Bank Of The West Assurance Money Market

O ffshore portfolio bonds are becoming a more mainstream offering in the UK.

However, it is only natural that investors will seek reassurance that they can commit to opportunities in a safe and tax-efficient manner, backed by confidence that if the worst should happen, their investments are protected from companies unable to meet liabilities to policyholders.

UK investors should be aware of the Financial Services Compensation Scheme which was introduced as part of the Financial Services and Markets Act 2000 and merged all the existing compensation schemes relating to retail investments.

Under FSCS rules, there are limits to the amounts of compensation. On investments, the limit is 48,000 per person (100 per cent of 30,000 and 90 per cent of the next 20,000). The FSCS provides protection if an authorised firm is unable to pay claims against it, for example, for loss arising from bad investment advice, poor investment management or misrepresentation and when an authorised investment firm goes out of business and cannot return investments or money. Investments covered include stocks and shares, unit trusts, futures and options, personal pension plans and long-term policies such as endowments.

For long-term insurance, such as pensions and life insurance, protection is unlimited, subject to 100 per cent of the first 2,000 plus 90 per cent of the remainder of the claim. Policyholder protection is triggered if an authorised insurer is unable, or likely to be unable, to meet claims against it, for example, if it has been placed in provisional liquidation or administration.

UK investors who hold offshore bonds will not be protected by the FSCS if the company becomes unable to meet its liabilities.

It is possible for a non-UK resident to be covered by the FSCS, for example, a Ger- man resident who has a policy with a UK-based insurer, when the insurer is authorised to do business via an offshore life assurance business licence, will be protected.

Most UK investors set up offshore bonds with companies based in UK-dependent territories, such as the Isle of Man and the Channel Islands, or EU member states such as Ireland and Luxemburg. All these jurisdictions benefit from stable governments, strong regulatory controls and investor protection measures. Among the major offshore centres, Isle of Man is the only jurisdiction to have a statutory compensation scheme for investors.

There are discussions going on into establishing an EU-wide compensation scheme. In the meantime, all life companies are subject to strict EU solvency margins. The same rules which apply to life companies in the UK apply anywhere else in the EU.

The aim of the solvency margin requirements is to ensure that the company concerned has sufficient funds to comply fully with its obligations to policyholders.

Currently in Luxemburg, insurance companies are bound to deposit the assets they hold, made up of prem-iums paid by policyholders and any bonuses, with a third-party custodian, usually a bank approved by the Comm-issariat aux Assurances. In the event of default on the part of the insurer, the Comm-issariat aux Assurances may freeze the accounts to protect policyholders' rights.

In Dublin, policyholders have priority to assets over all other claimants if an insurance company becomes bankrupt and they operate the same minimum solvency margin requirements as the UK. Companies calculate reserves and manage their businesses within a regulatory framework which relies on professional actuarial responsibility, aiming to provide rigorous management to protect investors.

The Isle of Man became one of the first offshore centres to introduce a formal policyholder protection scheme. This was introduced under the Life Assurance (Compensation of Policyholders) Regulations 1991 and administered by the Isle of Man Government Insurance and Pensions Authority. All policyholders, whatever their nationality and their location, whose policies were issued after April 5, 1988 by Isle of Man-based insurance companies, are protected.

In other words, the Isle of Man system operates glo- bally, covering investors no matter where they reside. Up to 90 per cent of benefits under the policy are covered with no upper limit. This makes the Isle of Man compensation scheme broadly equivalent to the UK.

No defaults have so far taken place and so the compensation scheme has not been activated. This gives weight to the argument that the Insurance and Pensions Authority licensing criteria and supervision regime in no small way contributes to the stability and reputation of the Isle of Man's insurance industry.

This protection has been supplemented by additional investor compensation measures, most notably the introduction in 2002, of the Financial Services Ombudsman Scheme, an independent dispute resolution service for customers with a complaint against an Isle of Man financial services business.

There are many measures available to compare the benefits from different jurisdictions, with policyholder protection being only one of these. It is important to maintain consumer confidence and the support from stable policyholder protection is an integral part of this.