been introduced in order to:

(a) safeguard the interests of the insured. (b) safeguard the reputation of the Bailiwick as a well-ordered jurisdiction; and (c) set minimum standards of conduct for insurance intermediaries and insurers

serving customers in the Bailiwick. The principal requirements are as follows:

• those acting as insurance intermediaries in or from within the Bailiwick have

to be licensed under the Law; • all insurers with a physical presence in the Bailiwick are required to be

licensed by the Commission. An insurer will be deemed to have physical presence if the insurer acts through a Bailiwick resident agent or has a branch operation in the Bailiwick;

• those insurers who write Bailiwick risks from overseas without a physical

presence in the Bailiwick are categorised as recognised insurers; • all insurance business placed by Bailiwick insurance intermediaries must be

placed with recognised insurers. A list of recognised insurers is maintained by the Commission which, as well as including recognised insurers, also includes insurance companies licensed by the Commission; and

• licensed insurers and insurance intermediaries shall only conduct business

through insurance representatives whom they have authorised. In summary the Insurance Laws presently control three insurance sectors:

1. Insurers operating in Guernsey must be licensed;

Unit A, Element A1

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2. Insurance managers, who mainly manage captives and protected cell companies, must be licensed;

3. Insurance intermediaries must be licensed.

A1.4B Additional relevant legislation Protected Cell Company Legislation Legislation permitting the incorporation of protected cell companies extends the benefits of captive insurance to small companies and organisations. Previously only medium to large companies and organisations usually found it financially viable to set up a captive. The introduction of PCC legislation has laid the foundation for Guernsey’s rent-a-captive business and is of particular interest to the promoters of association captives international groups involving numerous autonomous subsidiaries; and even insurers who wish to separate the life funds of different policyholders into separate cells, or classes, within a PCC. Originally the use of PCCs had been reserved for certain types of investment funds and insurance vehicles. The legislation has now been extended so that PCCs can be used more widely, for example, securitisations and other financial services vehicles. Incorporated Cell Company Legislation Incorporated cell companies (ICCs) were introduced to the island in 2006 by the Incorporated Cell Companies Ordinance, 2006. This has, however, been superseded by the relevant sections of Companies (Guernsey) Law, 2008. ICCs provide a similar structure to PCCs, but differ in that the individual cells are incorporated companies and thus have legal identity in their own right. It should be noted that incorporated cells are not considered subsidiaries of their ICC solely by virtue of being an incorporated cell of that ICC. Foundations On 8 January 2013 the Foundations (Guernsey) Law, 2012 came into effect. Foundations are a new form of legal entity for the Bailiwick. A commonly accepted definition of a foundation is as follows:

“A legal entity without members and with its own organisation, the object of which is to achieve a certain specific purpose by means of the endowment made.”

Foundations are common in civil law jurisdictions where the concept of a trust is not widely known.

Unit A, Element A1

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Foundations suit clients who are unfamiliar with trusts and can be used for wealth planning, as a hybrid structure with trusts, for commercial use (ancillary and incidental to its purpose) or philanthropy. A key attraction of a foundation over a trust is that assets are owned by the foundation and not the trustees. Third Parties (Rights against Insurers) (Guernsey) Law, 1936 Guernsey insurers should be aware of the existence of the above Law. The aim of the legislation is to ensure that persons who have a claim against other persons who are covered against that claim by insurance can claim against the insurer direct in the event that the persons claimed against make arrangements with their creditors or are made bankrupt or wound up. Consequently, if the parent of a captive is liquidated, any third party claimants of the parent may claim directly for any insurance liabilities arising.

A1.4C Limited partnership legislation – investing Lloyd’s ‘Names’. Local limited partnership legislation has been amended to enable, on incorporation, the partners to elect to bestow an irrevocable legal personality on the partnership thus fulfilling a Lloyd’s requirement for those investing as ‘Names’.

A1.4D Minimum capital and solvency levels Minimum capital and solvency requirements are laid down in the Law but the Director of Banking & Insurance Supervision & Policy Division may vary these requirements where necessary. Most insurers in practice have capital and solvency substantially in excess of the minimum requirements. The Minimum Level of Paid-up Share Capital The minimum level of paid-up share capital for Insurance Intermediaries, which needs to be maintained at all times, is as follows:

1. The Minimum Capital Requirement of a licensed insurance manager or a licensed insurance intermediary (a "licensee") under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended 2008, shall be £25,000 or 125% of the licensee’s professional indemnity insurance deductible or excess, if higher. 2. When calculating whether a licensee maintains the Minimum Capital Requirement in whatever form is required of him by or under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended 2008, the formula to be used shall be the total approved assets minus the total liabilities of the licensee.

Unit A, Element A1

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The Insurance Managers and Insurance Intermediaries (Approved Assets) Regulations, 2008 defines Approved Assets as:

‘all those assets held by the licensee and valued in accordance with Recognised Accounting Standards (as defined in the Law) less those assets held by the licensee and which are designated as unapproved assets.’

and Unapproved Assets as:

a) Positive goodwill, being the value of a business in excess of the qualified value of its other assets and liabilities,

b) Fixtures and fittings, being any furniture or other non-structural items owned by the licensee,

c) Computers and information technology equipment, which includes any device used for the storage or processing of data electronically, and

d) Motor vehicles, being any car, truck, motorcycle or other vehicle that can be used to transport persons or goods and is of a type permitted to travel on public roads.

A1.4E General Requirements for Licensees Guernsey is a reputable financial centre of considerable standing in international business circles with a wealth of technical expertise to support its position of excellence. It is a requirement of the legislation that licensed insurers appoint a general representative who is either a resident executive director (if none is available then a resident employee) who has to be fit and proper, or an authorised insurance manager. The general representative is a key part of the regulatory process in Guernsey and, with rare exceptions, will only be approved if there exists the necessary skills to manage and control all aspects of the insurer. While the appointment of a general representative is not a requirement for licensed insurance intermediaries, the Commission has required licensed insurance intermediaries that have no physical presence in the Bailiwick to maintain a local address for the delivery of documents. All of the below restrictions and requirements apply to licensed insurers and 2, 3, and 4 apply to licensed insurance intermediaries:

1. the company may only write insurance business which conforms with information contained within its current business plan;

2. any material changes in the information given in the original application for

registration, including the business plan, are subject to prior notification to the Commission;

Unit A, Element A1

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3. A current personal questionnaire should be lodged with the Commission for all directors, controllers and managers;

4. prior written consent must be given by the Commission whenever changes in

the ultimate beneficial ownership or changes in directors or managers are proposed.

Further requirements relating to licensed intermediaries can be found within the Insurance Intermediaries (Conduct of Business) Rules 2014. Additional requirements for PCCs and ICCs are as follows:

i) No new cell shall be created without the prior written consent of the Commission

ii) the minimum margin of solvency requirements should be calculated on a

cellular basis.

A1.4F Licensed Insurance Intermediary’s Annual Return A licensed insurance intermediary’s annual return is required in accordance with section 20 of the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (IMIIL) and is to be submitted to the Commission within 6 months of the end of the Licensee’s financial year.

The Insurance Managers and Insurance Intermediaries (Annual Return) Regulations 2008 states that the annual return shall comprise the following:

(1) Signed audited accounts (original copy). (2) A copy of the auditors’ management letter or confirmation that no auditors’

management letter is required to be issued. (3) An up-to-date list of all authorised insurance representatives, together with

details of current qualifications. (4) Confirmation of renewal of PI cover (on expiring terms, or otherwise),

including exclusions and geographical limitations. (5) A statement of all insurers with whom the intermediary has placed business

in the financial year in question. (6) A narrative up-to-date business plan. (7) Confirmation that all material changes to personal questionnaire forms have

been notified to the Commission. (8) Confirmation:

(i) of compliance throughout the period covered by the annual return with the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (and any ordinance, regulation or rule under it), with all applicable Conduct of Business Rules and Codes issued under that Law, and with any condition subject to which the licensee is licensed under that Law;

Unit A, Element A1

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(ii) that the accounts have been prepared and deposited in accordance with the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002.

(9) Such additional information the Commission may, from time to time, require.

Where the Commission has, in any particular case, given written confirmation that a format other than the standard format of an annual return may be used, that format will suffice; but the Commission shall not give such confirmation unless all the information required by the standard format is provided. The Commission is developing an online document submission system which will include annual returns. As a result the above requirements may change.

A1.4G Client Money Regulations The Insurance Managers and Insurance Intermediaries (Client Money) Regulations, 2008 sets out how licensees must safeguard moneys received by them from clients for payment on to insurers, or claim money received from insurers for onward payment to clients. The Licensees (Conduct of Business) Rules 2014 contain similar requirements regarding holding client assets prior to investing them.

A1.5 Be aware of the laws applying to pensions A1.5A Pensions have an element of regulation Pension Trustees The pension trustees are controlled under the Trusts (Guernsey) Law, 2007 and the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 when acting in the course of business. Trustees are also under an obligation to provide certain information to the States of Guernsey Income Tax to maintain a scheme’s tax “approval”.

Who regulates the trustees?

There is no specific regulator under the Trusts (Guernsey) Law, 2007. The Commission regulates under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000and the States of Guernsey Income Tax regulates under the Income Tax (Guernsey) Law, 1975.

http://www.gfsc.gg/The-Commission/Policy%20and%20Legislation/The-Insurance-Managers-and-Insurance-Intermediaries-(Client-Monies)-Regulations-2008.pdf

Unit A, Element A1

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Employer

Under the Income Tax (Guernsey)Law, 1975, the Income Tax Office regulates situations that may arise in which the employer may be required to give information regarding an approved scheme, which is relevant to the scheme’s taxation.

Insurers offering pension products

Under the Insurance Business (Bailiwick of Guernsey) Law, 2002 the Commission regulates the insurers offering pension products. Fund managers/custodians

The Commission regulates the fund managers/custodians under schedule 2 to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, unless the Incidental Activities Exemption applies. Insurance intermediaries The Commission regulates insurance intermediaries under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002.

A1.6 Be able to apply the Insurance Intermediaries (Conduct of Business) Rules 2014, the Code of Conduct for Authorised Insurance Representatives and the Code of Conduct for Financial Advisers in the Bailiwick

A1.6A Principles of conduct of finance business In 1991 the Commission issued the Principles of Conduct of Finance Business which applies to all licensed financial institutions. In 2013 the Commerce and Employment Department requested the Commission to in develop and introduce the Guernsey Financial Advice Standards. These standards were to focus on three key areas Educational requirements: Licensed financial services providers which offer financial advice to retail clients should be compliant with FCA level 4 Remuneration for providers: Both commission and fees will be allowed, but requiring full disclosure

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Scope of Advice: Licensees must disclose the range of products they are able to access, and any limitations The Commission issued two consultation papers in September 2013 and July 2014 setting out how Commerce and Employment’s request would be met. Under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 the Commission has subsequently issued Codes of Conduct for Authorised Insurance Representatives (the current code became effective on 1 January 2015, with the former code being repealed) and the Code of Conduct for Financial Advisers which are an extension of the Principles of Conduct of Finance Business. The Code of Conduct for Authorised Insurance Representatives applies to employees advising on all general insurance and long term pure protection products. The Code of Conduct for Financial Advisers applies to employees advising retail clients on long term single and regular premium insurance products. The Insurance Intermediaries (Conduct of Business) Rules 2014, also issued by the Commission under Insurance Managers and Insurance Intermedairies (Bailiwick of Guernsey) Law, 2002, places additional requirements upon licensees regarding the conduct of their Authorised Insurance Representatives and Financial Advisers. Copies of the above mentioned laws, rules, codes and principles can be found on the Commission’s website: http://www.gfsc.gg/Insurance/Pages/Legislation-and-Guidance.aspx

A1.6B Descriptions of long term business Life and annuity Effecting or carrying out contracts of insurance on human life or contracts to pay annuities on human life. Marriage and birth Effecting or carrying out contracts of insurance to provide a sum on marriage or on the birth of a child, being contracts expressed to be in effect for a period of more than one year. Linked long term Effecting or carrying out contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to -

(a) the value of, or the income from, property of any description (whether or not specified in the contracts); or

http://www.gfsc.gg/Insurance/Pages/Legislation-and-Guidance.aspx

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(b) fluctuations in, or an index of, the value of property of any description (whether or not so specified).

Permanent health Effecting or carrying out contracts of insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity, being contracts that -

(a) are expressed to be in effect for a period of not less than five years or until normal retirement age for the policyholder concerned, or without limit of time, and

(b) either are not expressed to be terminable by the insurer, or are expressed to be so terminable only in special circumstances mentioned in the contract.

Capital redemption Effecting or carrying out capital redemption contracts. Pension fund management Effecting or carrying out -

(a) contracts to manage the investments of pension funds; or (b) contracts of the description mentioned in subparagraph (a) that are

combined with contracts of insurance covering conservation of capital or payment of a minimum interest.

Credit life assurance Effecting or carrying out credit life assurance contracts the term of which is expressed to be for a period of not less than 10 years or which are without limit of time.

A1.7 Be aware of current Anti Money Laundering

and Combating the Financing of Terrorism legislation and the obligations on individuals to be vigilant

A1.7A What is money laundering?

Financial services businesses in Guernsey must comply with Guernsey’s AML/CFT framework. This framework is set out in the Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (“the Handbook”) as the relevant enactments.

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Money laundering means exchanging money or assets that were obtained criminally for money or other assets that are 'clean'. The clean money or assets don't have an obvious link with any criminal activity. Money laundering also includes money that's used to fund terrorism, however it's obtained.1 Appendix H of the Handbook provides guidance on money laundering and financing of terrorism techniques and methods and expands on this question and what is meant by the financing of terrorism. Deception is the heart of money laundering: at its most basic level money laundering is deception by attempting to make assets appear to have been obtained through legal means with legally-earned funds or to be owned by third parties who have no relationship to the true owner. The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. From the perspective of the criminal, it is no use making a profit from criminal activities if that profit cannot be put to use. A proportion of the profit will often be re-invested into further criminal ventures, but criminals will often wish to use the rest for other purposes. If this activity is to be achieved without being detected the money must be ‘laundered’. Money laundering can be described as the processing of criminal proceeds to disguise their illegal origin. Criminals seek to put their proceeds of crime into a state in which it appears to have an entirely respectable origin. If this act is carried out successfully it allows criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Where criminals are allowed to use the proceeds of crime, the ability to launder such proceeds makes crime more attractive. However, this does not mean that all criminals need to resort to elaborate schemes in order to create the perception of legitimacy of the source and ownership of their assets. Small-time criminals rarely do; they deal in cash and avoid financial institutions as much as possible. Even with regard to larger criminal activities the need to launder money will vary from jurisdiction to jurisdiction.

A1.7B What is the Financing of Terrorism? For terrorists, the acquisition of funds is not an end in itself but a means of committing a terrorist attack. With terrorist financing, it does not matter whether the transmitted funds come from a legal or illegal source. Indeed, terrorist financing frequently involves funds that, prior to being remitted, are unconnected to any illegal activity. Examples have occurred when legitimate funds have been donated to charities that, sometimes unknown to the donors, are actually fronts for terrorist organisations. Tracking terrorist financial transactions arising from legitimate sources is more difficult than following the money trails of the proceeds of crime because of the, often, relatively small amount of funds required for terrorist actions and the range of legitimate sources

1 HM Revenue & Customs (www.hmrc.gov.uk)

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and uses of funds. While many organised crime groups are adept at concealing their wealth and cash flows for long periods of time, their involvement in the physical trade of illicit drugs, arms, and other commodities, often exposes the revenues and expenditures connected to these illegal dealings. In contrast, terrorist attacks are in many cases comparatively inexpensive, and their financing is often overshadowed by the larger financial resources allocated for the group’s political and social activities, making it more difficult to uncover the illicit nexus. Identifying and disrupting the mechanisms through which terrorism is financed are key elements in the overall efforts to combat terrorism. As well as reducing the financial flows to terrorists and disrupting their activities, action to counter terrorist financing can provide vital information on terrorists and their networks, which in turn improves law enforcement agencies’ ability to undertake successful investigations.

A1.7C The duty of vigilance It cannot be stressed too strongly that all staff are at risk of being or becoming involved in criminal activity if they are negligent in their duty of vigilance and they should be aware that they could face criminal prosecution. While key staff are at the forefront due to their level of business engagement it is the responsibility of everyone to be vigilant and participate in deterring criminal activity. It is the Board’s responsibility to ensure employees receive ongoing training. Employees should be conscious that profits generated from crime are used to finance even more crime and terrorist activity.

A1.7D Controls & Monitoring The task of detecting crime falls to law enforcement agencies. While financial services businesses may on occasion be requested or, under due process of law, be required to assist them in that task, the duty of vigilance is only to avoid assisting the process of laundering and to react to possible attempts at being used for that purpose. Thus the duty of vigilance consists mainly of the following:

assessing the risk of your business being used by criminals to launder money checking the identity of your customers checking the identity of 'beneficial owners' of corporate bodies and partnerships monitoring your customers' business activities and reporting anything suspicious

to the Financial Intelligence Unit making sure you have the necessary management control systems in place keeping all documents that relate to financial transactions, the identity of your

customers, risk assessment and management procedures and processes making sure that your employees are aware of the regulations and have had the

necessary training

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A financial services business should not enter into a business relationship or carry out a significant one-off transaction unless it has fully implemented the above systems. Vigilance systems should enable key staff to react effectively to suspicious occasions and circumstances (for example complex, unusual large transactions and all unusual patterns of transactions which have no apparent economic or visible lawful purpose) by reporting them to the relevant personnel in-house and to receive training from time to time from the financial services business to equip them to play their part in meeting their responsibilities. Vigilance systems should also include a programme to detect the reason why suspicious transactions have been overlooked in error where this becomes apparent.

A1.7E Criminal Activity There are three stages of laundering, which broadly speaking occur in sequence but often overlap:

• Placement is the physical disposal of criminal proceeds. In the case of many serious crimes the proceeds take the form of cash which the criminal wishes to place in the financial system. Placement may be achieved by a wide variety of means according to the opportunity afforded to and the ingenuity of the criminal, his advisers and network. Typically, it may include:

a. placing cash on deposit at a bank (often intermingled with a legitimate credit to obscure the audit trail), thus converting cash into a readily recoverable debt; or

b. physically moving cash between jurisdictions; or c. making loans in cash to businesses which seem to be legitimate or are

connected with legitimate businesses, thus also converting cash into debt; or d. purchasing high-value goods for personal use or expensive presents to

reward existing or potential colleagues; or e. purchasing the services of high-value individuals; or f. purchasing negotiable assets in one-off transactions; or g. placing cash in the client account of a professional intermediary.

• Layering is the separation of criminal proceeds from their source by the creation of layers of transactions designed to disguise the audit trail and provide the appearance of legitimacy. Again, this may be achieved by a wide variety of means according to the opportunity afforded to, and the ingenuity of, the criminal, his advisers and network. Typically, it may include:

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a. rapid switches of funds between banks and/or jurisdictions; or b. use of cash deposits as collateral security in support of legitimate

transactions; or c. switching cash through a network of legitimate businesses and “shell”

companies across several jurisdictions; or d. resale of goods/assets.

• Integration is the stage in which criminal proceeds are treated as legitimate. If layering has succeeded, integration places the criminal proceeds back into the economy in such a way that they appear to be legitimate funds or assets. The Bailiwick of Guernsey’s good reputation makes it potentially vulnerable as a staging post for funds at the layering stage and the integration stage. This problem is similar to that faced by the United States of America and the United Kingdom and other Member States of the European Union. Financial services businesses should recognise that the Bailiwick could be targeted by money launderers, terrorists and those involved with the proceeds of crime and that they are in the front line of the Bailiwick of Guernsey’s defence.

The Money Laundering Reporting Officer (“MLRO”)2

Money Laundering Reporting Officers (MLROs) have a pivotal role to play in ensuring that a firm is compliant with anti-money laundering obligations.

They also ensure that the firm has appropriately considered its exposure to anti-money laundering risks and can respond effectively to those risks in a way which minimises the likelihood of criminal, civil or disciplinary sanctions. An MLRO should be a point of contact for all anti-money laundering enquiries within the firm. They should also be able to advise the management team on the firm's risk of exposure in relation to money laundering and how effectively the firm as a whole is managing that risk.

The Consequences of Failure

For the financial services business involved, the first consequence of failure in the duty of vigilance is likely to be commercial. Financial services businesses which, however unwittingly, become involved in money laundering risk the loss of their good market name and position and the incurring of non-productive costs and expenses. The second consequence may be to raise issues of supervisory concern. The third consequence is the risk of criminal prosecution of the financial services business for the commission of a relevant offence. Each carries a heavy penalty on conviction by the Court.

2 The Law Society (www.lawsociety.org.uk)

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For the individual employee it should be self-evident that the consequences of failure are not dissimilar to those applicable to financial services businesses. The employee’s good name within the industry is likely to suffer and he or she may face the risk of prosecution for the commission of a relevant offence. It should be noted that two of the relevant offences are concerned with assistance given to the criminal. There are two necessary aspects to such criminal assistance:

the provision of opportunity to obtain, disguise, convert, transfer, conceal, retain or invest criminal proceeds or terrorist funds; and

the knowledge or suspicion on reasonable grounds (actual or, in some cases, imputed if the person should have had a suspicion) of the person assisting that they are dealing with the proceeds of criminal conduct or terrorist funds. Such involvement is avoidable on proof that knowledge or suspicion was reported to the FIS without delay in accordance with the vigilance policy of the financial services.

While due reporting removes the criminality from assistance, it will be noted that:

any reporting (other than due reporting of knowledge or suspicion) which prejudices an investigation, by tip-off or leak, may constitute a relevant offence; and

any failure to report knowledge or suspicion that a financial services business is dealing with the proceeds of non-drug trafficking crime may itself constitute a relevant offence. Any failure to report knowledge or suspicion that a person is engaged in drug money laundering or terrorism or the financing of terrorism is a relevant offence.

Additional References The Board and the MLRO should guide the business on anti-money laundering and countering terrorist financing, however the following are useful reference points for individuals:

Handbook for Financial Services Businesses on Countering Financial Crime & Terrorist Financing (“the Handbook”)

GFSC Website, AML/CFT Typologies

A1.F Verification (Know Your Customer) (Customer Due Diligence) Please refer to the following sections of the Guernsey Financial Services Commission Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing:

Section 3.5.1 Section 3.5.2 Section 4 Section 5

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Sections 6.1; 6.2 and 6.3 Section 8.4 Section 9.4 Sections 10.3 and 10.6 Sections 13.4 and 13.5 Appendix C

The Handbook can be found on the GFSC website (www.gfsc.gg) under Legislation and Guidance.

A1.8 Know the complaints procedures available to Guernsey policyholders

The Insurance Intermediaries (Conduct of Business) Rules 2014 define what is considered to be a complaint against a licensee. There are two categories of complaint: A complaint is any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of a person about the provision of, or failure to provide a financial service which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience. A significant complaint means a complaint alleging breach of law, mala fides, malpractice or impropriety, or repetition or recurrence of a matter previously complained of (whether significant or otherwise). Where a licensed insurance intermediary or licensed insurance manager is issuing policies to the general public the licensed insurance intermediary or licensed insurance manager must be able to demonstrate that it has in place procedures for dealing with customer complaints. In such circumstances, the complaints procedure should as a minimum set out the following:

(a) The licensee must ensure that all of its employees who deal with clients are at all times aware of the licensee’s complaints procedures;

(b) Complaints should be dealt with by a senior officer of the licensee who is independent of the circumstances giving rise to the complaint;

(c) If a complaint remains unsettled for longer than three months, the licensee must inform the Commission of the complaint, and advise the complainant that he or she may inform the Commission directly of the complaint;

(d) A licensee must inform the Commission within fourteen days of it becoming aware of a significant complaint, and advise the complainant that he or she may inform the Commission directly of the complaint; and

(e) A licensee must inform the Commission within 14 days of it becoming aware of a series of complaints regarding any one employee, current or otherwise.

When the Guernsey Financial Services Commission receives a complaint this is copied to the licensee in the hope that it can be quickly resolved. The Commission has no powers

http://www.gfsc.gg/

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to arbitrate as the proper recourse, if not resolved through mediation, is through the courts. If the complaint showed that the licensee fails to meet its regulatory obligations, the Commission would consider the steps which could be taken by the licensee to address these failings and where appropriate require the licensee to undertake a risk mitigation plan or it could impose conditions on the licensee to either undertake or cease from doing certain actions. If the complaint showed that the licensee is not fit and proper the Commission would consider taking enforcement action against that licensee. Such action could incur the imposing of more stringent conditions or revocation of the licence. The Commission does have the power to impose fines on the licensee and, if appropriate, individuals of the licensee but not to require the licensee to award compensation to the complainant.

Channel Island Financial Services Ombudsman On 30 October 2013 the States of Guernsey approved a report regarding the creation of a Financial Services Ombudsman (FSO). The FSO is to be a joint scheme with Jersey and is expected to begin operating in the latter part of 2015. The Ombudsman will be able to consider complaints in respect of defined financial services provided in Guernsey in respect of acts or omissions occurring on or after 2 July 2013. The following financial services will be within the scope of the scheme3:

1. Banking: All banks which deal with eligible complainants; 2. Insurance: Insurance brokers, companies and managers which deal with eligible

complainants; 3. Investments and Funds: Class A funds and any licensee under the Protection of

Investors (Bailiwick of Guernsey) Law, 1987 carrying out business in relation to Class A funds wherever the Class A fund is administered together with any licensee advising, dealing or managing in relation to category 2 controlled investments;

4. Pension related: Fiduciary business licensees (not personal license holders which are exempt from the FSO) and Non-Fiduciary businesses which administer any pension product (including RATS and QROPS) and/or provide pension advice to eligible complainants;

5. Money Lending and Consumer Credit Providers; 6. Money service businesses with eligible complainants.

The definition of eligible complainant will include the following;

3 Billet d’Etat XX 2013 Wednesday, 30th October 2013

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1. Consumer/private individual; 2. Small businesses; 3. Charities with an annual income of less than £1 million; 4. Non-professional trustees or council members.

Please note the definition of eligible complainant is the current intent and is subject to change.

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GUERNSEY

ELEMENT A2

The Legal Requirements and

Guernsey Law (as amended in accordance with

The Inheritance (Guernsey) Law, 2011)

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A2.1 Know the principles of the Laws of Succession in Guernsey

The Inheritance (Guernsey) Law, 2011 came into force on 2 April 2012 and made fundamental changes to the laws of inheritance in Guernsey. The new law brought about two key changes, firstly, the removal of the restrictions on leaving property by Will (known as rules of forced heirship), and secondly the rules on intestacy (how your property will pass if you do not make a Will). It is hoped that the new law will help to alleviate problems, including the lack of freedom to leave your estate as you wish, that arise under the previous inheritance laws, in particular with regard to unmarried couples.

The previous law imposed restrictions on how a person could dispose of both their Guernsey real property (land and buildings) and their personal property (money, stocks and shares, furniture, wheresoever situate) in their Will (the forced heirship rules referred to above). The new law removed these restrictions in their entirety and allows the person making a Will to leave their property to whomsoever they wish by giving testators complete freedom of testamentary disposition. If the testator owns real property outside of Guernsey, then it is advisable to make a separate will in the jurisdiction where the property is situate. Succession to Real property is subject to the ‘lex situs’, i.e. the law of where it is situate. This is in contrast to personal estate, where succession is governed by the law where the deceased was domiciled at the date of their death.

Despite this testamentary freedom, the new law has introduced the concept of financial provision under which certain members of the deceased’s family and dependants can apply to the Royal Court for a share of the deceased’s estate to be made available to them if they have not been reasonably provided for financially either in the deceased's Will, in an intestacy or by a combination of a Will and the law. When making a Will after 2 April 2012, a person should have consideration for any potential applications that could be made to challenge their Will.

A claim for financial provision can only be made by a spouse or civil partner, a former spouse who has not remarried or former civil partner who has not formed a subsequent partnership, a child of the deceased, anyone treated by the deceased as a child of the family, a cohabitee who has lived with the deceased for a period of two years prior to their death or anyone who was being maintained, wholly or partly, by the deceased. When considering the claim the Court must balance the needs of the applicant against the needs of all other beneficiaries of the estate and the Court will consider a variety of factors including the financial resources and needs of the applicant and the beneficiaries and any obligations the deceased had towards the applicant and beneficiaries. If a claim for financial provision is successful the Court can make any order it thinks fit including an order for a lump sum or periodic payment of money or an order vesting or transferring property. A claim must be made within 6 months of the date of death of the deceased, unless the Court grants permission otherwise. The new Law also changed the way in which property is inherited through intestacy (i.e. without a Will). The law no longer distinguishes between property which has been inherited through intestacy known as ‘propres’, and real property acquired by other means, known as ‘acquêts’, thus removing further restrictions on the inheritance of real property.

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If a person dies without leaving a Will:

If there are no descendants, the spouse/civil partner (although Guernsey law does not currently have any laws relating to civil partnerships) will inherit the whole of the deceased’s real property.

If there is no surviving spouse/civil partner the descendants inherit the whole of the deceased’s real property.

If they leave descendants and a spouse/civil partner, one half of the matrimonial home will pass to the surviving spouse/civil partner and they will also have a right of enjoyment until remarriage of the remaining half of the home. They will also inherit one half of any other real property owned by the deceased. The remaining half of all real property (including the remaining half of the matrimonial home) will pass to the deceased's descendants.

If they do not have a spouse/civil partner or children, both their real and personal property will pass to their heirs at law (normally their brothers and sisters or their respective children or, if none, their ascendants, remoter relations, the Crown and so on).

In relation to personal property, if a person dies without leaving a Will:

If there are no descendants, the surviving spouse/civil partner will inherit the whole of the deceased’s personal estate.

If there is no surviving spouse/civil partner, the descendants inherit the whole of the personal estate of the deceased.

If there are descendants and a spouse/civil partner, their spouse/civil partner will inherit a one-half share of their personal property, and the remaining one-half will be inherited by their descendants, to be shared equally.

If they die without leaving a spouse/civil partner or descendants, their personal property will pass to their heirs at law, as above.

The new law only applies to Wills made on or after 2 April 2012 (unless the testator has incorporated provision for the new law to apply if the Will was made after 29 June 2011). Those Wills made before such date remain valid and do not need to be amended unless the testator wishes to take advantage of the removal of the testamentary restrictions.

For Wills made prior to 2 April 2012, the new law is disregarded; property will pass according to the Will and law prior to 2 April 2012 and as such the rules of forced heirship will apply. Family members of the deceased will not be able to apply against the estate for reasonable provisions.

The new law will apply to Guernsey only, Sark and Alderney have different inheritance laws which are not affected.

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The full law can be accessed here: http://www.guernseylegalresources.gg/CHttpHandler.ashx?id=71396&p=0

A2.2 Know the principles of the law relating to unmarried couples

A2.2A Title to realty

The system of title to realty in Guernsey is a registered system with all titles being registered on the Public Records of the Island in the Greffe.

Charges Certain charges which impinge upon the Realty in question and which therefore affect the Title are also registered at the Greffe. These charges include bonds which are registered debts secured against property generally in the form of bank advances (“mortgages”). Other types of advances may also be registered. Certain obligations in the form of covenants to repair, etc. and which generally appear in estate schedules relating to flats may also be registered. Certain other types of registries may also be made, e.g. Court Orders.

A2.2B Vesting General

Every conveyance of realty contains what the lawyers call a “vesting” clause. This clause simply states the way in which the purchaser has acquired the property. If the purchaser is a sole individual, then the property will have been acquired by the purchaser for him or herself and his or her heirs for an estate of inheritance. Clearly, if the purchaser is a company, then there will be no heirs, but the company as a separate legal entity will have acquired absolute title in its sole name. When two or more individuals acquire a property together in some form of “joint” ownership, then the vesting clause will set out precisely how they own the property. The generally encountered forms of ownership are as follows:

(i) Jointly for the survivor (“survivorship”) – For the purchasers, the survivor of them and the heirs of such survivor. If one of them dies, the survivor takes all absolutely.

http://www.guernseylegalresources.gg/CHttpHandler.ashx?id=71396&p=0

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(ii) Jointly for the purchaser and their respective heirs in undivided shares – usually, but not necessarily equal shares, i.e. half each but could be one quarter / three quarters, etc. The shares are indicative of each party’s interest in the Realty or contribution to its purchase. If one party dies, his or her share passes to his or her heirs or beneficiaries under his or her will and not to the surviving co-owner.

(iii) Jointly for the purchasers and their respective heirs in (say) equal undivided half shares but with the right for the survivor to enjoy the whole during his or her lifetime – as in (ii) above but with the survivor having the life enjoyment of the whole of the property (free from rent but with certain obligations including maintenance).

(iv) Jointly for the purchasers and for the heirs of either one of them, but with the right of the other to have life enjoyment - such that the property will pass to the heirs or beneficiaries of one party only as specified subject to the life enjoyment of the other.

Prior to being legally bound to purchase realty the Purchaser’s advocate will discuss the above options and advise the parties according to their needs. The choice of vesting will depend on the parties’ personal circumstances (i.e. whether they have children from this or previous relationships or marriages, whether they are still married to someone else, etc.), their wishes if they were to die and if one of them is contributing more to the purchase price than the other. Once the type of vesting is selected, it will always be included in the terms of the Conveyance of the Property to the parties (unless the parties choose to incorporate a company to purchase the property through that vehicle). To achieve the parties’ complete wishes, it is sometimes necessary for wills of realty also to be prepared but this will depend on the circumstances of the case. Following the completion of the Conveyance, it is registered at the Greffe as a public record so that it is clear as to how the property is vested in joint ownership. If then one of the joint owners dies, the consequences concerning the property will depend on the choice of vesting. If (i) is chosen, the property will automatically pass to the survivor. Of one of the other options is chosen, the beneficiary/ies of the deceased joint owner’s share may be a beneficiary/ies named in a will or in the absence thereof, those persons entitled according to the rules of Intestacy. Such beneficiary/ies’ ownership may be subject to an enjoyment in the property by the remaining joint owner or a third party if so created in the Conveyance or some other document registered at the Greffe or if there is a surviving spouse, the spouse will have a statutory right of enjoyment as described at A2.1. The vesting itself is unlikely to be capable of being challenged. Married Couples

In the majority of cases, but not always, the couple will buy for themselves, the survivor of them and the heirs of the survivor (i.e. (i) above). This means that if one of them dies, then the surviving spouse will own the property outright (as explained above).

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Unmarried Persons

An unmarried couple will sometimes decide to purchase a property for themselves, the survivor of them and the heirs of the survivor with the above result. Their decision will be personal to them and will often depend upon the nature and duration of their relationship. It may be however that they choose one of the options (ii), (iii) or (iv) appearing above.

A2.2C Matrimonial law Matrimonial Causes Division of the Royal Court The Matrimonial Causes Division of the Royal Court has to deal with all issues relating to the breakdown of a marriage and this includes the jurisdiction to determine the equitable distribution of all marital assets on the divorce of the parties to marriage, and this includes making Orders as to Real Property at the Final Order of Divorce. Matrimonial assets will include assets in the sole name of either spouse or in their “joint” names and the Court has power to divide the assets in such proportions as it deems fit. Ouster of Jurisdiction The Court will not permit its jurisdiction to be “ousted” by agreement between the parties to that effect and will exercise its jurisdiction within its discretion. It will particularly have regard to the needs of any children of a marriage. Prenuptial Agreements

The Court has unfettered jurisdiction to override any settlement which may have been made by the spouses if it thinks it just to do so. The Court may uphold a Prenuptial Settlement particularly in the case of more mature persons, both of whom have come to the marriage with substantial assets of their own and both of whom remain in a position to provide reasonably for their own future needs. On grounds of public policy the Court will not uphold a post nuptial agreement, designed to facilitate the separation of the parties. Court Orders

The Order of the Court as to the distribution of matrimonial assets will be set out in a formal document. This Order will either be the result of the Court’s judgement after due process in a case of a dispute between the parties, or will be made pursuant to a joint application, the parties having reached an appropriate settlement either in divorce proceedings or prior to divorce in the form of a Judicial Separation by Consent.

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A2.2D Break up of unmarried couples General By definition unmarried couples do not have recourse to the jurisdiction of the Matrimonial Causes Division of the Royal Court in the event of a breakdown in their relationship.

A further danger arises in that a recent decision of the Court of Appeal holds that where realty has been purchased by persons for themselves, the survivor of them and the heirs of such survivor, then the equity in that property will always fall to be divided between them in equal shares notwithstanding that one party may have contributed considerably more than the other towards its purchase unless the conveyance itself or some other form of agreement records how the equity is to be divided. As far as realty purchased in undivided shares is concerned, the shares reflect the party’s respective interests in or contributions to the property and it will be that share of the proceeds of sale he or she would receive back in the event of separation and sale.

Unmarried Persons Agreements

An unmarried couple is often advised to set out, in advance, the terms which they feel would be appropriate in the event that their relationship should break down and they wished to go their separate ways. This agreement is generally referred to as an Unmarried Persons or Cohabitation Agreement. Such an agreement may be applicable in varying degrees given the type of vesting which the parties have agreed upon. In other words, the vesting and the agreement will be inter-related. In the recent case referred to above, the Court of Appeal did not rule upon the applicability and effect of such agreements. Provided that the agreement is appropriately worded and so drafted as to give one party a cause of action against the other in the event that one party seeks to dishonour it, then there is no reason to suppose that such an agreement will not be upheld as between the parties although it is unlikely to bind the creditor of one of the parties.

The agreement is not intended to be a prenuptial settlement and if the parties do subsequently marry in an applicable case, then the issues dealt with in the agreement will fall to be determined within the general jurisdiction of the Matrimonial Court as above.

The agreement generally recites arrangements which the parties propose to make, their agreement as to how their obligations, for example to repay the mortgage, are to operate, records whether or not one party or both parties have made capital contributions and finally, the way in which the equity in the property should be divided between them in the event that they go their separate ways. Often provision is made for an adjustment if one of the parties has dishonoured the arrangements, for example

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his or her obligations to make the agreed contributions towards the mortgage repayments; and the agreement may provide that nothing is to prevent the parties from coming to an amicable agreement at the time, for example, one party buying out the other for an agreed price.

A2.3 Know the laws relating to Consumer Protection

Legislation

There is no consumer protection legislation in place at present. Common Law

In the absence of legislation, consumer protection relies on common law principles (imported to a large extent from English common law (i.e. non-statutory law)). Goods must be fit for their purpose and of “merchantable quality”. Similarly, work done must be of “workmanlike” quality using proper materials and in accordance with generally accepted standards.

Contract Individual contracts may contain provisos as to quality, etc. and consumer redress. Exemption clauses may also be included but generally would have to pass a test of “reasonableness” if tested in litigation.

Consumer Credit There is no consumer credit legislation in place and this is an area of business currently unregulated by the Guernsey Financial Services Commission.

Rates of Interest The only control lies in an (old) piece of legislation which may be relied upon in Court proceedings by a debtor pursued by a creditor for repayment. The debtor may claim that the rate of interest is excessive. If upheld, this partial defence may result in the Court abating the claim and interest, but not below 10% per annum. [See Ordinance of the States giving power to the Court to reduce excessive interest (6th December 1930).]

A2.4 Be aware of the laws relating to Bankruptcy Unlike the United Kingdom, Guernsey has no same concept of Bankruptcy. Guernsey law provides other similar routes of action for a creditor who is owed money that the debtor cannot pay, which are detailed and complex and beyond the scope of this

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section. The choice of procedure will depend on whether the debtor has realty or not, the size of the debt, and whether the debtor has other debts against him. Alderney law is largely the same as Guernsey law in this field.

A United Kingdom Bankruptcy Order can be valid in the Channel Islands as a trustee in bankruptcy can apply to the Jersey or Guernsey Court for orders in aid to enable the trustee to exercise the same powers over the Channel Islands assets as he has in respect of the United Kingdom assets. At the moment in Guernsey there is no Official Receiver although a Public Trustee is about to be appointed who will carry out similar although not the same functions as the Official Receiver.

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GUERNSEY

ELEMENT A3

Guernsey Taxation

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A3.1 Know what taxes are due in Guernsey and the circumstances in which they are payable

A3.1A Income tax The principal taxing statute in Guernsey is the Income Tax (Guernsey) Law 1975 as amended. From 1 January 2008, with the introduction of ‘Zero-10’ the following changes were made to the Income Tax (Guernsey) Law, 1975:

i) Guernsey resident companies are subject to Guernsey tax at the Company Standard Rate of 0% on profits from business except where the profits were derived from those businesses detailed in points ii) and iii) of this section;

ii) Profits from banking business are subject to Guernsey tax at the Company Intermediate Rate of 10%. With effect from 1 January 2013, this rate extended to profits from domestic insurance business, fiduciary business, insurance intermediary business and insurance manager business; with effect from 1 January 2015 the rate was extended to licenced fund administration businesses providing administration services to unconnected third parties. The 10% rate will apply to the service providers and not the products.

iii) Profits from trading activities regulated by the Office of the Director General of Utility Regulation, and income from the ownership of lands and buildings are subject to Guernsey tax at the Company Higher Rate of 20%;

iv) Individuals shall continue to pay income tax at 20% on assessable income; v) Guernsey resident shareholders shall be taxed at 20% on their distributed profits

(less the effective rate of tax paid by the company); vi) Individual taxpayers shall be liable to the standard rate of Guernsey tax but may

elect to pay a maximum liability of £220,000.

A3.1B Other direct taxes No capital gains tax, inheritance tax, gift, wealth tax or estate duty is levied in Guernsey. However, a fee may have to be paid to the Ecclesiastical Court in order to obtain a grant of probate on a will in Guernsey.

In an attempt to contain speculation on private dwellings, a tax (dwellings profits tax) was introduced in Guernsey in 1973. This law (Dwellings Profits Tax (Guernsey) Law, 1975, as amended) was suspended in January 2009.

A3.1C Indirect taxes There are no value added, purchase or turnover taxes in Guernsey. There are excise duties on wine, spirits, tobacco, beer and motor fuel but duties are generally lower than

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in other European countries especially the UK. Other imported goods from outside the EC are subject to duties levied at the EC’s common external tariff rate.

Document duty is payable on the conveyance of real property located in Guernsey. The rates are shown below: Dwelling of value £0 to £250,000 2% Dwelling of value £250,001 to £400,000 2.5% Dwelling of value £400,001 and above 3% A field or parcel of land, regardless of value 3%

A3.1D Residence In order to determine the method of assessment on an individual liable to Guernsey income tax it is necessary first to consider that individual’s residential status. An individual who is resident but not solely or principally resident in Guernsey and does not elect to pay the standard charge, must deliver a return on the basic of his total income wherever such income may arise or accrue in that year. That individual can elect to pay tax on his Guernsey sourced* income only, subject to a minimum charge of £27,500. He does not then pay tax on any non-Guernsey income. (* dividend income, bank deposit interest and royalties are not treated as Guernsey sourced income when received by an individual who is resident but not solely or principally resident.) An individual who is solely or principally resident in Guernsey is chargeable on his total income wherever it arises or accrues. That individual can elect to cap his Guernsey tax liability on non-Guernsey income to £110,000, and on his Guernsey income to £220,000. For every £1 paid towards the non-Guernsey cap, £1 is reduced from the maximum tax on Guernsey income such that the maximum total liability for the year will only ever be £220,000. Residence for the purposes of Guernsey income tax is defined in the following extract from the Income Tax (Guernsey) Law, 1975, section 3:-

(1) An individual shall be treated as being ‘resident’ in Guernsey in any particular year of charge if-

a. He spends 91 days or more in Guernsey in that year of charge, or b. He spends 35 days or more in Guernsey in that year of charge and,

during the four preceding years of charge, he has spent 365 days or more in Guernsey.

(2) An individual shall be treated as being ‘solely resident’ in Guernsey in any particular year of charge if-

a. He is resident in Guernsey, within the meaning of subsection (1), in that year of charge, and

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b. He is not resident in any other place in that year of charge; and for the purposes of this paragraph an individual shall be treated as being resident in any other place in any particular year of charge only if he spends 91 days or more in that place in that year of charge.

(3) an individual shall be treated as being ‘principally resident’ in Guernsey in any particular year of charge if-

a. he spends 182 days or more in Guernsey in that year of charge, or b. he spends 91 days or more in Guernsey in that year of charge and,

during the four preceding years of charge, he has spent 730 days or more in Guernsey, or

c. he takes up permanent residence in Guernsey in that year of charge; and for the purposes of this paragraph an individual shall be treated as taking up permanent resident in Guernsey in any particular year of charge if-

i. he is resident in Guernsey, within the meaning of subsection (1), in that year of charge, and

ii. he is solely or principally resident in Guernsey in the following year of charge.

(4) For the purposes of this Law an individual shall be regarded as being in Guernsey or in any other place on any particular day or as spending any particular day in Guernsey or in any other place, if he is in Guernsey or, as the case may be, in that other place at midnight on that day.”

All income arising or accruing in Guernsey is subject to Guernsey income tax, with the exception of bank deposit interest paid or credited to an individual who is not resident in Guernsey.

A3.1E Non-Residence An individual not resident in Guernsey is taxable on income derived from or arising in Guernsey, other than dividend income, bank deposit interest, royalties and directors fees.

A3.2 Understand the methods used to assess and collect Guernsey income tax

A3.2A Tax year The tax year in Guernsey is the year to 31 December and is known as the Year of Charge.

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A3.2B Basis of assessment For the tax years 2002 onwards individuals are liable to tax on the income arising in the tax year concerned (i.e.: the current year basis) on all types of income other than business profits. From 2005 the basis of assessment for business was also changed to the ‘actual’ year basis. Businesses are now assessable on the profits derived in the accounting period ending in the Year of Charge, for example, accounts for the year ended 30 September 2013 will be assessable in the Year of Charge 2013.

A3.2C Collection of tax

Employers are required to operate a system of deduction of tax from salaries before payment to the employee under a system called ETI (Employees Tax Instalment Scheme). The deductions made by an employer are paid over quarterly to the Director of Income Tax.

A3.2D Tax returns

In January each year, individuals are required to complete a tax return giving details of the amount and source of income and deductions claimed for the previous calendar year, together with a claim for personal relief for the current year. Based on this return, an assessment is raised setting out the tax that is due for the relevant tax year. The tax shown on the assessment is due within 30 days of the date the assessment is issued. Deductions under the ETI scheme and withholding tax on dividends received from Guernsey companies are allowed as credits against these instalments.

A3.2E Charge on income With effect from 1 January 2008, income tax relief for interest paid (up to a maximum of £15,000) will be dependent on the purpose for which a loan is used and the amount of the loan. The most significant restriction is that interest relief will only be available in respect of a principal private residence (‘PPR’) to the extent that the loan does not exceed £400,000. From 1 January 2015 the cap on the amount of tax relief on interest paid in respect of a PPR was reduced from £25,000 (£50,000 for a couple) to £15,000 (£30,000 for a couple).

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A3.3 Be able to apply the main income tax allowances and understand the effect that they have on an individual’s taxable income

A3.3A Personal allowances and exemptions Individuals are entitled to a range of personal allowances varying with age, marital status, and dependants and whether the assessable income was earned or investment income.

A3.3B Married Persons Allowance A taxpayer may claim a married persons allowance if: (i) in the year of charge his wife is living with him or is wholly maintained by him;

and (ii) in computing his assessable income for that year he is not entitled to any

reduction on account of any payment made for his wife’s maintenance. The allowance for married persons is augmented if one spouse is over the age of 64 at the beginning of the Year of Charge and a further increase is given if both spouses are over 64.

A3.3C Single Person’s Allowance A single person’s allowance is due to individuals who are not entitled to a married person’s allowance.

A3.3D Dependent Relative Allowance An allowance is given for the cost of maintaining;

(i) children over the age of 19 on 1 August in the Year of Charge who are in full time higher education at some point during the Year of Charge;

(ii) relatives who are dependent due to old age or infirmity;

provided that the claim relates to a dependent relative (other than a child receiving higher education) in respect of whom a claim has already been made for a year of charge prior to the Year of Charge 2009.

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A3.3E Infirm Person’s Allowance / Housekeepers Allowance An allowance given to a claimant who by reason of old age or infirmity of himself or his spouse is compelled to maintain or employ an individual solely for the purpose of having care of the claimant or the claimant’s spouse. If the allowance is claimed on grounds of infirmity, then throughout the year the claimant or his spouse must be permanently incapacitated by physical or mental infirmity. The allowance is also available to single widowed claimants employing a

housekeeper irrespective of infirmity.

Provided that the claim relates to an infirm person in respect of whom a claim

has already been made for a year of charge prior to the Year of Charge 2009.

Provided that the claim relates to a housekeeper in respect of whom a claim has already been made for a year of charge prior to the Year of Charge 2009.

A3.3F Charge of Children allowance Available to a taxpayer entitled to the single person’s allowance who receives, in respect of one or more children, family allowances in the year of charge, and who with certain exceptions is not cohabiting with another person. Where a claimant is entitled to claim a dependent relative allowance in respect of a child receiving higher education he will be treated for the purpose of the charge of children allowance as receiving a family allowance for that child.

A3.3G Wife’s Earned Income Allowance The conditions to be fulfilled to entitle a claimant to a wife's earned income allowance are that the claimant is entitled to the personal allowance for married persons and that there is included in the claimant's assessable income some earned income arising or accruing to the claimant's wife.

A3.3H Life Assurance Allowance The United Kingdom abolished Life Assurance Premium Relief (LAPR) on new policies in 1984, whereas Guernsey continued to allow relief on life assurance contracts effected on the claimants life or his wife’s life up to and including 2009. From 1 January 2008 (on claim(s) relating to policies effected prior to 1 January 2008) relief was limited to one quarter of the premiums payable in the year of charge which effectively meant a level of 5% on total premiums paid. From 1 January 2009 relief was limited to one eighth of the premiums payable in the year of charge which effectively means a level of 2.5% on total premiums paid. From 1 January 2010 relief is no longer applicable.

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Tax reliefs can generally be claimed up to six years after the end of the tax year to which they relate; this means that, to be given relief for 2009 (which was the last year any relief at all was due), a claim would have be made no later than 31 December 2015. Further details can be obtained from the Income Tax Office. Where the policy was providing an investment element (eg an endowment) the contract has to run for a minimum period of ten years to ensure that the maturity proceeds will be received on a “tax free” basis. The Director has the right to tax any “profits” or “gains” on policies that run for less than ten years.

Further information will be found in A3.6.

A3.3I Pension schemes Payment by employees resident in Guernsey of ordinary (i.e.: periodic contributions fixed in amount or calculated on some definite basis by reference to earnings, i.e. a percentage of salary) or statutory contributions (i.e.: contributions required by law) to an approved fund. There is no maximum sum that may be contributed, but tax relief will be restricted to the lower of £50,000 and 100% of Taxable Income, (including contributions made by the individual to a Retirement Annuity Scheme or a Retirement Annuity Trust Scheme). Payments by employers to such a fund are not taxable on the employee. Employee contributions refunded to employees are taxed at half the standard rate of income tax (i.e. currently 10%) unless the employment concerned was wholly outside Guernsey. Transfer payments made to schemes outside of Guernsey, with the exception of certain schemes approved in the United Kingdom, Jersey, the Isle of Man and the Republic of Ireland, are treated as a refund of contributions and subject to income tax at one half the standard rate.

A lump sum on retirement of up to 30% of the fund value may be paid tax free subject to a maximum specified limit – currently £184,000 from 1 January 2015. Pension funds may also be commuted for a lump sum under Triviality rules:- For individuals under 50: where the fund value does not exceed £15,000 the fund may be commuted (the standard 20% tax charge applies). For individuals 50 and over: the same applies but the tax charge is 10%. However, if 50 and over, a permitted Commutation sum of £30,000 is allowed as long as the aggregated Commutation value of funds from all Approved pension schemes does not exceed £30,000. Except where the employment concerned was wholly outside Guernsey, pensions or annuities paid are subject to income tax in Guernsey.

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A3.3J Retirement Annuity Schemes Relief is available to individuals resident in Guernsey for contributions made to an Approved retirement annuity scheme. There is no maximum sum that may be contributed, but tax relief will be restricted to the lower of £50,000 and 100% of Taxable Income (including any contributions made by an individual to an occupational pension scheme). Pension payments are subject to tax at the standard rate of income tax of 20%. However, lump sums up to 30% of the accumulated fund can be paid free of tax provided that collectively, the taxpayer does not receive lump sums from all such schemes or occupational pension arrangements of more than a specified limit, currently £184,000 (from 1 January 2015). Pension funds may also be commuted for a lump sum under Triviality rules:- For individuals under 50: where the fund value does not exceed £15,000 the fund may be commuted (the standard 20% tax charge applies). For individuals 50 and over: the same applies but the tax charge is 10%. However, if 50 and over, a permitted Commutation sum of £30,000 is allowed as long as the aggregated Commutation value of funds from all Approved pension schemes does not exceed £30,000. Transfers to schemes not specifically approved in Guernsey or the UK, Jersey, Isle of Man and Republic of Ireland are generally subject to tax at half the standard rate (i.e. 10%).

A3.4 Understand the impact of taxation in other countries and the principles of double tax relief

A3.4A General

Most tax systems allow relief for taxes suffered on foreign income. The relief may be available under the terms of a double tax agreement concluded between the two taxing jurisdictions concerned or ‘unilaterally’ under the law of the tax jurisdiction in which the receipt of the income is liable to tax.

The terms of a double tax agreement may also limit the exposure to tax in the territory in which the income arises.

Relief for foreign tax is either given by allowing;

- a deduction or - a credit

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In order to demonstrate the difference between the two systems it has been assumed that interest income of 100 is subject to withholding tax of 20 in the territory from which the interest is paid and that the recipient is liable to tax at 30% on the income concerned in the territory where he is resident.

Deduction Credit Income 100 100 Less foreign tax (20) - Taxable income 80 100 Tax at 30% (24) (30) Less credit relief - 20 56 90 Foreign tax - (20) Post tax income 56 70

As can be seen relief by way of credit is generally more favourable and thus where it is available it will often be subject to restrictions.

Guernsey provides relief for foreign taxes in part by credit relief and part by way of deduction. The extent of the relief differs depending on whether or not the income is paid from a tax jurisdiction with which Guernsey has concluded a double tax agreement.

In Guernsey, relief is only given for foreign taxes withheld from the income concerned. No relief is available for the underlying tax paid by the profits out of which dividends are paid.

A3.4B Double tax agreements Guernsey has concluded double taxation agreements with the jurisdictions detailed below. The agreements are based on the provisions contained in the OECD model treaty (with the exception of the UK treaty which is based on the old style of the treaty). Guernsey also has several partial double tax agreements which provide solely for mutual procedures and tax information exchange. Full double tax treaty territories:

Cyprus Liechtenstein Seychelles Hong Kong Malta Singapore Isle of Man Mauritius United Kingdom (old

style treaty) Jersey Monaco Luxembourg Qatar

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The main provisions of the agreements are as follows:-

A resident of one, (but in the case of the UK treaty, not both) territories, is exempt from tax on trading profits arising in the other territory except to the extent that they are attributable to a permanent establishment in the other territory.

Notwithstanding the above, profits which a resident of one of the territories derives from operating ships or aircraft are exempt from tax in the other territory.

An individual who is resident in one (but in the case of the UK treaty not both) of the territories is exempt from tax in the other territory in respect of personal, including professional, services performed within the other territory provided that the services concerned are performed for and on behalf of a person resident in his own territory and that the profits or remuneration are subject to tax in the individual’s own territory.

Where the above exemptions do not apply, and income is taxable in both territories, the tax paid in one territory is allowed as a credit against tax due in the other territory. The arrangement with the UK specifically excludes dividends and debenture interest from benefiting from the agreement.

With effect from 6 April 2010, all UK pensions and similar payments that are made to residents of Guernsey will no longer be subject to UK income tax, but will, instead, only be subject to Guernsey income tax.

A3.4C Unilateral relief Where no treaty exists Guernsey grants unilateral relief. Relief is available in Guernsey at the lesser of the other territory’s effective rate or three-quarters of the Guernsey effective rate. In these circumstances, with the current rate of withholding tax in many countries being 30%, the effective additional tax payable in Guernsey is slightly under 5%.

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A3.5 Understand the principles of domicile and the extent to which Guernsey residents may be subject to UK inheritance tax

A3.5A The law of domicile generally Under UK law as it stands at present every individual has a domicile in a state which is subject to a single system of law. For example, an individual is not domiciled in Australia as such; rather, he is domiciled in one of the Australian states, e.g. New South Wales. There are three kinds of domicile – domicile of origin, domicile of choice and domicile of dependence. An individual acquires a domicile of origin when he is born, and normally this would be his father’s domicile. This means that a person may be domiciled in a place in which he has never set foot and in which he never intends to set foot. His domicile is thus not to be confused with his nationality or with his residence or ordinary residence. The key point is that an individual never loses his domicile of origin. It may, however, be superseded by a domicile of choice or a domicile of dependence, in which case his domicile of origin falls into abeyance. It will revive, however, if he abandons his domicile of choice or his domicile of dependence lapses.

No one is born with a domicile of choice. Rather, an individual becomes capable of acquiring such a domicile when he attains the age of 16 (or, in Scotland, 12 for a girl and 14 for a boy). Acquiring a domicile of choice is difficult. To do so an individual must both (a) be in another country physically, and (b) have a settled intention to reside permanently in that country. This intention must be quite definite – it is insufficient that a person has simply lived in a country a long time unless there is no realistic possibility that he will ever leave the country in question. A person who has emigrated from England with a view to acquiring a domicile of choice will obviously be in a better position to support his claim to be domiciled abroad if he has severed as many of his ties with the United Kingdom as possible. There is, however, no absolute requirement that he need sever all his ties with the United Kingdom. In the end what matters is his intention, and severing ties is only evidence of that intention.

In the same way that a person can acquire a domicile of choice, so he can also lose that domicile of choice. This will happen when (a) his residence in the country of his domicile of choice comes to an end, and (b) he loses his intention to reside permanently in that country. Once a person loses his domicile of choice his domicile of origin revives and operates as his domicile until he acquires a new domicile of choice. Assume, for example, that X has as a domicile of origin in the UK , that he emigrates to France, acquires a domicile of choice there, but becomes disenchanted with France and decides to settle permanently in California. The moment he departs French soil his French domicile of choice will lapse, and his UK domicile of origin will revive and remain in effect until he sets foot in California. If he has the misfortune to die on route to the United States he will thus die an UK domiciliary.

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Domicile of dependence is less important than domicile of origin and domicile of choice. A child has a domicile of dependence, normally his father’s domicile, until he attains the age of 16 (or earlier in Scotland – see above); as from that age he is capable of acquiring a domicile of choice.

At one time a domicile of dependence was important in relation to married women. This was because a married woman could not acquire a domicile of choice. Rather, she had a domicile of dependence that she acquired on getting married and which was the same as her husband’s domicile, her domicile changing with his. This rule was altered by the Domicile and Matrimonial Proceedings Act 1973, which provides that, as from 1 January 1974 a married woman’s domicile is determined in the same way as anyone else’s. This general rule is subject to the important qualification that a woman married before that date, who acquired her husband’s domicile on marrying him, retains that domicile as a domicile of choice unless she changes it either by abandoning that domicile so that her domicile of origin revives or by acquiring a new domicile of choice.

A3.5B Inheritance tax deemed domicile rules The inheritance tax (IHT) rules extend the meaning of domicile in that they provide that in certain circumstances a person not domiciled in the UK as a matter of general law is deemed to be domiciled in the UK for IHT purposes. This can happen in two ways. First, a person who is domiciled in the UK as a matter of general UK law but who emigrates from the UK, ceasing to be a UK domiciliary, remains a UK domiciliary for three years after he ceases to do so under the general law. Secondly, a person is deemed to be domiciled in the UK for IHT purposes on a given date if, basically, he has been resident in the UK in 17 or more of the 20 years of assessment ending with that in which the date in question falls. It is important to note that the latter rule applies both to individuals who have never been domiciled in the UK and to individuals who are domiciled in the UK as a matter of general law. The point is easily overlooked, with disastrous consequences. Assume, for example, that a UK domiciliary and long-standing UK resident emigrated from the UK on 1 January 2010. Under the 3 year rule he would ceased to be domiciled in the UK on 2 January 2013, but under the 17 year rule he would remain domiciled in the UK until midnight on 5 April 2013.

A3.5C Liability to inheritance tax in the UK Where the transferor is domiciled, or deemed so, in the UK, subject to the various exemptions and reliefs that apply a charge to IHT potentially arises regardless of the location of the asset. If the transferor is not domiciled in the UK a charge only potentially arises if the asset is located in the UK. Although transfers of assets between spouses are normally exempt from IHT, a transfer of an asset from a spouse who is domiciled in the UK to one that is not, that exceeds a cumulative total in value of the nil rate band (£325,000 in 2015) is subject to IHT.

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A3.5D Exempt gilts Although the deemed domicile rules apply for most IHT purposes, it is important to note that they do not apply for all. In particular, they do not apply in determining whether certain types of gilt edged securities, known as exempt gilts, fall outside the scope of IHT when held by a person who is not actually domiciled in the UK.

A3.6 Understand how life funds are subject to tax in Guernsey and elsewhere

The treatment of life assurance policies differs between taxing jurisdictions and may depend on whether the policy is written by a domestic life assurance provider or is an ‘offshore policy’.

In the UK, investment in an offshore policy has the effect of deferring a tax liability on

income. However it also has the effect of converting capital gains into an income receipt. Special rules apply to personal portfolio bonds, i.e. life assurance bonds that comprise other than specified types of investments.

Residents in the UK are currently allowed to withdraw 5% of the initial amount invested

in a life assurance bond as a tax free return of capital, although this may be altered by future legislation. This is not available to Guernsey residents.

In Guernsey the proceeds of a qualifying policy held for ten years are treated as a

capital receipt and hence not taxable. Any gain realised on a policy surrendered before that time may be taxed as income.

Where an amount is withdrawn within the first ten years the following principles are

applied:-

(i) most qualifying life policies are unitised, the taxable gain or loss associated

with each withdrawal is calculated by reference to the increase or decrease in the value of each unit withdrawn on the date of surrender.

(ii) the units are treated as being surrendered on a ‘first in, first out’ basis i.e. in

a situation where the investor makes regular payments into the policy any surrendered units will be treated as having been taken from the earliest units invested, then from any subsequent units invested in chronological order from oldest to most recently invested.

(iii) any bonus units applied to the policy are treated on the same basis as any

other investment into the policy, although, when units associated with a bonus are subsequently withdrawn the entire proceeds are taxable as an income receipt.

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(iv) Charges applied to a policy can usually be claimed against any profits calculated above although this is somewhat at the discretion of the Income Tax Authority.

(v) Losses made on a policy can be carried forward to offset subsequent profits,

however they cannot be carried back to reduce previous profits. Losses cannot be transferred between different policies.

(vi) Some policies add an element of equalisation to ensure that each withdrawal

is a round sum i.e. exactly £1,000.00 rather than £998.82. In this case the equalisation of £1.18 is taxable as income immediately (unlike bonuses) as the equalisation payment is not unitised.

An example of a typical policy with regular withdrawals is set out below:-

Clusters of policies are generally treated as one investment so that the surrender of one policy constitutes the partial surrender of the whole.

Movements between funds within a bond are not treated as partial surrenders

and therefore do not give rise to a tax charge. However, the surrender or partial surrender of a bond in order to invest in another bond or another type of investment would be treated as a surrender or partial surrender. If a policyholder dies before the bond matures, there is no tax liability on the remaining fund.

This treatment will not necessarily apply to other investment products offered by

life assurance companies.

Capital invested 1 January 2013 £30,000.00

Units Purchased 25,000.00

Therefore Unit Price at purchase (a)

£1.20

First withdrawal 30 March 2013 £ 1,000.00

Units surrendered 769.23

Therefore unit price on sale (b) £ 1.30

Profit per unit (b-a) £ 0.10

Therefore withdrawal profit £ 76.92

Add: Equalisation £ 0.01

Profit on withdrawal £ 76.93

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GUERNSEY

ELEMENT A4

Guernsey Social Security

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A4.1 Know the classes of Guernsey Social Security which apply to individuals

(The Social Insurance (Guernsey) Law, 1978, as amended) Persons covered Under the Law all males and females over school-leaving age, who are resident in Guernsey or Alderney are insured persons and classified in one of the following groups:- (a) Class 1: Employed Persons – that is, persons employed by an employer under a

contract of service the earnings from which are £131.00 a week or more. (b) Class 2: Self-employed Persons – that is, persons who are gainfully occupied

who are not employed under a contract of service and (c) Class 3: Non-employed Persons – that is, persons who are neither employed nor

self-employed persons.

Gender Equality The social insurance scheme was revised at the beginning of 2004 which addressed areas that could have been open to challenge under the Human Rights Law as discriminatory. The changes give the same rights and obligations to men and women whilst preserving any legitimate expectations that pre-existed.

Contribution Liability 2015

(For convenience the Health Service and Long Term Care contributions have been shown separately.) Contributions are payable by each class of insured person as follows:-

Employed Persons Employee Employer Total % % % Social Insurance 3.2 4.9 8.1 Health Service Long Term Care

0.8 2.0

1.0 0.6

1.8 2.6

Total 6.0 6.5 12.5

Payable on earnings between £131.00 and £2,601.00 per week

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Self-employed Persons

Social Insurance 6.3% Health Service 1.6% Long term Care 2.6%

Total 10.5%

Payable on annual income attributable to the self-employment between £6,812 and £135,252.

Non-employed Persons

In 2010 the Social Security Department introduced an allowance for non-employed

people which will be subtracted from their annual income figure with liability being

calculated on the balance. For 2015 the allowance is £7,223.

Non-employed Persons under age 65

Social Insurance 5.7% Health Service 1.6% Long Term Care 2.6%

Total 9.9%

Payable on annual income between £17,030 and £135,252. Persons with income below the lower income limit are exempt, but may pay a voluntary contribution of £18.67 per week.

Pensioners

Specialist and Long Term Care 2.9%

All persons age 65 or over are required to pay a contribution towards the Specialist & Long Term Care on annual income between £17,030 and £135,252 scheme, that is between a minimum of £5.47 and a maximum of £71.40 per week.

People whose income, before the deduction of the allowance, falls below the annual lower income limit will continue to be exempt from paying contributions.

Example:- Annual Income £17,029 = exempt Annual Income £17,030 = £17030 - £7223 = £9807

£9807 * 2.9% = £284.40 £284.40 / 52 = £5.47 per week

£9807 * 9.9% = £970.89 £970.89 / 52 = £18.67 per week

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Notes: Persons in receipt of certain benefits also receive a contribution credit. From 2004 a contribution credit is also attached to family allowance. This is intended to protect the pension record of women, or men, who are not working because they are looking after a child. The person does not get a family allowance credit if they are required to pay employed or self-employed contributions, nor if they are liable for non-employed contributions, having personal income of £17,030 or more, per year.

States Subsidy The States of Guernsey, out of taxation, subsidise the Social Insurance and Health Service schemes by making a grant in respect of persons who pay a contribution on earnings less than the upper earnings limit set by the States each year. The grant is a percentage of the contributions collected each year set by Ordinance of the States and represents a 15% share of the funding for the social insurance scheme and 12% for the Health Insurance

scheme. Investments In July 1980 the States resolved that:-

(1) the Social Insurance scheme should no longer be partially funded; and (2) the Insurance Fund as at that date, should be maintained in real terms as a

contingency reserve by “ploughing back” the income from the investments. Adjustment of benefit rates and contribution earnings and income limits

All benefit rates are adjusted following review; the upper and lower earnings and income limits are generally increased by the same percentage as that applied to benefits. Relevant contribution year

The contribution period used to determine entitlement to short-term contributory benefits is the ‘relevant contribution year’. (The short-term contributory benefits are: sickness benefit, invalidity benefit, maternity benefits, unemployment benefit and industrial injuries benefits.) Contribution years are the same as calendar years. Benefit years commence 6 months later and run from 1 July to 30 June of the following year. Thus, from 1 July 2013 until 30 June 2014 the ‘relevant contribution year’ for short-term claims to benefit is the calendar year 2012; from 1 July 2014 until 30 June 2015 the ‘relevant contribution year’ is 2013, and so on. All candidates are advised to obtain and study the “Benefit Payment and Contribution Rate” booklet issued by the Social Security Authority. This information can also be obtained online at www.gov.gg.

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A4.2 Know the social insurance benefits which are dependent on the payment of contributions and those that are not

The Social Insurance scheme is financed by contributions from insured persons, employers and taxation. Similarly the Health Service is financed by contributions from insured persons and employers. The Long Term Care scheme is financed by contributions from insured persons and taxation. The Family Allowance Scheme, the Supplementary Benefit Scheme and the Attendance and Invalid Care Allowances are financed by taxation.

A4.3 Understand the principles concerning the circumstances in which the main types of social security benefits become payable

Entitlement under the Social Insurance scheme tends to be contribution based, providing financial assistance during old age, bereavement, incapacity, unemployment, maternity and death.

The Health Service benefits are based upon a test of residency. They provide prescription drugs, specialist medical care, and GP consultations. A person does not need to be working or paying social security contributions to be entitled to benefit. Likewise, entitlement to Long Term Care is based on a test of residency. The scheme assists with the cost of care in nursing and residential homes. The person must have, at any time, lived locally for a continuous period of 5 years and for at least 12 months immediately prior to claiming. The person needs to be assessed as being in need of care and has a bed in a care/nursing home. All figures are applicable as at January 2015.

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A4.4 Understand the principles of the reciprocal social security arrangements between Guernsey and the United Kingdom

A4.4A Long-term contributory benefits Old age pension The reciprocal agreement with the UK modifies the effect of the local provisions on entitlement to an old age pension. It enables a pension to be paid for a period of employment in Guernsey too short to give the minimum yearly average of 10 contributions. Where a person has paid sufficient contributions to achieve an average of 10 or more (achievable in a minimum of 450 weeks, i.e. 8 years 8 months) a pension will be paid by Guernsey without reference to the special calculation provision of the agreement, and without requiring details of contributions paid in the UK.

Where the contribution average is less than 10, details of the UK contribution record will be required to be combined with contributions paid or credited in Guernsey to calculate a theoretical average. The amount paid by Guernsey will be proportionate to the ratio between the Guernsey contributions and the combined total.

It is possible for a person who has moved from the UK to Guernsey, who continues making UK National Insurance contributions, to receive a UK old age pension in addition to a Guernsey old age pension. Providing there is an existing UK contribution record, voluntary contributions can continue on a Class 2 Voluntary basis. For 2014-15 the weekly contribution is £2.75. This concession only applies to people who are actively working. Following the enactment of the UK Pensions Act 2007, the number of contributing years was reduced from 44 to 30. Each year equals 1/30 of the basic old age pension. Missing contributions can be backdated currently to 1996 but contributions pre 2000/01 have to be made at the Class 3 rate which is more expensive. It should be noted that equalisation between male and females is now taking place and that the retirement age of 65 is gradually being extended. Full details can be found on the HMRC website. Guernsey Income Tax will allow limited income tax relief at 10% for current contributions and will allow a little backdating.

Bereavement Benefits If insufficient contributions were paid to give entitlement to bereavement benefits, details of UK contributions will be obtained and a pro-rata benefit paid.

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A4.4B Non-contributory benefits with reciprocal arrangements Family Allowance Both child benefit in the UK and family allowance in Guernsey are non-contributory benefits and are thus not exportable. However, under the agreement the residence and presence conditions for the payment of family allowance are deemed to have been satisfied by residence and presence in the UK. Families moving to Guernsey with the intention of remaining more than 6 months are immediately accepted as resident; the payment of UK child benefit ceases and is replaced by Guernsey family allowance.

Attendance and Invalid Care Allowance Different rules apply to these benefits in Guernsey and the UK. As they are non-contributory they are not exportable. As with family allowance, however, the agreement provides that residence and presence in the UK may be used to satisfy the condition that a claimant must have been resident in Guernsey during the 5 years preceding the claim and present for 6 of the preceding 12 months.

A4.5 Understand how the non-payment of contribution affects all individuals’ eligibility for benefits

The Reciprocal Social Security Agreement between the United Kingdom and Jersey and Guernsey The purpose of the social security agreement with UK and Jersey is to avoid double contribution liability and to safeguard entitlement to contributory benefits. Individuals are liable to pay contributions according to the legislation of the jurisdiction in which they are ordinarily resident.

Broadly speaking, the effect of the agreement is that contributory benefits that are paid in one Party are payable in another. The agreement does not provide for the payment of non-contributory benefits; they are payable under domestic legislation alone.

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A4.5A Short-term contributory benefits Sickness and maternity For those moving to Guernsey to take up employment, the reciprocal social security agreement provides that, once employment has actually commenced, UK National Insurance contributions are treated as if paid to Guernsey. This means that, where a person claims sickness or maternity benefit but has not yet built up a sufficient contribution history in Guernsey, the UK contribution record will be used to determine entitlement. In these circumstances benefit will be paid by Guernsey. The agreement also provides that where employment has not started, a claim to sickness benefit made to Guernsey will be passed to the UK Department of Social Security which, under those circumstances, will be able to accept and pay a claim to short-term incapacity benefit made from Guernsey. Sickness benefit or invalidity benefit can continue to be paid to a claimant who has returned to the UK.

Industrial Injury Under Guernsey Law there is immediate cover against industrial injury; the only condition is that the injury was caused by accident arising out of and during the course of employment. Industrial injury benefit is payable even if the injury occurs on the first day of work. Industrial injury benefit and industrial disablement benefit can continue to be paid to a claimant who has returned to the UK. Unemployment Benefit The payment of unemployment benefit has an extra condition: that 26 weekly contributions have at some time been paid to Guernsey as an employed person. For those first taking up employment in Guernsey this means that unemployment benefit will not be payable until there has been six months employment. Once the 26 contributions condition has been satisfied, unemployment benefit is payable exactly as sickness benefit, with contributions paid in the UK treated as if paid to Guernsey. Unemployment benefit is not payable to any person not present in Guernsey.

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UNIT B:

PRODUCTS FOR THE DOMESTIC

MARKET IN GUERNSEY

Unit B, Details of Syllabus

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UNIT B FINANCIAL PRODUCTS FOR THE DOMESTIC MARKET

IN GUERNSEY

DETAILS OF SYLLABUS

ELEMENT B1 - Protection Products

On completion of this element, candidates will be able to B1.1 know, in a generic sense, the main products available in Guernsey B1.2 know the tax treatment in Guernsey of term assurance, permanent health

insurance, critical illness insurance and “key man” insurance B1.3 Be aware of the use of Trusts in relation to the Laws of Succession.

ELEMENT B2 - Savings and Investment On completion of this element, candidates will be able to B2.1 know, in a generic sense, the main products available in Guernsey and those UK

products which are not available in Guernsey B2.2 know the tax treatment in Guernsey of bank accounts, national savings products,

shares, gilts, investment trusts and unit trusts B2.3 know the tax treatment in Guernsey of whole life and endowment assurances

and annuities

ELEMENT B3 - Pensions On completion of this element, candidates will be able to B3.1 know, in generic terms, the main products available in Guernsey and those UK

products which are not available in Guernsey

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ELEMENT B3 – Pensions (continued) B3.2 know the conditions covering eligibility, contributions, benefits and options for

occupational pension schemes in Guernsey, their tax treatment and the statutory and Income Tax rules governing occupational pension schemes

B3.3 know the conditions covering eligibility, contributions, benefits and options for

retirement annuity contracts (“personal pensions”) in Guernsey, their treatment and the statutory and Income Tax rules governing retirement annuities

B3.4 know the options available in Guernsey on leaving an occupational pension

scheme B3.5 know the circumstances in which a transfer payment may be made from a UK

pensions arrangement to a Guernsey pensions arrangement and vice-versa B3.6 know the differences between pension arrangements for Guernsey residents and

offshore pension arrangements made in Guernsey for overseas residents

ELEMENT B4 - Mortgages On completion of this element, the candidate will be able to B4.1 know, in a generic sense, the main products available in Guernsey B4.2 know the tax treatment in Guernsey of repayment, endowment and pension

mortgages

ELEMENT B5 - Best Practice On completion of this element the candidates will have knowledge of the following B5.1 Terms of Business Letters/Agreements B5.2 Fact Find B5.3 Written Advice B5.4 Commission’s thematic review

Unit B, Element B1

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UNIT B PRODUCTS FOR THE DOMESTIC

MARKET IN GUERNSEY

ELEMENT B1 Protection Products

Unit B, Element B1

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B1.1 Know in a generic sense the main products available in Guernsey

For protection purposes, e.g. forms of life assurance and health insurance, the main products available in the UK are also on offer for Guernsey residents. Differences in the tax treatment of these products in Guernsey compared to the UK are detailed in the next syllabus element.

B1.2 Know the tax treatment in Guernsey of term assurance, permanent health insurance, critical illness insurance and “Keyman” insurance

B1.2A Life Assurance (Including Term, Convertible Term, Mortgage

Protection, Whole Life and any of these incorporating a terminal illness benefit)

(a) Premiums

Life Assurance Relief

Tax relief on life assurance premiums was removed with effect from 1 January 2010. However as tax reliefs can generally be claimed up to six years after the end of the tax year to which they relate; it is useful to be aware of the existence of reliefs prior to 2010. The qualifying rules were as follows and further information can be obtained from the Income Tax office:-

i) Policies on an own life or on the life of a spouse and ii) Premiums up to 7% of the sum assured payable on death (applying to each

policy separately) and iii) Premiums up to one-sixth of income, and iv) In the case of joint policies for an unmarried couple, the premium could be

concession split between the two parties in any reasonable proportion for tax relief purposes.

v) Where a business effects life or critical illness policies on the life of a key employee or director, premiums were allowable as a business expense but see vi) below.

(b) Benefits

i) As a general rule, benefits payable on death, maturity or early surrender are free of tax (but see note ii) below).

ii) Where the Director of Income Tax deems that the Policy was effected as a tax avoidance device, he may invoke Section 67 of the Law the “anti-

Unit B, Element B1

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avoidance” law), so that any growth is taxed. In particular, single premium whole Life policies or Investment Bonds which run for less than 10 years may well be taxed.

iii) If an income is drawn from a contract (e.g. by partial surrender), the growth on this and any subsequent surrenders will be taxed.

iv) The issue of a Policy as a cluster of several smaller policies does not alter the tax treatment of the whole for tax treatment – the cluster will be treated as if it was a single contract.

v) The payment of an accelerated benefit in the event of the contracting of a “critical illness” will be tax-free and any subsequent payment on death, maturity or surrender will not be affected from a taxation point of view.

vi) The payment of benefits from a life or critical illness policy to a business where the policy was effected as keyman assurance will be treated as a trading receipt and taxed accordingly.

B1.2B Critical illness Critical Illness Policies are offered under a number of different names, such as “Dread Disease” or “Serious Illness”. They pay out on diagnosis of specified (normally life-threatening) conditions and moves have been made to standardise the definitions of these conditions.

Critical Illness insurance may be offered as:-

(a) a “stand alone” policy. (b) an additional benefit available on a life policy with benefits payable both on

diagnosis of a specified condition and on death. (c) an accelerated benefit (or “rider” benefit) on a life policy with benefits

payable on death or earlier diagnosis of a specified condition.

Premiums purely for Critical Illness cover do not qualify for tax relief and benefits for an own life (or life of spouse) policy are not taxable.

B1.2C Permanent Health (Income Protection) Insurance (a) Individual Policies

i) No tax relief on premiums. ii) By concession no taxation of benefits for the whole duration of the claim.

(b) Keyman PHI (benefits payable to employer)

Provided that the insured person is not the proprietor:-

i) Tax relief is available on premiums as a business expense. ii) Benefits are taxable.

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(c) Group PHI (benefits payable to the employer, then passed on to

employee)

i) Tax relief is available on premiums as a business expense. ii) Benefits are taxable in the hands of the employer. iii) The employer can claim relief on paying over to the employee as “Salary” in

the normal way (so that (ii) and (iii) cancel each other out). iv) The employee pays tax as earned income.

(d) Group PHI (benefits payable direct to employee)

i) Employer can claim relief as a business expense. ii) Employee pays tax on premiums as a “benefit in kind”. iii) Benefits are free of tax as if it was an individual policy.

B1.3 Be aware of the use of Trusts in relation to the Laws of Succession

Life Policies Written in Trust Often the proceeds of the policy will pass outside the estate as a beneficiary will have been named on the policy and therefore on death, the proceeds will be paid over automatically to that beneficiary. If no beneficiary is named, the proceeds will be payable to the executor or administrator of the estate to distribute under the terms of any will, or in the absence thereof, according to the rules of Intestacy. Sometimes there may be a good reason for the life assurance policy to be written or placed in trust. If this is required, often the Assurance Company will have a standard form to achieve this. However, there are certain issues that need to be considered:

What is a trust? Under the Trusts (Guernsey) Law 2007, as amended:- “a trust exists if a person (a "trustee”) holds or has vested in him or is deemed to hold or have vested in him, property which does not form or which has ceased to form part of his own estate:-

(a) for the benefit of another person (a “beneficiary”) whether or not yet ascertained or in existence; and/or

(b) any purpose other than a purpose for the benefit only of the trustee”

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By establishing a valid and properly constituted trust and transferring the benefit of the policy or other assets to a trustee to hold as described above for someone else’s benefit, the policy or asset is placed in trust.

Under Guernsey Law, subject to the terms of the trust, there is no limit on the period for which a trust may continue to be valid and enforceable. A trust (unless a charitable trust) created before the commencement of the 2007 Law shall terminate on the expiration of 100 years from the date of its creation unless terminated sooner. Who can/should be a trustee? A trustee can be any individual or company with legal capacity (i.e. adult and not mentally incapable) who is prepared to act as trustee to hold the property for someone else. The trustee is required to exercise his functions in utmost good faith and act “en bon pere de famille” (i.e. as a father would act to his children). The relationship between the trustee and the beneficiary is a fiduciary one. The terms of the trust will describe the trustees duties and powers concerning the trust. A professional trustee must be licensed under the Fiduciary Law. Should the trustee be an executor of the life assured’s will? It is often but not always appropriate for the same person to act in both capacities although the duty of the trustee commences as soon as the asset is placed in trust and the trust has been formed, whereas an executor’s duty only begins once the testator has died and the executor has been sworn in the Ecclesiastical Court of the Bailiwick of Guernsey as executor.

The suggested minimum number of trustees Under s17 of the Trusts (Guernsey) Law 2007, as amended the number of trustees shall not be less than two unless:-

(a) only one trustee was originally appointed; (b) a corporate trustee resident in Guernsey is acting; (c) the Public Trustee is acting; or (d) the terms of the trust provide otherwise.

It should be noted that a trust will not fail if there is no trustee or less than the number required as described above as the Court can appoint a trustee under the law. Can the beneficiary be a trustee? The trustee of a trust may also be one of the beneficiaries although in certain circumstances and to avoid any argument that a trust is a sham arrangement, it is sometimes prudent to have an additional independent person to act as co-trustee.

Unit B, Element B1

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Can the trust be altered at some later stage to allow a change of beneficiaries? Subject to the terms of the trust, beneficiaries can be added or excluded after the formation of the trust and the transfer of the assets to it. A trust with no beneficiary Usually the trust describes the beneficiaries and the class of beneficiaries fairly widely so that even if the named beneficiaries die before the expiry of the trust, others will then be classed as beneficiaries, for example children or descendants of named beneficiaries or as a longstop provision, a charity. In the unlikely event of all beneficiaries dying before the life assured, then subject to the terms of the trust, the proceeds of the policy would be held on resulting trust for the life assured or if he has died, his heirs at law. Does the trust have to be established prior to the issue of the policy or can the trust be established any time after? If it is intended for the policy to be placed in trust from its issue, the trust will have to be created before or at the same time as the policy was issued. Alternatively, if a policy is in being it can later be placed in trust. Would it be preferable (although less flexible) for the policy to be issued on a “life of another” basis with the beneficiary actually being the policy owner? If this were to be the case the policy proceeds would not be in trust and would be subject to the laws of inheritance. From an Income Tax point of view, if the policy is issued in this manner, the beneficiary/policyholder cannot claim tax relief- only the life assured can claim relief in respect of a life assurance policy. If the life assured assigned the policy (after it was issued) to the proposed beneficiary, there would not be a trust. The proposed beneficiary by virtue of the assignment would need to be aware that the proceeds of the policy would be his absolute property and would fall into his personal estate. The life assured would have no further claim to the policy.

Unit B, Element B2

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UNIT B FINANCIAL PRODUCTS FOR THE

DOMESTIC MARKET IN GUERNSEY

ELEMENT B2 Savings and Investments

Unit B, Element B2

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B2.1 Know, in a generic sense, the main products available in Guernsey and those UK products which are not available in Guernsey

Most savings and investment products covered by the Certificate in Financial Services syllabus are potentially available to Guernsey residents.

N.B. Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPS)

are not available to Guernsey residents.

B2.2 Know the tax treatment in Guernsey of bank accounts, national savings products, shares, gilts, investment trusts and unit trusts

B2.2A Bank accounts and building society accounts From 1 January 2015 the first £50 (£100 for a married couple) of interest will be exempt from income tax. Interest paid over and above these amounts is paid gross and is taxable.

B2.2B National Savings products Interest payable on these products is taxed in the same way as for residents of the UK. Refer to the IFA Guide that can be downloaded from the National Savings website (www.nationalsavings.co.uk) for details of these Products. It should be noted that Premium Bonds and National Savings Certificates do not suffer Guernsey Income Tax.

B2.2C Gilt-edged securities Residents and non-residents of the UK can receive interest paid gross on holdings of gilts.

B2.2D Shares Dividends paid on shares are subject to withholding tax depending on the country of origin of the shares. For example, share dividends paid by UK companies are paid with 10% income tax deducted from the gross amount of the dividend. It should be noted that Guernsey Income Tax is payable on the net dividend received.

http://www.nationalsavings.co.uk/

Unit B, Element B2

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B2.2E Unit trusts, investment trusts and offshore funds

For Guernsey residents it is important to note the Guernsey Income Tax rules for this type of investment. These are covered under Guernsey Income Tax Practice Note “M19 Guernsey Residents – Investments in Funds”.

“Income will always be taxable, the only variations being the time it is brought into charge:-

(a) distributions in cash form are income of the year in which the distribution is declared:

(b) where a fund offers the investor the alternative of having distributions of income or a “roll up” (or a mixture of both of these), then a tax charge will arise whether or not the distribution is taken in cash form.

(c) where under the terms of the fund income is not distributed but is accumulated (usually by enhancing the share or unit value), then a tax charge will not arise until the holding is disposed of. (On disposal the element of the proceeds relating to accumulated income will have to be determined). Cases will also be reviewed to consider whether any charge to tax arises on death or leaving the Island.

Any other gains arising from the holding of an investment in a fund will give rise to a charge to income tax if:-

(a) in the opinion of the Administrator, section 67 of the Income Tax (Guernsey) Law, 1975 applies (general provision against legal avoidance); or

(b) the disposal forms a business or part of a business (section 19(a) of the

Income Tax (Guernsey) Law, 1975).” It is therefore most important that any investor contemplating cashing in any collective investment should be made aware of the taxation consequences. Where point c (accumulation) applies, the onus would be on the investor to prove the element of the capital gain to the Income Tax Authority. This may prove to be very difficult to quantify.

B2.2F Traded Endowment Policies For many years it has been possible to buy and sell traded or second hand endowment policies by way of auction. In the 1990s the concept of using “with profit” endowment policies as a means of investment became very popular both from the investors point of view and also for the seller. As a result of this several FSA authorised market makers came into being. A further innovation took place with the creation of a “traded

Unit B, Element B2

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endowment policy exchange” which provides a trading platform. Most of these traders offer commission on business successfully completed. Given the fact that surrender values are often calculated to the advantage of the remaining policyholders, the true value of a TEP is often higher. The UK FSA encouraged policyholders to use the TEP route by stipulating that Life Offices should point the “sale” option out to anyone considering surrender. Following the bear market of 2001 – 2003 surrender values have suffered as a result of the equivalent of a market value adjustment being applied. By selling the policy (as opposed to surrendering it) the policyholder may partially mitigate the financial effect of the MVA and end up with a higher cash value.

It should be noted that the TEP concept is primarily applied to conventional endowment policies where the basic sum assured receives bonuses based on the sum assured. The main advantages for the investor/purchaser are:-

(i) The policy comes with certain guarantees namely the basic sum assured together with the attaching bonuses. Subject to the continuation of premium payments the purchaser is assured of these guaranteed components at maturity even if no further bonuses were declared.

(ii) There is the prospect of a terminal bonus at maturity which would enhance the value of the investment.

(iii) In the event of the failure of the Life Office the UK Policyholders Protection legislation may provide a certain amount of protection for the investment.

(iv) Rather unsavoury, but if the life assured were to die, the investor would (in the case of a low cost endowment) receive the full death benefit. This would be considerably higher than the policy purchase price. A death claim would also apply to a traditional with profits policy but in this case the claim would be based on the basic sum assured, attaching bonuses and perhaps an element of terminal bonus.

(v) The investment would always have a quantifiable value in the form of the Life Offices surrender value.

The main disadvantages for the purchaser are:-

(i) Lower than expected returns due to the application of market value adjustors or changes to the underlying asset mix caused by increased capital requirements. This could be to the investors’ detriment if a forced sale or surrender has to take place before maturity.

The main advantages for the seller (life assured) are:-

(i) A payment which would be higher than the surrender value being offered by the life office.

(ii) The payment would be tax free as a result of the sale, providing the policy did not breach the qualifying rules.

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It should be noted that a traded endowment (second hand) policy is not viewed by Guernsey Income Tax as a qualifying policy from the investor/purchaser’s point of view. The Income Tax Authority reserves the right to charge tax on any gain made when the policy matures. There are traded endowment policy funds available. If an investment is made via a life assurance investment bond, the ten year rule would apply and providing no withdrawals take place from the inception date of the bond, the proceeds would be tax free from year ten onwards.

B2.3 Know the tax treatment in Guernsey of whole life and endowment assurances and annuities

B2.3A Whole life and endowment assurance Refer to element B1.2 for the tax treatment of these products.

B2.3B Annuities These products are taxed as is the situation in the UK whereby all income from Pension Annuities (Compulsory Purchase Annuities) is taxed as earned income. Income from Purchased Life Annuities suffers income tax only on the interest element and not the capital element.

Unit B, Element B3

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ELEMENT B3 Pensions

Unit B, Element B3

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B3.1 Know, in generic terms, the main products available in Guernsey and those UK products which are not available in Guernsey

Pensions that are available in Guernsey are:

o A States of Guernsey “old age” pension o Occupational pensions o Personal pensions (Retirement Annuity Contracts) o Retirement Annuity Trust Schemes (RATS)

N.B. The UK States Earnings Related Pension Scheme (SERPS), and its successor the State Second Pension (S2P) which started operation from 6 April 2002 are not available in Guernsey. Stakeholder Pensions are also not available in Guernsey. Auto-enrolment, which commenced in the UK in 2012 has not been introduced in Guernsey.

B3.2 Know the conditions covering eligibility, contributions, benefits and options for occupational pension schemes in Guernsey, their tax treatment and the statutory and Income Tax rules governing occupational pension schemes

Occupational Pensions

B3.2A Relevant law Section 150 of the Income Tax (Guernsey) Law 1975, as amended. All schemes must receive approval from the Guernsey Income Tax.

B3.2B Recommended reference notes Guernsey Practice Notes (Requirements for Approved Occupational Pension Schemes In Guernsey) dated July 2011 and prepared by BWCI Limited in conjunction with Guernsey Income Tax), attached as Appendix B.

B3.2C Why should an employer have a scheme?

1. Staff recruitment 2. Staff retention 3. Promote an image of a caring employer 4. Tax concessions.

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B3.2D Types of scheme (i) A Defined Benefit scheme is a scheme where the scheme rules define the benefits

independently of the contributions payable, and benefits are not directly related to the investments of the scheme.

A final salary scheme is the most common form of a defined benefit scheme where the benefit is calculated by reference to the final earnings of a member, usually based on pensionable service.

A career average scheme is another form of defined benefit scheme where the benefit for each year of membership is related to the pensionable earnings for that year.

In any defined benefit scheme the employee is guaranteed a benefit in terms of their pensionable earnings. The employer takes on most of the risks (eg investment) and as a result the employer's contribution rate can fluctuate significantly over time.

(ii) A Defined Contribution scheme or money purchase scheme is when the determination of an individual member's benefits is by reference to the contributions paid in to the scheme in respect of that member, usually increased by an amount based on the investment return.

In any defined contribution scheme the benefits the employee receives are unknown. The benefits depend upon the amount of contributions paid into the scheme, the investment return achieved on those contributions, and the terms at which an annuity at retirement can be purchased (if applicable).

(iii) A Hybrid Scheme is a scheme which offers both defined benefit and defined

contribution sections or benefits which are the better of a defined benefit and a benefit on a defined contribution basis.

A Cash Balance scheme is a form of hybrid scheme in which the benefits are expressed in terms of a fund value which accumulates through indexation of the fund and the addition of future accrual. The accumulated fund value is used to purchase the required form of benefits when those benefits become due. There can be guarantees relating to the rates of indexation and terms at which the accumulated fund is converted into a pension.

B3.2E Eligibility A Definition of Eligibility must be included in the Rules of the scheme and all eligible employees must be given the opportunity to join, though membership should not be compulsory. The definition can include part-time workers and (since 1/1/98) Proprietary Directors and Employees.

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B3.2F Funding The scheme must be funded in part or full by the employer. There is no limit related to employer’s contributions. There is no limit on the amount that may be contributed by employees (subject to the Scheme rules) however the tax relief available will be restricted to the lower of £50,000 or 100% of Taxable Income in aggregate for all approved Pensions Schemes.

B3.2G Normal Retirement Age (NRA) Is the age at which the rules of the scheme concerned entitle that person to immediate benefits on his retirement, irrespective of his state of health. Normal retirement age may differ between categories of member and may be any age within the range 50 to 75. In certain circumstances the Director may allow a lower normal retirement age.

B3.2H Maximum pension benefits Pension On retirement:

• a Defined Benefit member may receive a pension calculated in accordance with the scheme rules

• a Defined Contribution member may receive a pension derived from the member’s Fund Value.

Subject to these requirements, there are no limits on the amount of pension that can be provided. If desired, the pension may be guaranteed for a period of up to 5 years.

B3.2I Commutation Part (or in some cases all) of a member’s pension may be commuted for cash. The tax free limit effective from 2011 is 30% of the Fund value for a Defined Contribution Scheme. For existing Defined Benefit Schemes there is the option to revert to the new Defined Contribution limits, otherwise the Scheme may continue to calculate the benefits in accordance with the existing Scheme Rules. Lump sums paid after 1 January 1998 from all occupational pension schemes, retirement annuity schemes (personal pensions) and retirement annuity arrangements must be aggregated and if they exceed a certain specific limit are subject to income tax at the standard

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rate. The maximum tax free lump sum limit is reviewed annually and amounts to £184,000 (from 1 January 2015). When a pension at retirement is trivial in amount or the individual is in serious ill-health (i.e. has a seriously impaired life expectancy) the whole of the pension may be commuted for a lump sum. Triviality Pension funds may also be commuted for a lump sum under Triviality rules:- For individuals under 50: where the fund value does not exceed £15,000 the fund may be commuted (the standard 20% tax charge applies). For individuals 50 and over: the tax charge is 10%. However, if 50 and over a permitted Commutation sum of £30,000 is allowed as long as the aggregated Commutation value of funds from all Approved pension schemes does not exceed £30,000. Note: A Retained Benefit is a benefit entitlement an individual has from other approved schemes under Section 150 of the Law.

B3.2J Death in service benefits and their payment The scheme may provide for the following benefits on death in service:

1. a lump sum of up to four times final remuneration at date of death together with a refund of the own member's contributions to the Scheme accumulated with interest (less any lump sum retained death benefit from a prior Approved Scheme)

2. A spouse’s, children’s or dependant’s pensions derived from the member’s Fund

Value for a Defined Contribution member or calculated in accordance with the scheme rules for a Defined Benefit member.

Since approved pension schemes are set up under Trust, any lump sum payment from the Scheme is usually paid out at the discretion of the Trustees. Members are encouraged to complete Expression of Wishes Forms which state which of the individual’s financial dependants and in what proportion the lump sum should be paid. It should be noted that the Trustees are not legally bound by the individuals wishes but are expected take them into account.

By having the death in service benefit set up under trust, any lump sum can be paid out quickly following the individuals death, subject to the Trustees having completed any enquiries needed to assist them in determining to whom the payment should be made, and such a quick payment can help to relieve any financial problems which the member's dependants may immediately encounter.

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Any lump sum payment death in service benefit will be tax free irrespective of the monetary amount. Such a payment does not form part of the Estate and thus is not subject to inheritance laws.

B3.2K Death after retirement benefits The scheme may provide for a spouse’s, children’s and or dependant’s pensions of up to 100% of the pension which could have been provided for the member had he not commuted any pension for a lump sum. In addition, or as an alternative, the scheme may provide for the payment of the balance of the first 5 year’s pension payments to be made as a lump sum if death occurs during those first 5 years.

B3.2L Pension increases All pensions (including spouse’s etc) may increase by up to 5% or the increase in inflation over the appropriate period as measured by reference to any recognised cost of living index in Guernsey or the UK or in any other Crown Dependency, if greater. This applies to deferred pensions and pensions in payment.

B3.2M Options at retirement Typically (but subject to the Scheme's Rules) an individual may surrender part of his pension at retirement to provide a pension for his/her spouse or a dependant. The amount of pension which can be surrendered is limited so that the reduced member's pension (prior to any commutation-see Section 3.2I) is not less than the aggregate of the spouse's and dependants' pensions provided by exercising by this option. A small number of Schemes may permit an individual who is retiring before the State Pension Age may opt to have their pension adjusted so that it is greater before States Pension Age and reduced afterwards.

B3.2N Benefits on leaving service The Income Tax (Guernsey) Law, 1975 gives members an absolute right to deferred pension benefits after 5 or more years of qualifying service, and a transfer value after 2 years qualifying service although scheme rules may reduce this period. On leaving service after the vesting period, a member has the following options:

1. To take a deferred pension at NRA, or 2. To take a transfer value to a new employer’s scheme or to a retirement annuity

scheme or a retirement annuity trust scheme, or 3. To take a refund of the member’s own contributions (if any), plus interest.

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On leaving service before completing the vesting period (subject to the overriding law), the only rights a member has is a refund of his/her own contributions, plus interest and benefits relating to any transfer-in from a previous scheme.

B3.2O Transfers Transfers in or out are allowed to or from other occupational schemes, personal pensions or RATS in Guernsey, the UK, Jersey, Isle of Man and Republic of Ireland. Other territories may require special consideration. Transfers from the UK will require confirmation from Her Majesty’s Revenue and Customs (HMRC) that the Guernsey scheme is a Qualifying Recognised Overseas Pension Scheme (QROPS). Assessing decisions on transfer options is a complex specialist area. A decision to transfer to a retirement annuity or RATS is in effect an investment decision. By taking a transfer value the individual may hope to ultimately secure higher benefits. However, by taking such investment risks the eventual outcome could be less favourable. Few individuals (and advisors) are well equipped to analyse the risks involved in these decisions.

Security of the benefits in the Scheme can also be an issue. If the pension scheme is in deficit, and the Employer is unable or unwilling to fund the deficit, the promised benefits may not ultimately be paid in full. However, experience has shown that some insurance companies offering retirement annuities have also not proved to be as secure as previously believed. Transfers to another defined benefit schemes can be even more complicated. As assessment is needed of the transfer value from one scheme and the value of the benefits offered in a new scheme. In view of the potential complexity, specialist advice maybe needed. In the UK a specialist qualification is needed to provide this advice. Pension mis-selling (i.e. individuals encouraged wrongly to leave good occupational schemes) has been a major problem in the UK. Advisors should be wary of offering advice in this area unless they have the relevant technical expertise and experience.

B3.2P Proprietary directors and proprietary employees Until January 1998, these were ineligible for membership of an occupational scheme. From 1 January 1998, they can be included, subject to certain restrictions:-

1. Normally, only service from 1 January 1998 counts for benefits purposes. 2. Only full-time Directors and Employees working at least 30 hours per week can be

considered. 3. There must be at least one independent Trustee. 4. The Director of Income Tax may place restrictions on where the funds are invested. 5. The definition of final salary is normally the average of 5 years salaries.

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B3.2Q Additional Voluntary Contributions (AVCs) An individual may opt to pay AVCs in order to provide additional benefits. These payments normally commence payment at the same time as the individuals main scheme benefit. However, it is possible to defer payment to age 75.

B3.2R Divorce Unlike the UK, there is no legislation relating to pension sharing on divorce. However, when a husband and wife separate Guernsey Income Tax may be prepared, to allow a transfer of part of the pension rights of one of the parties from an occupational scheme to another occupational scheme, retirement annuity scheme or retirement annuity scheme. However, this is considered on a case by case basis and is subject to the approval of the Scheme's Trustees. In practice, the approach to pensions issues depends upon the negotiation carried out by the lawyers representing either party. One party may be willing to accept a compromise in another area of the settlement when considering the impact of pension rights. Actuarial advice may be required by each party in order to assess the value of pension rights.

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PERSONAL PENSIONS (RETIREMENT ANNUITY CONTRACTS) AND RETIREMENT ANNUITY TRUST SCHEMES (RATS)

B3.3 Know the conditions covering eligibility, contributions, benefits and options for retirement annuity contracts (“personal pensions”) in Guernsey, their treatment and the statutory and Income Tax rules governing retirement annuities

These pension products have been available in Guernsey since 1984 and the rules are very different from the UK. They may take the form of an Insured arrangement or a Retirement Annuity Trust Scheme and are governed by Section 157A of the Law.

B3.3A Relevant law Section 157A of the Income Tax (Guernsey) Law 1975, as amended.

B3.3B History Personal Pensions and RATS first became available in Guernsey in 1984, following much lobbying from many professional bodies. They were introduced in recognition of the need to allow self-employed people and those in non-pensionable employment to provide for their retirement in a tax-efficient manner.

Both Personal Pensions and RATS are in effect “Money Purchase” arrangements (see Section 3.2D). Since their introduction, many changes have been made to the limits and rules, but this summary relates purely to the current situation.

B3.3C Eligibility In practice, nobody who is resident in Guernsey, Alderney or Herm is precluded from effecting a Personal Pension or RATS, though contribution limits and tax reliefs can differ.

B3.3D Contribution limits The Law does not prohibit the payment of members’ contributions in excess of the Income Tax limits, however tax relief will be limited on contributions in any year on the lower of £50,000 and 100% of Taxable Income. These limits apply in aggregate to contributions

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made by the individual to all Approved Schemes. The monetary limit of £50,000 has been established for 2011 and may be reviewed for subsequent years.

B3.3E AVCs There is no need for Free Standing AVC products in Guernsey, as a Personal Pension is available.

B3.3F Pension age Normally, the Pension Age must be in the age range 50-75, though earlier retirement may be allowed in certain occupations or in the case of serious ill-health, subject to the Director of Income Tax’s approval.

It is not necessary to “retire” before commencing to draw benefits.

B3.3G Annuity rates and purchase of annuities Annuity rates have fallen significantly over last few years, as a result of falling gilt yields and increasing life expectancy. This means, that an individual needs a significantly larger fund than the individual would have needed a few years ago to purchase the same amount of pension. In Guernsey, there is an extreme shortage of life insurance companies willing to write annuity business, which means it is not possible for individuals to obtain quotes from an number of different life insurance companies before choosing their selected provider. In view of the lack of 'open-market' option (as per the UK), RATS can be used (see Section B3.3N)

B3.3H Tax concessions The Income Tax concessions allowed for Personal pensions and RATS are as follows:-

a) Full relief on contributions paid by the individual b) No Guernsey Tax on the investment income of gains for the fund c) Up to 30% of the fund is available as cash at Pension Age (currently, up to £184,000

(from 1 January 2015) of this is tax-free). However, the pension income is taxable.

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B3.3I Choice of benefits at pension age The individual normally has the following choices:-

i) Cash up to 30% of the fund (of which up to £184,000 (from 1 January 2015) is tax-

free) ii) A single or joint life pension iii) A level or escalating pension iv) A guarantee period of up to 10 years. v) Triviality: Pension funds may also be commuted for a lump sum under Triviality rules:-

For individuals under 50: where the fund value does not exceed £15,000 the fund may be commuted (the standard 20% tax charge applies).

For individuals 50 and over: the tax charge is 10%. However, if 50 and over a permitted Commutation sum of £30,000 is allowed as long as the aggregated Commutation value of funds from all Approved pension schemes does not exceed £30,000.

B3.3J Death benefit Most products offer the value of the fund at the date of death as a death benefit.

B3.3K Transfer values It is now permissible to effect a transfer into a Guernsey Retirement Annuity from:-

1. another approved Guernsey Retirement Annuity; 2. an approved Guernsey Occupational Pension Scheme; 3. a Guernsey Occupational Pension Scheme established for employees outside of

Guernsey (which is exempt from tax under section 40(o); 4. a Guernsey Retirement Annuity established for non-residents (which is exempt from

tax under section 40(ee) – see “Overseas Residents” below”; 5. a Pension Scheme/Retirement Annuity established outside of Guernsey which is

approved or exempted by the tax authorities in that territory, and which provides benefits similar to a Guernsey Retirement Annuity.

Furthermore, a simplified regime now exists with Her Majesty’s Revenue and Customs (HMRC) in the UK to facilitate such transfers to Guernsey. The receiving scheme has to obtain Qualifying Recognised Overseas Pension Scheme (QROPS) status from HMRC.

B3.3L Overseas residents Section 40(ee) of the Law permits non-residents of Guernsey, Herm, Alderney or Jersey to effect a Retirement Annuity – please note Sark residents may participate. There are no

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restrictions as to premium levels, commutation of benefits or the age at which benefits may be taken. Benefits are not subject to tax in Guernsey provided that the individual remains non-resident. Unlike Jersey’s similar 131c legislation, there is no restriction on the location of intermediaries introducing 40 (ee) business. N.B. The UK Revenue prohibits transfers from UK pension arrangements either directly or “indirectly (via Guernsey approved schemes) into a Section 40(o) or 40(ee) contract.

B3.3M Retirement Annuity Trust Schemes (RATS) Retirement Annuity Trust Schemes are similar in many ways to Self-Invested Personal Pensions in the UK, in that the individual decides (within certain restrictions imposed by the Director of Income Tax) where to invest the funds. However, unlike a Personal Pension, there is no compulsion to use the fund to purchase an annuity at Pension Age, which is generally perceived to be a major advantage of a RATS, because the individual can nominate beneficiary(ies) to receive the remaining fund (less tax) on death.

Whilst RATS have the advantages of individuals being able to choose the investment media and no necessity to purchase an annuity, they can be more expensive to set up and administer. Furthermore, the very fact that one has not bought an annuity can result in the fund being exhausted before death. RATS may not be suitable for smaller fund values. Different people have different views of the definition of “small”, ranging from under £100,000 to £250,000. Most agree, however, that RATS are very suitable for people with large Transfer Values from the UK under the QROPS rules.

The area of RATS is a very complicated and delicate one and extreme caution should be observed before giving advice on this subject. See appendices B & C for details of approval, codes of practice etc. and trustees & adviser roles. RATS can provide an alternative to the very limited supply of insurers that will quote under open market option for those with retirement annuity contracts. However, due to the limitations noted above they are unlikely to be suitable in all situations due to the risks involved and the size of fund required to make the payment of a pension in this way cost effective.

B3.4 Know the options available in Guernsey on leaving an occupational pension scheme

On leaving membership of a Guernsey Occupational Scheme:-

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1. where qualifying service is five years or less – the member must be given the option of taking a refund of his contributions;

2. where qualifying service is more than two years – the member must be given the option of taking:-

(a) a refund of contributions, less 10% income tax; or (b) a transfer payment to another approved scheme; or (c) a transfer payment into a retirement annuity.

3. where qualifying service is five years or more, the member must also be given the

option of deferred pension benefits.

(In addition if the rules of the Scheme would allow a transfer payment for members with two years service or less into other approved Schemes, it must permit transfer payments into a Retirement Annuity.)

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UNIT B

FINANCIAL PRODUCTS FOR THE DOMESTIC MARKET IN

GUERNSEY

ELEMENT B4 Mortgages

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B4.1 Know, in a generic sense, the main products available in Guernsey

Mortgage products available in the UK are also available to Guernsey residents. The differences with regard to tax relief available on the interest paid is covered in the next syllabus element, B4.2.

B4.2 Know the tax treatment in Guernsey of repayment, endowment and pension mortgages

Interest Tax relief at the full rate (currently 20%) is available on the interest paid on the first £400,000 of a loan in respect of the principal private residence. From 1 January 2015 the cap on the amount of tax relief on interest paid in respect of a PPR was reduced from £25,000 (£50,000 for a couple) to £15,000 (£30,000 for a couple). Pension Mortgages As Retirement Annuities (Personal Pensions) are non-assignable, a Pension Mortgage is effectively an interest-only mortgage, with the borrower promising to repay the capital at the end of the loan period. This is designed to be achieved by the borrower having sufficient tax-free cash at Pension Age. Pension Mortgages generally involve a higher monthly outlay so tend to be suitable for relatively few people. However, they are most tax-efficient in the correct circumstances.

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ELEMENT B5 Good and Reasonable Practice

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This section is intended to highlight areas of good and reasonable practice in advising clients and should be read in conjunction with section 5 of the Insurance Intermediaries (Conduct of Business) Rules 2014 and the Code of Conduct for Financial Advisers (“the Code”). The Code is the minimum standard all Financial Advisers (“FAs”) must observe but is generally not prescriptive regarding how those standards are met.

for each piece of new business, surrender or switch the FA must, as a minimum do the following: • obtain a signed terms of business letter/agreement (see B5.1)

• interview the client and complete a fact find (see B5.2) • Research the market place to find suitable products • provide the client with written advice (see B5.3) FAs are authorised to provide advice by the board of the licensee, and the advice and actions of an FA are the responsibility of the licensee.

B5.1 Terms of Business Letter/Agreement At the initial meeting with a prospective client the AIR/FA must provide the client with the firm’s Terms of Business and explain its content. If advice is to be given on long term regular or single premium products, the agreement must be signed by the client, unless the client specifically advises in writing that they do not wish a written agreement to be used. In all cases the AIR/FA must do the following:

1. Explain the level and type of service their firm offers clients. This would include whether they offer advice on the whole of the market, a restricted portion of the market or are tied to the products of a single provider or number of providers. This should be reflective of the level of work actually undertaken, not merely whether they are “able” to offer advice on the whole of the market. This should also be provided to the client in writing.

2. Provide evidence of their authorisation.

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B5.2 Fact Find In order to be able to give objective and suitable advice, an FA must obtain and record sufficient knowledge of the client’s circumstances and objectives. This is normally achieved by completing a fact find at the initial meeting with the prospective client. The fact find should identify the client’s present situation including, amongst other things, their finances, family situation, commitments and future plans. If a client does not wish to disclose certain information, the FA should ensure that the client understands the impact this may have on the FA’s ability to help the client meet their objectives and record why the information has not been obtained. The fact find should also be to identify the client’s objectives. Advice cannot be suitable unless it addresses the client’s objectives. At this stage the FA should also establish the client’s attitude to investment risk and capacity to bear loss. It is important that the FA is able to demonstrate how they and the client arrived at a particular attitude to investment risk and that the client understands the consequences, both in terms of potential gain and potential loss, of their attitude to investment risk. The FA should also ensure that the client understands the impact that their attitude to risk will have on their ability to meet their objectives. Subsequent meetings regarding new pieces of business also need to be recorded on a fact find document. In order to maintain clear records, old fact find documents should, in general, not be updated.

B5.3 Written Advice A client who buys a long-term insurance product (excluding pure protection products) must be provided by the FA with a copy of the written advice. Good and reasonable practice is to produce a letter or report explaining the product and why the FA recommended the product. This should be peer reviewed before it is issued to ensure the advice is both suitable and clearly explained. The letter must be given to the client before executing the transaction(s) and should be signed by the FA who made the recommendation. Only once the client has indicated their agreement to the recommendations within the letter should the transactions be executed. The purpose of written advice is to provide the client with sufficient information, in a format they will understand, to enable them to make an informed decision. As such it should:

1. Identify the client’s current position, their stated objectives and reasons for seeking advice in plain language they are likely to understand.

2. Detail any research performed and explain why any of the products

considered were not recommended.

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3. Clearly explain the salient features of the recommended product in plain

language and how it will meet the client’s objectives. If no product will meet the client’s objectives, given their attitude to risk, this should be explained. When explaining the features of the product, equal prominence should be given to both the positive and negative features, such as surrender penalties, extra costs, tax liabilities, risk of loss and so forth. Wherever possible, information should be provided in quantitative terms, particularly when comparing products, such as in the case of pension transfers.

4. Clearly identify all the costs the client will face, both initial and ongoing,

including all remuneration due to the FA’s firm, charges from the product provider, bid/offer spreads and so forth. These should be stated in monetary terms and presented together in one place. Where appropriate, a ‘total cost’ figure should also be included.

Written advice is also required whenever a client is advised to surrender a long term policy or to make the policy paid up. It is also required when advice is provided on varying or transferring an existing pension scheme. No letter is required for genuine execution-only cases or off the page sales. However the FA should ensure that such sales are properly documented and that advice is neither given nor appears to be given.

B5.4 Commission’s thematic review In July 2012 and October 2013/December 2013, the Commission undertook two series of onsite visits to specifically assess licensed long-term insurance intermediaries’ compliance with the Code of Conduct for AIRs and the Conduct of Business Rules. The latter visits also look at advice given under the Protection of Investors (Bailiwick of Guernsey) Law, 1987. During these visits the Commission identified common areas of non-compliance by licensees and set out its expectations of where improvements could be made. A summary of the Commission’s findings can be found in Appendix D.


Code of Practice 1. Introduction

The following code of practice should be regarded as mandatory for Trustees (where appropriate) and thus a condition of approval under Section 157A of the Income Tax (Guernsey) Law, 1975.

As far as the external advisors are concerned, the code of practice will be regarded as voluntary as it is assumed that the advice will be regulated by one of the departments of the Guernsey Financial Services Commission, or will be given by a member of a professional body subject to an appropriate professional code of conduct. Where this is not the case, clarification should be sought from the GFSC.

2. The Trustees' Role

(a) Independent Trustee

Neither members of Retirement Annuity Trust Schemes, nor their relatives, may be Trustees of the Scheme, unless the Instrument establishing the Trust specifically enables the Trustees to act by majority and the majority of those Trustees are neither members of the Scheme nor relatives. For these purposes “relative” includes any individual whatsoever related to the member, either by blood or marriage.

(b) Number of Trustees

At all times, provision should be made for a minimum of two Guernsey resident trustees. The purpose of this is to avoid the situation where there is a sole Guernsey resident trustee who is also the annuitant. As and when this person dies, if his heirs are situated overseas, there might be difficulties for the Income Tax Office in collecting the appropriate tax due of 20% of the residual funds.

KL

Text Box

APPENDIX A

2

(c) General Duties

The trustees should ensure that they have read the relevant sections of The Trusts (Guernsey) Law, 1989 and appreciate their responsibilities thereunder. For example, they may wish to take independent professional advice as to the implication of their investment strategy on future cash flow for making annuity payments and, indeed, for the continuing security of such annuity payments. Also, accounts should be prepared and lodged with the Income Tax Office, as and when required.

(d) Annuity Quotation

If the annuity to be provided is not to be purchased from an insurance company, then the following rules should be adhered to.

As close as possible to the date of establishment of the annuity, a quotation should be obtained either from an actuary or by taking an annuity quotation from a recognised insurance company. In obtaining such a quotation, the annuity may allow for no increases or for annual increases of a fixed rate of up to 5% per annum, or in line with the Guernsey Retail Price Index. Guarantees of a minimum period of payment should not be allowed for in the calculation but a contingent spouse's annuity not greater than the annuity may be provided for.

The annuity must then be paid in accordance with the appropriate quotation selected. The terms and conditions of such annuity payments may be reviewed at intervals of not less than three years.

At the outset, and whenever a review is executed, details must be lodged with the Income Tax Office.

(e) Annuity Payment - Deduction of Tax

When the annuity commences the trustees will be responsible for operating the ETI

Scheme on the payments. This means that tax must be deducted as payments are

made and the relevant documentation must be submitted to the Income Tax Office

on a quarterly basis. There are penalties for failure to do so.

3

3. External Advisors

Personal Circumstances In acting as an advisor, practitioners should have regard to the following points:

(1) If the retirement annuity trust scheme is set up as a result of a transfer value being paid out of an occupational pension scheme or a personal pension, then the annuitant must sign an undertaking to be lodged with the Income Tax Office, to indicate that he understands what is given up, including the nature of guarantees and bonuses given up, annuity protection and, where appropriate, loss of future service accrual under an occupational pension scheme.

(2) If an annuity is not being purchased from an insurance company then the annuitant

(and contingent annuitant, where appropriate) should be known to have other means of subsistence and thus not specifically dependent upon the retirement annuity trust for a significant part of their normal living expenses in retirement. The danger is that in basing an annuity on a quotation, which in turn utilises an "average expectation of life" assumption, there will be a substantial proportion of annuitants (and contingent annuitants) who outlive the available funds in a retirement annuity trust scheme. Thus the external advisors must warn the parties concerned of this danger.

(3) The retirement annuity trust scheme established must be of an appropriate size to be

cost effective in relation to administration costs, intermediary costs, investment management costs and any other advisory costs.

(4) The investment(s) selected for the retirement annuity trust scheme should have

regard to the cashflow requirements needed to make the annuity payments and to the conditions imposed by the Director of Income Tax.

4

(5) Where the advisor will receive remuneration from the provider of investment services in connection with the retirement annuity trust scheme, this should be disclosed to the trustees.

Income Tax Office Guernsey Financial Services Commission PO Box 37 La Plaiderie Chambers 2 Cornet Street La Plaiderie St Peter Port St Peter Port Guernsey Guernsey GY1 3AZ GY1 1WG Tel: (01481) 724711 Tel: (01481) 712706 / 712801 Fax: (01481) 713911 Fax: (01481) 712010 .............................................................................................................................................................. Scheme Name: Income Tax Reference: I/we confirm that I/we have received a copy of the code of practice relating to retirement annuity trust schemes and have read and noted its contents and agree to act in accordance therewith. I/we also confirm that I/we have read the relevant sections of The Trusts (Guernsey) Law, 1989 and appreciate our responsibilities thereunder. Signed Name Signed Name Signed Name Date

G38522.1

Guernsey Practice Notes

Requirements for Approved Retirement

Annuity Trust Schemes and Approved

Retirement Annuity Schemes

July 2011

These notes have been prepared by the BWCI Group in conjunction with the States of Guernsey Income Tax Office

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APPENDIX B

BWCI Group G38522.1

Contents

1. Introduction 1

2. Trustees and Advisers 2

3. Membership 3

4. Contributions 4

5. Benefits 6

6. Death Benefits 7

7. Lump Sums 8

8. Transfers of Benefits 9

9. Accounts and Investment of the Funds 10

Appendix 1 Applications for and Consequences of Approval 11

Appendix 2 Definitions 13

Appendix 3 Extra Statutory Concessions 16

Appendix 4 Trustee Confirmation Form 17

Appendix 5 Retirement Annuity Member Certificate 18

Appendix 6 Form 681 19

Appendix 7 Commutation Example 21

Readers are reminded that nothing stated in these notes should be treated as an authoritative statement

of the Law on any particular aspect or in any specific case and action should not be taken as a result of

these notes alone. Any further enquiries may be addressed to the Retirement Annuity Supervisor, States

of Guernsey Income Tax Office, PO Box 37, 2 Cornet Street, St Peter Port, GY1 3AZ

BWCI Group 1 G38522.1

1. Introduction

1.1 Introduction

These notes set out the contributions which may normally be paid to and the benefits which may normally

be provided by retirement annuity schemes and retirement annuity trust schemes seeking approval under

section 157A of the Income Tax (Guernsey) Law, 1975. The Director of Income Tax may be prepared to

allow other benefits in special circumstances. These notes do not cover offshore retirement annuity

contracts or retirement annuity trust schemes seeking exemption under section 40(ee) of the Law.

The notes produced by the Director regarding the procedure for applications for approval, together with a

summary of the consequences of approval under section 157A, are set out in Appendix 1.

1.2 Application of these Practice Notes

These Practice Notes apply in full to Retirement Annuity Trust Schemes.

Sections 2, 5.3, 6.3 and 9 and Appendix 4 of these Practice Notes do not apply to contracts written under

Retirement Annuity Schemes but the remaining sections apply in full to such schemes and contracts.

1.3 Definitions

The terms which appear in bold type in these notes are defined in Appendix 2.


2. Trustees and Advisers

2.1 Appointment of Trustee

There should usually be at least two Guernsey resident trustees, although a Guernsey resident corporate

trustee may act alone.

Members of Retirement Annuity Trust Schemes may not be trustees of the scheme, nor may any

relative of the member or his or her spouse. For these purposes “relative” means a person related to the

member by either blood or marriage. This condition may be waived, however, if the terms of the

Instrument establishing the Trust specifically enable the trustees to act by majority and the majority of

those trustees are neither members of the Scheme nor relatives, as defined above.

Any changes to the trustees must be notified to the Director within 30 days of such change.

2.2 Conditions of Approval

The trustees should ensure that they have read the relevant sections of The Trusts (Guernsey) Law, 2007

and appreciate their responsibilities thereunder. For example, they may wish to take independent

professional advice as to the implication of their investment strategy on future cash flow for making

annuity payments and, indeed, for the continuing security of such annuity payments. Also, accounts

should be prepared and lodged with the Income Tax Office annually.

Where trustees are regulated by the GFSC they should ensure that they also comply with the

requirements of the GFSC RATS Rules.

Adherence to these Practice Notes is a condition of approval and such approval will not be granted until

the trustees have confirmed such adherence by completing a Trustee Confirmation Form (see Appendix

4) and returning it to the Director.

Any subsequent changes to the trust deed and rules must be notified to the Director.


3. Membership

3.1 Membership

Membership of an Approved Scheme may be made available either to a single individual or group of

individuals or may be made available without limitation.

Every member of an Approved Scheme must be made aware of the terms of the scheme.

3.2 Approval of Members

Each member to be admitted to the scheme must also be approved and this is usually done by

submission of Form RAMC (see Appendix 5) at the time of joining.


4. Contributions

4.1 Contributions by Members

A member is not required to contribute to a scheme. Where a member does contribute, contributions in

any year of up to the lower of £50,000 and 100% of Taxable Income will be allowable as a deduction for

tax purposes.

The Law does not prohibit the payment of members’ contributions in excess of this amount but no tax

relief will be granted for contributions in any year in excess of the lower of £50,000 and 100% of Taxable

Income. This limit applies to the overall contributions to all Approved Schemes and Approved

Occupational Pension Schemes.

The monetary limit of £50,000 has been established for 2011 and may be reviewed for subsequent years.

4.2 Carry Forward Provisions

From 2011 onwards, if an individual has made a contribution to a pension arrangement but cannot take

advantage of the full tax relief available to him in any year, he may carry forward the unused tax relief to a

later year, for a maximum period of 6 years following the end of the relevant year of charge. Within that

six year period, however, any contribution made which exceeded the maximum relief available for that

year alone, would absorb all, or part, of any brought forward relief, irrespective of whether or not it was

required to reduce any tax payable. The following example demonstrates the practical application of this.

An individual has a Taxable Income of £35,000 in 2011 and makes contributions to a pension scheme of

£2,000 in 2011. He therefore has £33,000 of potential tax relief available to carry forward to later years, to

be utilised by the end of 2017.

In 2012 he receives a (non-taxable) inheritance of £60,000 and invests it in his pension scheme. His

taxable income is again £35,000.

The calculation of his unused tax relief to carry forward to 2013 and later years is:

Brought forward from 2011 £33,000

Year of Charge 2012 allowance £35,000

£68,000

Contributions made in 2012 (£60,000)

Available to carry forward £8,000

As the 2011 carry-forward has been fully utilised, £8,000 may be carried forward until the end of 2018.

Note that the full amount of the pension contribution must be taken into account for determining the

amount carried forward even though the individual only required £35,000 of tax relief to eliminate his tax

liability for 2012.

In 2013 the individual’s Taxable Income is again £35,000 and he makes a pension contribution of £2,000.

The previous £8,000 unused carry-forward remains available until 2018 and in addition, £33,000 of

unused tax relief may be carried forward until 2019.

4. Contributions (continued)


4.3 Contributions by Employers

An employer of a member is permitted to contribute to the scheme if it wishes to do so. If the contribution

is an Ordinary Contribution it will be allowable as a deduction for tax purposes in the accounting period

in which it is paid. Anti avoidance legislation prevents employers making disproportionately large

Ordinary Contributions for individual members.

Where a contribution is not an Ordinary Contribution, the Director may allow it as a deduction for the

accounting period in which it was paid. Alternatively the Director may direct that the contribution be

apportioned over a longer period.

Employers’ contributions are normally exempt from taxation as a benefit in kind for the member.

However, in the case of a Proprietary Director or a Proprietary Employee any employer contributions in

excess of 25% of Relevant Earnings would be taxable as a benefit in kind.

Where the employer contributes to the scheme it may (but is not required to) operate net pay

arrangements through the ETI scheme in the same way as for an occupational pension scheme.


5. Benefits

5.1 Commencement of Benefits

A member may elect to commence benefits at any time from age 50, or at an earlier age if due to

Incapacity or where the Director has agreed an earlier age due to the individual’s occupation.

However, commencement of benefits may not be deferred beyond age 75.

5.2 Benefits

Subject to the options available under section 7, benefits must be taken in pension form. It is not,

however, necessary to purchase an annuity from an insurance company and the annuity may be paid out

of the fund itself. If desired, the annuity may be guaranteed for a period of up to 10 years.

A quotation should be obtained either from an Actuary or from a recognised insurance company. In

obtaining such a quotation, the annuity may allow for no increases or for annual increases of a fixed rate

of up to 5% per annum, or in line with inflation as measured by any recognised index in Guernsey or the

UK or in any other Crown Dependency. A contingent spouse’s annuity not greater than the annuity may

be provided for if required by the member. The quotation may take account of any reduced expectation of

life for a member in poor health, but it is not compulsory to do so. The level of income drawdown should

not normally exceed the quotation obtained but may be less if the member so requests and if the prior

agreement of the Director has been obtained. It should not normally be the intention to pay a low rate of

annuity so as to leave a substantial fund for a member’s beneficiaries on his death (however, see 6.3

below).

The terms and conditions of such annuity payments may be reviewed at appropriate intervals.

The trustees will be required to deduct tax in accordance with the ETI scheme upon any annuity payments

made and should notify the Director before the first pension payment is made.

A lump sum, part of which may be tax free, may also be taken (see section 7). The annuity does not need

to commence when the lump sum is taken, but must commence before age 75.

5.3 Risk Disclosure

If an annuity is not being purchased from an insurance company then the annuitant (and contingent

annuitant, where appropriate) should be known to have other means of subsistence and thus not be

specifically dependent upon the retirement annuity trust scheme for a significant part of their normal living

expenses in retirement. The danger is that in basing an annuity on a quotation, which in turn utilises an

"average expectation of life" assumption, there will be a substantial proportion of annuitants (and

contingent annuitants) who outlive the available funds in a retirement annuity trust scheme. Thus the

trustees must warn the parties concerned of this danger. The wording of the GFSC RATS Rules may be

used for this purpose.


6. Death Benefits

6.1 Death before Commencement of Benefits

The following benefits may be provided:-

(i) a lump sum (tax free) of up to the amount of the member’s Fund Value at the date of death; plus

(ii) an annuity payable to the member’s spouse, children or Dependants derived from the member’s

remaining Fund Value. This annuity will be taxable according to the recipient’s personal

circumstances

6.2 Death after Commencement of Benefits

The following benefits may be provided:-

An annuity payable to the member’s spouse, children or Dependants with the aggregate of such

pensions not exceeding 100% of the pension which could have been provided for the member had he not

commuted any annuity for a lump sum.

6.3 Termination of Scheme

If there is a fund left after all annuitants’ entitlements have been met this may be distributed as required by

the Deed, or at the discretion of the trustees. However, it should be noted that if distributions are made

other than in the form of an annuity under the scheme, an income tax charge will arise at the standard

rate of 20% on the remaining funds held within the scheme. Where amounts are paid in the form of an

annuity the payments will be taxable according to the personal circumstances of the recipient.


7. Lump Sums

7.1 Full Commutation

Where the Fund Value is Trivial in Amount or retirement is due to Serious Ill Health the entire

Fund Value may be paid as a lump sum.

It is permissible to commute a Fund Value which is Trivial in Amount at any age. The full

amount of the trivial commutation is taxable at the standard rate (currently 20%) if commutation

occurs before age 50 and at half the standard rate if commutation occurs on or after age 50.

It is not necessary to seek prior approval from the Director before commuting a Fund Value

which is Trivial in Amount. However, before commuting a Fund Value of greater than £15,000,

Trustees should obtain a declaration from the member confirming that the Fund Value may be

deemed Trivial in Amount (ie the member is age 50 or over and the aggregate of the member’s

Fund Values (including any previous trivial commutations, taken at face value) from all Approved

Occupational Pension Schemes and Approved Schemes does not exceed £30,000).

Tax should be remitted to the Director within 30 days of the commutation being paid.

7.2 Retirement Lump Sum

In circumstances other than those set out in paragraph 7.1 above, a member who has attained

age 50 may commute up to 30% of his Fund Value for a lump sum.

Retirement lump sums in excess of a specific limit are subject to income tax. In assessing the

taxable element of a lump sum, the lump sum benefits (excluding Serious Ill Health lump sums,

trivial commutation lump sums and lump sums paid in respect of overseas transfers in) paid since

1 January 1998 from all Approved Schemes, and Approved Occupational Pension Schemes

must be aggregated. The maximum tax-free lump sum limit is reviewed annually. Details of the

limits for the last five years are provided below.

Year Maximum tax-free lump sum

£

2007 145,000

2008 152,000

2009 161,000

2010 165,000

2011 167,000

Details of the current limit in force may be found at www.gov.gg

A lump sum can be paid at the same time or before or after a member commences annuity

payments and a member may elect to receive his lump sum in any number of tranches.

The example in Appendix 7 illustrates this flexibility.

http://www.gov.gg/


8. Transfers of Benefits

8.1 Outward Transfers of Benefits

Outward Transfer Payments may be made, provided they are allowed by section 157C of the Law, and

tax should be deducted as appropriate, in accordance with that section. Appendix 1 covers the tax

implications of such transfers.

8.2 Inward Transfers of Benefits

A member may transfer his benefits from an occupational pension scheme or another Approved Scheme

into his present scheme subject to Section 157B of the Law.

Regard should also be had to the relevant legislation regarding pension transfers in the transferring

territory.


9. Accounts and Investment of the Funds

9.1 Accounts

The Director will ask to see accounts annually.

9.2 Investment of the Funds

The investment(s) selected for the Retirement Annuity Trust Scheme should have regard to the

cashflow requirements needed to make the annuity payments.

The following are suitable investments for Retirement Annuity Trust Schemes:

1. Equity investment in any company quoted on a recognised stock exchange.

2. Equity investment in companies not quoted on a recognised stock exchange. Where any member

of the scheme holds, together with relatives or any other member, more than 15% of the issued

share capital of the company, not more than 10% of the total fund shall be invested in the

company.

3. Any other investment marketed by a generally recognised financial institution.

4. Loans to members may be made by the Trustees, provided that:

(a) The total amount advanced at any time does not exceed 30% of the Fund Value.

(b) Interest is charged on a commercial basis. Such interest must actually be paid by the

member at least annually and, for these purposes, “commercial basis” means interest

should be charged on the loan at a rate no lower than that obtainable on a similar amount

deposited with, and no higher than that payable on a similar amount borrowed from, a

financial institution.

(c) The Trustees should ensure that they hold sufficient security for the loan, to enable them to

enforce repayment at any time.

(d) The loan must be repaid before benefits commence to be paid in respect of the member for

whom the loan was made.

5. Purchase of property let on a commercial basis. This may include property occupied by a

member, their relatives or connected companies, provided that a properly valued commercial rent

is paid. Property should be wholly owned by the Trustees; part ownership is not permitted.

9.3 Gearing

The trustees should not borrow money for the purposes of additional investment (i.e. “gearing”) except in

the case of investment into real property. This restriction applies to all such borrowing from the date of

publication of these Practice Notes although existing borrowings may continue.


Appendix 1 Applications for and Consequences of Approval

Applications for Approval of Scheme

Applications for approval should be made using form 681 and addressed to the Retirement Annuity

Supervisor (see Appendix 6)

The Director is unable to provide a pro-forma trust deed, nor is he able to offer advice on the wording or

composition of this, and it is strongly recommended that professional advice is obtained before executing

a trust deed. It would be usual for the trust deed to contain, possibly as an appendix, the Rules of the

scheme, confirming that it will conform to the requirements of the Law.

Where the Trustees are regulated by the GFSC, scheme documentation does not need to be submitted

with the application form, although the Director may subsequently request additional information. Where

the Trustees are not regulated by the GFSC, the Director will normally expect to see a properly executed

trust deed.

Once an application for approval has been received it will be allocated a reference number. This

reference number should then be quoted on all further correspondence in connection with the scheme.

Basis of Approval

The Law, at section 157A(2), allows for the approval of a Retirement Annuity Scheme contract made by

an individual with a company, resident in Guernsey (or carrying on business through a permanent

establishment situated in Guernsey) and carrying on in Guernsey the business of granting annuities on

human life. Approval of such a contract is subject to the conditions contained in sections 157A (2) and (3)

of the Law. The Director may also place other conditions on the Scheme as he thinks fit in appropriate

cases.

The Law, at section 157A (4), allows for the approval of a Retirement Annuity Trust Scheme provided that

it is established:

(a) under the laws of the United Kingdom or Guernsey and is administered in either of those

territories; and

(b) for the purposes of providing Retirement Annuities for individuals and their families and

dependants; and

(c) under irrevocable trusts.

Approval is also subject to the conditions contained in sections 157A (2) and (3) of the Law, in other

words the same as those for insurance company based retirement annuity contracts with necessary

adaptations. The Director may also place other conditions on the Scheme as he thinks fit in appropriate

cases.

Tax Consequences of Schemes Approved under Section 157A

Income derived from investments and deposits forming a part of the scheme will be exempt from

Guernsey income tax.

Both members’ and employers’ contributions will qualify for income tax relief. See Section 4.

Lump sum payments which fall within the limits laid down by the States of Guernsey Income Tax Office,

excluding trivial commutations but including a lump sum payment following the death of a member before

Appendix 1 Applications for and Consequences of Approval


commencement of benefits, may be made free of tax. Lump sums in excess of the tax-free limit taken in

commutation of pension (see section 7) or following the death of a member after commencement of

benefits are taxable at the standard rate.

Commutations of Fund Values which are Trivial in Amount are taxed at the standard rate if the member

is under age 50 and at half the standard rate if the member is over age 50.

Transfer Payments to other Approved Schemes or to Approved Occupational Pension Schemes or

Statutory Schemes may be made without deduction of tax.

Transfer payments made to schemes outside of Guernsey or to Guernsey schemes which are neither

Approved Schemes nor Approved Occupational Pension Schemes, with the exception of certain

schemes approved in the United Kingdom, will be subject to income tax at one half of the standard rate.

Any pension paid in respect of Guernsey service or as a result of a Transfer Payment being accepted by

a Guernsey scheme will normally be subject to Guernsey income tax and the payer will normally be

required to operate the Employees Tax Instalments Scheme.


Appendix 2 Definitions

Actuary

A Fellow of the Institute and Faculty of Actuaries

Approved Occupational Pension Scheme

A pension scheme or part of a pension scheme approved by the Director in accordance with section 150

of the Law and any scheme authorised by Resolution of the States of Guernsey

Approved Scheme

A retirement annuity scheme or a retirement annuity trust scheme approved by the Director under section

157A of the Law

Crown Dependency

Guernsey, Jersey or the Isle of Man

Dependant

An individual who is dependent for the ordinary necessities of life upon a member of an Approved

Scheme.

Director

The Director of Income Tax referred to in section 205 of the Law.

Fund Value

The member’s entire (pre-commutation) accumulated fund under the Scheme, including contributions,

investment returns and the proceeds from any insurance policies.

GFSC RATS Rules

The Retirement Annuity Trust Schemes Rules, 2010 made by the Guernsey Financial Services

Commission, as amended from time to time.

Incapacity

Physical or mental deterioration which prevents an individual from following his or her normal

employment, or which seriously impairs earning capacity.

Law

The Income Tax (Guernsey) Law, 1975, as amended.



Ordinary Contribution

A periodic contribution fixed in amount or calculated on some definite basis by reference to the earnings

or contributions of the members of the scheme, or to the number of such members, or in the case of a

body corporate, a periodic contribution consisting of a share of the profits arising to that body from the

business in connection with which the scheme is established and computed according to a formula

approved by the Director.

Ordinary contributions should normally be on a consistent basis of calculation for all members of the

scheme. However, different contribution structures can be applied with the agreement of the

trustees/insurance company on the advice of an Actuary where appropriate.

Proprietary Director

A director of a company who is either the beneficial owner of, or able, either directly or through the

medium of other companies or by any other indirect means, to control more than fifteen per cent of the

ordinary share capital of the company.

Proprietary Employee

In relation to a company, an employee who is the beneficial owner of, or able, either directly or through

the medium of other companies or by any other indirect means, to control more than fifteen per cent of the

ordinary share capital of the company.

Relevant Earnings

As defined at section 157A (9) (a) of the Law.

Retirement Annuity Scheme

A scheme approved under Section 157A (2) of the Law.

Retirement Annuity Trust Scheme

A scheme approved under Section 157A (4) of the Law.

Serious Ill Health

A member will be deemed to be in serious ill health if the scheme’s trustees have received evidence from

a registered medical practitioner that the life expectancy of the member is less than a year.

Statutory Schemes

A scheme as defined in section 612(1) of the UK Income and Corporation Taxes Act 1988

Taxable Income

Income of the member in respect of which tax is chargeable and arising or accruing in the year of

computation. No account is taken of deductions or allowances.



Transfer Payment

A payment equal to the member’s Fund Value, at the time when the payment is made. Reasonable

administration expenses may be deducted from the Fund Value.

Trivial in Amount

A Fund Value not exceeding £15,000.

A Fund Value of greater than £15,000 may be deemed trivial in amount for a member age 50 or over if

the aggregate of the member’s Fund Values (including any previous trivial commutations) from all

Approved Occupational Pension Schemes and Approved Schemes does not exceed £30,000.


Appendix 3 Extra Statutory Concessions

This appendix summarises the extra statutory concessions relating to pensions which the Director may

be prepared to allow in certain circumstances.

Divorce

When a husband and wife separate the Director may be prepared to allow a transfer of part of the

pension rights of one of the parties from an Approved Scheme to another Approved Scheme or

Approved Occupational Pension Scheme. Each case would however need to be submitted to the

Director for individual consideration and subject to agreement with the scheme trustees.


Appendix 4 Trustee Confirmation Form

Scheme Name: Income Tax Reference: I/we confirm that I/we have received a copy of the Practice Notes relating to retirement annuity trust schemes and have read and noted its contents and agree to act in accordance therewith. I/we also confirm that I/we have read the relevant sections of The Trusts (Guernsey) Law, 2007 and appreciate our responsibilities thereunder. Signed Name Signed Name Signed Name Date


Appendix 5 Retirement Annuity Member Certificate

1. Full name of member 2. Full postal address (do not abbreviate) 3. Income Tax reference number of member 4. Reference number under which trust approved by the Director of Income Tax: 5. (a) Date of first premium (b) Expected frequency and amount of future premiums

DECLARATION

This certificate gives details of a member in a Retirement Annuity Trust Scheme or a Retirement Annuity

Scheme which is in a form approved by the Director of Income Tax, Guernsey and is submitted to the

Director in accordance with Regulations made under section 159 of the Income Tax (Guernsey) Law,

1975.

Signed ............................................................................. Trustee/Officer of Company


Appendix 6 Form 681

Application for Approval under the Income Tax (Guernsey) Law, 1975, as amended (“the Law”)

Occupational Pension Scheme Retirement Annuity Contract

Retirement Annuity Trust Scheme (delete as appropriate)

1. Name of Scheme/Contract ..........................................................................................................

..........................................................................................................

2. Names of Trustees and

Administrators ..........................................................................................................

..........................................................................................................

3. Name of sponsoring employer

(if applicable) ..........................................................................................................

4. Details of any associated schemes

for employer named at 3. above ..........................................................................................................

5. Address for correspondence ..........................................................................................................

..........................................................................................................

..........................................................................................................

6. Date of establishment of

Scheme/Contract ..........................................................................................................

7. Anticipated approximate

size of membership ..........................................................................................................

8. I/we hereby apply for approval under: (delete as appropriate)

(a) section 150(2) of the Law (Occupational Schemes);

(b) section 157A(2) of the Law (Retirement Annuity Contracts);

(c) section 157A(4) of the Law (Retirement Annuity Trust Schemes).

9. I/we confirm that:

(a) a copy of the Instrument establishing the Scheme/Contract is available to the Director of

Income Tax on request (see Note 2 on next page);


Appendix 6 Form 681

(b) any changes to the Scheme, Deed, Rules or Contract of a material nature will be advised to

the Director within 30 days of implementation (see Note 4 below);

(c) any changes to the Trustees or the correspondence address will be notified to the Director

within 30 days;

(d) the Trustees/Administrators:

(i) are satisfied that the Scheme, Deed, Rules or Contract satisfies all of the conditions of

the legislation under which approval is sought;

(ii) are aware of and have read the Practice/Guidance Notes/Codes of Practice published

by the Director in respect of such arrangements (see Note 5 below);

(iii) undertake to ensure that the Scheme, Deed, Rules or Contract is administered so as to

adhere to the relevant legislation, notes, guidance or codes, or to advise the Director

immediately if this ceases to be the case;

(iv) undertake to supply the Director with such further information as the Director may

reasonably require.

10. Declaration

I hereby declare that the information provided in this application is true and correct to the

best of my knowledge and belief. I have taken professional advice in completing the

application, as appropriate.

I am authorised to make the declaration above on behalf of the Trustees/Scheme

Administrator.

Signed .............................................................................

Date .............................................................................

Capacity in which you are making the application (if not Trustee/Scheme Administrator):

........................................................................................................................................................................

NOTES ON APPLICATION FOR APPROVAL

1. When completed, the application should be submitted to the Income Tax Office, addressed to:

the Pension Schemes Supervisor (for section 150 applications); or

the Retirement Annuity Supervisor (for section 157A applications).

2. Do NOT send Scheme or Contract documentation unless requested. For Retirement Annuity Trust

Schemes, the document establishing the Scheme should only be submitted if its trustees are not

regulated by the GFSC.

3. A letter confirming approval will be sent as soon as possible after receipt of the application, which

will contain the approval reference number.

4. A change to a Scheme, Deed, Rules or Contract will be regarded as material if it affects, or may

affect, continued approval. There is no specific form for advising such changes.

5. All legislation, notes and codes are available at www.gov.gg/tax.

6. The application should only be signed by a person authorised and able to provide the information

and undertakings requested. This will obviously include the Trustees or Administrators, but may

also include a person holding a legal, actuarial or accountancy qualification.

http://www.gov.gg/tax


Appendix 7 Commutation Example

The example in this appendix illustrates how the lump sum calculation and payment in tranches works in

practice.

A member aged 50 has a Fund Value of £100,000 on 1 January 2011. He would like to receive a lump

sum of £10,000 on 1 January 2011 but does not wish to commence pension payments on this date.

On 1 January the administrator calculates the minimum fund that needs to be “retired” to provide the lump

sum. This is derived as

£10,000 = £33,333

30%

After payment of the lump sum the member’s fund has two segments:

A “Retired Segment” of £23,333 [£33,333 - £10,000] which must be used to provide an annuity either

immediately or at a future date

An “Unretired Segment” of £66,667 [£100,000 - £33,333] which can be “retired” (with up to 30%

commuted) at a future date

Suppose the member:

Pays additional contributions over 2011 which total £15,000

Receives an investment return of 5% over 2011 on the funds invested at 1 January 2011

Receives an investment return of 3% on the contributions paid over 2011.

The position at 1 January 2012 is that the member will have:

£24,500 remaining in his Retired Segment [£23,333 x (1+5%)]

£85,450 in his Unretired Segment [£66,667 x (1+5%) + £15,000 x (1+3%)]

KL

Text Box

APPENDIX C

REPORT ON THE THEMATIC REVIEW OF INVESTMENT AND LONG-TERM INSURANCE

SALES PRACTICE

June 2014

KL

Text Box

APPENDIX D

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Executive Summary Between October and December 2013 the Commission undertook a series of 12 on-site visits to intermediaries providing advice to retail customers on investments and long-term insurance products (“the Review”). The Review formed part of the Commission’s ongoing work to ensure retail customers receive an appropriate level of protection. The series of visits were a follow up to the 8 visits of a similar nature that the Commission undertook in July 2012 and to the Commission’s letter of January 2013 (the “Commission’s Letter”) which summarised the findings from these visits. Through its 2013 visits, the Commission found that the majority of licensees visited had made improvements and rectified a number of the issues identified in the Commission’s Letter. However a number of licensees had not made sufficient efforts to implement the improvements required by the Commission’s Letter. Of these, several licensees were referred to the Enforcement Division for further investigation. While a number of the issues identified by the 2012 visits have been addressed, the Commission’s findings indicate that further work is required across the sector, by every licensee. This report will summarise the Commission’s findings and explain our expectations going forward.

Methodology As with the 2012 visits, the Commission engaged RWA Compliance Services Limited to conduct the visits alongside Commission staff. Three of the licensees visited were also visited as part of the 2012 Visits. When combined with the 2012 visits, the Commission has now visited the majority of those licensees offering advice on investment and long-term insurance products. Those licensees that were not visited were either newly licensed, did very little business or only sold protection products. These licensees were selected on a risk based approach with due regard being given to those licensees with greatest market share and potential risk to consumers. The Review was mainly concerned with how licensees gathered sufficient information to give suitable advice and how they communicated that advice to their clients. The Commission also looked to see what improvements licensees had made in response to the Commission’s Letter. In advance of the visits, licensees were asked to provide various information, including a completed pre-visit questionnaire, a schedule containing details of all new business placed, surrendered or transferred in the 12 months prior to the request and copies of the standard documents used to record client information and assess their attitude to investment risk.

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The visits were conducted by interviewing key personnel followed by reviewing client files selected from the schedule referred to above. The findings summarised below are based on the documents reviewed and the responses given in advance of the visit and during the interviews. Findings The most significant findings of the Review are summarised below. This includes areas of both good and poor practice. Where there have been common areas of poor practice the Commission has set out what it expects from licensees going forward. Areas of good practice have been highlighted by way of example. These examples should not be taken as guidance and are in no way prescriptive. These practices may not be appropriate for every licensee, based on the internal organisation and range of products offered. 1. Client Information Principle 4 of the Principles of Conduct of Finance Business1 (the “Principles”): Information about Customers, requires a licensee to seek from customers it advises or for whom it exercises discretion any information about their circumstances and investment objectives which might reasonably be expected to be relevant in enabling it to fulfil its responsibilities to them. In order to give objective, suitable financial advice, an adviser needs to collect sufficient information regarding their client’s objectives, circumstances, both financial and personal and their willingness and ability to take risks.

1.1. Fact Finds The majority of licensees used a fact find questionnaire to obtain information regarding their client’s personal and financial circumstances. In most cases these were completed to a good standard, with the reasons for blank sections noted. However there were still a number of instances where licensees left sections blank without explanation or updated a previously used fact find. Of particular note, while there were almost always specific fields for recording detailed information regarding client’s mortgage liabilities, the sections for recording client’s other liabilities usually consisted of a simple text field, when they were present at all. The Commission is concerned that this will lead to advisers paying insufficient attention to client’s non-mortgage liabilities. When considering making a lump sum investment it may often be in a client’s best interests to pay off a debt instead. Where clients do not wish to disclose information regarding their personal circumstances, the adviser should consider whether he has sufficient information to give advice. Several examples were identified where shortly after entering into a long term investment, the client

1Link: The Principles of Conduct of Finance Business

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required to withdraw funds and was penalised for so doing. However the fact find did not indicate that access to the investment had been discussed or considered.

1.2. Objectives The majority of fact finds reviewed by the Commission contained a section for clients to record their objectives. In most cases this consisted of a list of general areas clients might require advice about, such as pension planning, mortgage protection or lump sum investments. Clients would indicate, often by numbering in order of priority, which areas they required advice regarding. The Commission is concerned that this may not allow licensees to record their clients’ individual, specific needs such as, the case of pension planning, the client’s income needs and expectations or in the case of lump sum investments and saving plans, the purpose for which the funds are being saved or invested. A number of licensees did make use of file notes to record additional information about their clients which in some cases did include information regarding the client’s objectives but this was usually along the lines of ‘to invest further funds’. File notes were also not used in a consistent and organised manner. At one licensee, the objectives recorded in the fact finds were completely uniform, consisting of the same three phrases in every case.

1.3. Client’s willingness and ability to take risk Most licensees visited assessed their client’s attitude to risk using a scoring system based on a questionnaire. This score would then be translated into a particular category, such as high, medium or low. These categories were generally accompanied by a description of what that level of risk would entail. The Commission often found that these descriptions used were vague, qualitative terms such as ‘some’, ‘more’, and ‘greater’ to describe the level of risk and did not enable the client to understand the consequences, both in terms of potential gains and potential losses, of investing with a particular level of risk. While the Commission recognises that past performance is not a guarantee of future performance, providing quantitative information regarding the historic volatility of portfolios at a particular risk rating may help clients, as long as the licensee takes care to explain what it means for the client. Providing information regarding the potential losses as well as the potential gains will also help manage client expectations and consider overall affordability. In a number of cases the descriptions and categories of risk used by licensees varied between the documents they used, creating potential confusion for the client. Some licensees attempted to provide further information to their clients by setting out what classes of assets, often in percentage terms, a portfolio constructed at a particular level of risk would typically hold. The Commission is concerned that, by itself, this may not be particularly useful to a client that does not already understand the kinds of risk attached to a particular asset class. A small number of licensees assessed their clients’ attitude to risk by providing them with a sheet containing a description of each level of risk, often along with a list of the types of

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investments that typically fall within that level. Clients are then expected to select an appropriate level of risk for themselves. The Commission does not consider that this is sufficient by itself. We would expect licensees to assist their clients in deciding on an appropriate level of risk and evidence the process and the rationale behind the final decision. In most cases the Commission did not find that the clients’ ability to take risk, their capacity to bear loss, was sufficiently addressed. While some of the questionnaires included questions that alluded to the effects of loss upon the client, the issue was rarely explicitly addressed. The Commission also found little evidence of the adviser’s consideration of the client’s concentration risk. 2. Client Advice Principle 5 of the Principles: Information for Customers, requires a licensee to take reasonable steps to give a customer it advises, in a comprehensible and timely way, any information needed to enable them to make a balanced and informed decision. A licensee is also required to be ready to provide a customer with a full and fair account of the fulfilment of its responsibilities to them. The Commission expects licensees to provide their clients with written advice clearly explaining what they are recommending and how it will help the client meet their objectives. The purpose of this written advice is to provide the client with sufficient information, in a format they will understand, to enable them to make a balanced and informed decision regarding the licensee’s recommendations. The Commission also expects licensees to take reasonable steps to satisfy themselves that their clients do in fact understand the advice.

2.1. Objectives In order to be suitable, a licensee’s advice must address the client’s objectives. In order to demonstrate the suitability of their advice and ensure the client understands the reasoning behind it, it is important to express the client’s objectives clearly. The Commission found that the written advice prepared by many of the licensees did not express the client’s objectives in a clear manner. In some cases product information was included in the section dealing with objectives, often expressed in technical terms a retail client is unlikely to use or understand. In general, the objectives recorded within the written advice were vague and generic, such as ‘to invest further funds’ or ‘get a better return than available at the bank’. The purpose of the investment, the use the funds invested were likely to be put to, or the client’s income needs in retirement, was rarely addressed.

2.2. Risk The Commission expects a licensee to explain the particular risks of any product they recommend and demonstrate how it relates to their client’s risk profile. While the majority of licensees attempted to do this, the link between the client’s risk profile and the risk of the product was not always clear, in part due to the vague manner in which the client’s risk profile was described. In many cases it consisted of the licensee stating that

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the client had a low risk profile and that the recommended product was low risk. It was unclear what criteria the licensee had used to determine that the product was in fact low risk. In an example of good practice, the output of the client risk profiling tool used by a licensee produced a model portfolio that matched the client’s risk profile. The licensee then constructed a portfolio similar to the model portfolio and explained the connection to the client. The Commission found that many licensees did not give the same prominence to the negative aspects of the products they recommended as they did to the positive. In one case a licensee routinely recommended structured products to clients with low and medium risk profiles without sufficiently emphasising the capital-at-risk nature of the products.

2.3. Explaining the Product The Commission found that a number of licensees were still relying on product provider information and fact sheets to explain the product they were recommending. As stated in the Commission’s Letter, the Commission does not consider this sufficient, particularly when advising retail clients. In particular, the Commission found very little reference within licensee’s written advice to any ‘cooling off’ periods in which the client may cancel their investment without penalty. The Commission also found that some licensees include what appeared to be information copied and pasted from the product provider’s documentation. This has the potential to mislead clients into believing that it is the licensee’s own opinion. In one case this included what appeared to be sections of fund fact sheets, which were technical and potentially incomprehensible to a retail client.

2.4. Costs The Commission found that the majority of licensees disclosed the fees or commissions that they would receive to their clients in a reasonable, clear and transparent fashion. However some licensees were not disclosing the costs of the product themselves. In some cases the licensee’s fees or commissions and the costs of the product were set out in different sections of the written advice or as part of the illustrations provided to the client. The Commission considers that clients will find it useful to have the total costs that they will incur, both annual and initial, set out and itemised in one place, in both cash and percentage terms, with these costs identifying both the adviser and product provider charges. A number of licensees made reference to receiving retrocession payments from fund managers which would, in some cases, be re-invested into the client’s portfolio. There was generally little information as to the extent this would occur and its value to the client.

2.5. Peer Review The Commission found that at every licensee visited there was evidence that some form of peer review occurred. This generally took the form of a signed peer review checklist or

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email correspondence within the file indicating that the reviewer was satisfied with the advice being given. However, the Commission was often unable to determine the effectiveness of the peer review process as many of the licensees did not maintain records within the client file of any changes the peer reviewer made. In one case a licensee maintained copies of the draft reports, including the reviewer’s notes and suggested changes, within the client file. In this case the Commission was able to determine that the adviser’s work was being peer reviewed in an effective manner. For the avoidance of doubt, the purpose of a peer review is to ensure the advice being given is both suitable and communicated clearly, in writing, to the client.

2.6. Research In files where a licensee provided advice on a long-term protection insurance product, the Commission generally found evidence of research within the client file and a reasonable attempt within the written advice to explain to the client why a particular product from a particular provider was being recommended over similar products from other providers. This was usually based on the cost or, when a more expensive product was recommended, on the superior service or level of protection offered. This was less evident when advice was given on investment products. In many cases licensees would include a general list of other products that they had considered within their written advice before stating that the one they were recommending was the most suitable. The Commission did not find this particularly useful or informative. There was also little evidence within the client file to support the claim that the other products had been considered. However, in an example of good practice, one licensee set out a number of products they had considered and explained, briefly, why they had not recommended them.

2.7. Investment Platforms The majority of licensees in the Review used an investment platform to manage their client’s investments. While most licensees provided some information regarding the purpose of the platform, the benefits of, and rationale for, using it were not always clear. In addition each licensee made exclusive use of a single platform and, based on the files reviewed, did not consider whether that platform was suitable given the particular circumstances of each client. As the use of an investment platform involves a cost, the Commission expects licensees to justify its use to their clients. In one case the only information regarding the use of an investment platform within a licensee’s written advice was in the section dealing with costs.

2.8. Central Investment Process The Commission found that a number of licensees had adopted, or were in the process of adopting, some form of central investment process. This generally involved some form of investment committee reviewing and researching the market and selecting various products, with various risk profiles, that they believed to be suitable for their clients and likely to

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perform well. This would lead to the creation of a panel of products, sometimes referred to as a ‘white list’, which the licensee’s advisers would make recommendations from. The Commission has, in principle, no objection to such a process. However, we would expect licensees to be able to demonstrate and evidence its operation. This would include formal policies and procedures setting out the terms of reference of any investment committee, the methods used to review the market and research products, the regularity of said reviews, the criteria used in selecting products for the panel and the criteria for removing products together with retained documentary evidence of the above processes being carried out.

2.9. In-house Solutions The Commission found that a number of licensees, particularly in relation to RATS, were offering some form of in-house solution or service. This either took the form of products and services offered by a related or group company or products and services provided by a third party with the licensee’s branding. When the licensee was offering its ‘own brand’ RATS it would have an agreement with the trust company that administered the Scheme and the investment firm who managed the holdings within the RATS, usually including a set of risk rated portfolios. The investment firm often offered discretionary management services, for which they charged a higher level of commission or fees. The Commission is concerned that licensees are recommending discretionary management services, when other more cost effective products may be more suitable, given the individual circumstances and risk profiles of their clients. When advising on the formation of a RATS a licensee with such an ‘in-house’ solution would always recommend their own product as the default solution. It could be argued that this is acceptable as long as the licensee made it clear to their clients and explained the relationship between them and the other companies providing services, on the basis that a client could simply go elsewhere if they did not feel the product they were being offered was good value. However, the Commission is concerned that retail clients are unlikely to have sufficient knowledge of the market to make an informed judgement, particularly regarding the costs attached to a product. Clients have a reasonable expectation that their adviser has acted in their best interests and recommended a product that is not unreasonably expensive. There is a clear conflict of interest when a licensee advises on its own products, whether they be provided by group companies or through a partnership with third party providers. This is particularly the case when the nature of the relationship and/or the terms of the agreement are unclear or unknown to the client. The scale of many local licensees, where directors and shareholders are often providing advice to clients, can only exacerbate this issue. Principle 3 of the Principles: Conflicts of Interest states that a licensee should either avoid any conflicts of interest arising or, where a conflict arises, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act, or otherwise. A licensee should not unfairly place its interests above those of its customers and, when a properly informed customer would reasonably expect that the financial institution would place their interests above its own, the licensee should live up to that expectation.

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The Commission expects, at a minimum, that licensees make their clients aware of any conflicts of interest that may exist. 3. Pension Transfers The Commission found that the majority of licensees offered their clients advice on the transfer of existing pension plans into RATS. In some cases licensees included phrases such as ‘To transfer your existing pension benefit into a RATS’ within the client’s objectives. This unduly shifts the responsibility onto the client and presents what should be the end-result of the advisory process as a foregone conclusion. The Commission found that the benefits of, and reasons for creating, a RATS, as stated within licensees’ written advice, were qualitative and emotive. They focused on flexibility regarding investments, retirement age and method of draw-down, the ability to take a loan from the trust and the passing of any residual funds to the client’s estate. There was not an assessment of how valuable the above might be to a client. In particular the fact that there may not be any residual funds was rarely sufficiently emphasised. When recommending that an existing pension be transferred into a RATS, most of licensees included information regarding the costs of the existing scheme, usually in percentage terms. While this is information that should be communicated to the client, it was not always presented in such a manner as to allow the client to easily compare the costs of their existing scheme to the scheme recommended by the licensee, either due to the two figures being presented in different formats or the figures being presented in different parts of the written advice. In addition the Commission found little information about the performance of the existing scheme. When providing advice on transferring out of a defined benefit pension scheme, licensees are required to produce an actuarial report if the transfer value is £30,000 or above. This would set out, amongst other things, the percentage return on investment that would be required in order to match the retirement benefits provided by the defined benefit pension scheme. Most licensees summarised the salient points of the actuarial report within their written advice as well as providing the client with a copy of the report. However the required return was always presented gross of charges. The Commission is concerned that clients may be unaware of the impact the various charges will have on the required return. This could turn what appeared to be a reasonable required return into one that may be unachievable, given a client’s particular attitude to risk. 4. Training and Competency While the Review did not focus on issues around licensee’s training and competency schemes, the Commission noted that some licensees did not have a formal training and competency scheme in place. Other licensees were in the process of enhancing their

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schemes. Guidance on the Commission’s expectations on training and supervision schemes is being issued by the Commission as part of the implementation of the Guernsey Financial Advice Standards.

Conclusions The Commission is encouraged by the engagement most licensees have shown with this Review. However the findings of this review show that while some firms have made improvements since the Commission’s Letter, there is still further work to be done by all licensees. In general terms, the industry still needs to be become more customer focused and less product focused. The Commission is grateful for the cooperation received from the licensees that took part in this Review.

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