Does it matter if the advisor managing my Maltese QROPS is MiFID II compliant?

Since QROPS were introduced in 2006, transferring a UK pensions to a QROPS has been one significant financial decision that British expats have been frequently asked about.

Unfortunately, QROPS pension transfers have been abused by unscrupulous financial advisors and companies focussed on generating high levels of commission irrespective of whether QROPS are actually the right financial – and the reality of the mis-selling only becomes clear when it is too late.

Malta was and still is a major QROPS option due to the high number of Double Tax treaties the jurisdiction has agreed with other countries enabling the opportunity to potentially avoid UK income tax on pension income.

The mis-selling of a wide range of financial products (including QROPS) by different firms across Europe has been one of the biggest scandals of the last 10 years and the European Union took action in early 2018 by introducing MiFID II.

An overview of MiFID II

MiFID II is the Markets in Financial Instruments Directive and is designed to increase the transparency of how financial organisations provide financial advice and promote financial products. Introduced on 3^rd January 2018, MIFID II rules are focussed on providing citizens living in the EU with greater financial protections from firms intent on mis-selling financial products.

Under MiFID II, organisations are required to meet reporting standards and tests. According to ESMA (the European Securities and Markets Authority): “The protection of investors is strengthened through the introduction of new requirements on product governance and independent investment advice, the extension of existing rules to structured deposits, and the improvement of requirements in several areas, including on the responsibility of management bodies, inducements, information and reporting to clients, cross-selling, remuneration of staff, and best execution.” Source: https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir

Under MiFID II, to be compliant firms are required to provide great transparency over fees, commissions, conflicts of interest while also ensure the best possible execution of financial advice to take “all sufficient steps” to obtain the best financial results for their clients. Firms are also required to record client instructions (including phone calls) for a minimum of five years.

One key element of MiFID II that is particularly relevant to British expats outside the EU, especially those with pensions or investments within the EU, is that the scope of MiFID II extends to those firms that operate outside the EU who use EU based investments and financial products. This ultimately means that firms that were using, for example, Maltese QROPS are now required to be compliant with MiFID II – and the trustees of such pensions are required to ensure they only work with firms that are compliant.

An example of how MiFID II is being used to target QROPS holders

While MiFID II is specifically designed to improve client protections, unfortunately it is becoming apparent that unscrupulous companies are trying to take advantage of the new rules to add additional and unnecessary costs (often at the higher level) by scaring individuals into agreeing to things they think they are required to by law.

Some firms are specifically targeting British expats with Maltese QROPS schemes with a range of emails, for example one person has recently sent Experts for Expats the following email:

Dear xxxxxx,

We are aware that you are unfortunately no longer a XXXXX client, however, we feel compelled to inform you about the recent changes in Maltese pension law and how these could have a significant impact on your pension and its value.

The changes mean your current advisor needs to be a European based MiFID advisor or hold the equivalent licensing. Whilst XXXXX hold this licence, the trustee have informed us the vast majority of IFA’s do not.

If you do not have a MiFID compliant advisor – the trustee will take control of the pension and be able to make changes to your pension without your consent. This could potentially mean buying and selling securities within your pension as they see fit or selling any structured products you may hold, e.g. structured notes, at a very significant loss.

What does this email really mean and why are you receiving it?

Under MiFID II compliance rules, legal entities that are legally or financially responsible for the performance of financial transactions are required to apply for an LEI (Legal Entity Identifier). Relating specifically to the QROPS situation, this would mean that the trustees and pension fund operators would be required to have a LEI. Your financial advisor may also be required to obtain and have an LEI.

Therefore, the email might be correct that in some cases your advisor may no longer be suitable under MIFID II rules, even if they operate outside of the EU, however this does not mean you need to rush in making a change, and your pension funds are not under threat from trustees acting without authority, for example selling structured products at a loss. Some firms have simply used this opportunity to encourage individuals to switch to a different advisor where they can charge additional fees (often as much as an additional 1% per annum).

Do you need to take action?

Before making any decision, it is important to understand that the ultimate purpose of this email is to scare people into making snap decisions that will potentially result in costly fees, exit penalties and ultimately damage pension funds.

As a guide, regardless of whether you are considering switching advisory firm, on-going fees for pension funds should not be any more than 1%, but many reputable companies will charge less to manage pensions.

If you are concerned about whether your advisor is still suitable under MiFID II rules, we can introduce you to specialists that can explain the requirements in full and also help you understand if you are being charged excessive charges – either directly or indirectly through commissions and/or exit fees.