2. Offshore financial services

Question 1

What financial services may be provided by the offshore financial services sector?

Answer 1

• Trust and company business services
• Insurance services
• Investment management services
• Banking services
• Legal services
• Tax compliance and tax planning services

Question 2

What do offshore centres do to gain a competitive advantage?

Answer 2

Develop new suitable laws and procedures to meet the needs of a worldwide client base.

Question 3

What is a fiduciary relationship?

Answer 3

Exists between the trustees and beneficiaries of a trust, whereby the trustee has a duty to act in the best interest of the beneficiary.
(A similar relationship exists between shareholders and the directors of a company)

Question 4

What is an overlying trust?

Answer 4

A trust that owns 100% of the share capital of a company.

Question 5

What is an underlying company?

Answer 5

A company who’s share capital is wholly owned by a trust.

Question 6

What is a trust?

Answer 6

Legal arrangement whereby the settlor properly vests the legal ownership of assets (later referred to as the trust fund) to the trustee for the benefit of the beneficiaries.

Question 7

Where does a trust’s legal capacity lie?

Answer 7

Trusts have no separate legal personality, all business is conducted in the name of the trustee.

Question 8

What is the separation of ownership in a trust?

Answer 8

Legal ownership lies with the trustee, while equitable ownership lies with the beneficiaries. This has many uses in finance planning.

Question 9

What is a company and its legal capacity?

Answer 9

An association of people who come together for business and profit making. A company has its own separate legal personality, thus it conducts business in its own name.

Question 10

Who owns and manages the company?

Answer 10

The company is owned by the shareholders and managed by directors.

Question 11

Where does liability lie for a company?

Answer 11

Should the business fail, shareholders are only as liable as their unpaid shares that they may owe to the company.

Question 12

What are the uses of companies? (5)

Answer 12

• Holding investment portfolios
• Trading
• Holding real estate
• Holding intellectual property rights
• Holding specific assets such as planes or yachts

Question 13

What is a partnership?

Answer 13

Arrangement between partners who work together to make a profit.

Question 14

What are examples of partnerships?

Answer 14

• General partnerships
• Limited partnerships
• Incorporated limited partnerships
• Separate limited partnerships

Question 15

What are foundations and how do they differ from companies and trusts?

Answer 15

• Have a separate legal personality

- Do not have shares

Question 16

What are the different types of corporate vehicles used in offshore centres?

Answer 16

• Foundations
• Partnerships
• Trusts
• Companies

Question 17

What are services provided by trust and company business service providers that are usually regulated?

Answer 17

• Company administration services to include providing directors, company secretary and registered/administrative office address and nominee shareholders
• Trustee and fiduciary services
• Services to foundations, such as acting as a member of a council of a foundation

Question 18

What are services provided by trust and company business service providers that are usually unregulated?

Answer 18

• Preparation of accounts
• Provision of authorised signatories
• Operating personal bank accounts for beneficiaries
• General administration

Question 19

What range of services are offered by offshore service providers?

Answer 19

• Acts as formation agent
• Acts as company secretary
• Act as trustee
• Act as partner of a partnership
• Act as director or alternate director
• Act as shareholder/unit holder as a nominee for another person
• Act as a member of a council for a foundation
• Provide registered office or business address
• Provide accommodation/correspondence or administration address

Question 20

What is the use of captive insurance?

Answer 20

Used by multinational companies to provide a more efficient alternative to that of the conventional insurance market.

Question 21

How does a captive insurance company work?

Answer 21

It is set up as a subsidiary company of that parent in order to reinsure the risk of the group. The parent company will invest funds in the captive instead of paying out large sums in premiums to conventional insurers.

Question 22

What are the advantages of captive insurance? (7)

Answer 22

• No insurance sales force means cheaper cover
• Premium kept within group and invested at low tax rates; there may be some tax advantages
• Access to wholesale reinsurance
• Cash flow improved as premium paid in line with groups cash flow needs
• Specialist cover available therefore improves risk management
• Offshore expertise in the captive insurance market
• Offshore captive may lie outside exchange control area aiding currency movements

Question 23

What considerations are there for captive insurance? (5)

Answer 23

• Size of parent company and current premiums paid
• Capital commitment required at an early stage
• Recognition of exposure to risk
• Parent will be delegating its role in insurance to separate company, therefore less direct over risks
• Exposed to claims and may make real losses

Question 24

What is an example of when law firms are often involved in financial planning?

Answer 24

Legal advice may be needed in relation to multi-jurisdictional structure to insure that no laws are broken.
Law firms often provide advise on estate planning and complex structuring.

Question 25

What is tax planning?

Answer 25

The business’ overall strategy which involves the avoidance of tax risks and benefitting from opportunities to minimise tax liabilities within legal boundaries.

Question 26

What is tax compliance?

Answer 26

Involves the preparation of tax returns and provision of information to the tax authorities as required.

Question 27

What types of collective investment schemes are popular in offshore centres?

Answer 27

Collective investment funds, retail funds, unit trusts

Question 28

What is the advantage of a collective investment scheme?

Answer 28

Investors pool their cash with a professional fund manager investing the funds, in order to gain a better return than if the individuals had made investments individually.

Question 29

What is the role of a fund manager? (4)

Answer 29

• Selecting, buying and selling investments
• Calculating the value of the fund
• Issue/redeeming units
• Issuing reports

Question 30

What is private portfolio management?

Answer 30

Private portfolios are managed for the benefit of an individual or individual entity. There is often a specified minimum investment.

Question 31

What does a portfolio manager need to understand for their client? (2)

Answer 31

• Risk profile

- Time horizon of investment and the terms of income requirement - i.e. capital growth or income & dividends

Question 32

What are the 3 types of private portfolio management?

Answer 32

• Execution only
• Advisory management
• Discretionary management

Question 33

What is private portfolio execution only management?

Answer 33

Individuals make all investment decisions personally, and the investment manager completing transactions only on the authority of the investor.

Question 34

What is private portfolio advisory management?

Answer 34

Investment advisor will give advice and recommendations to the individual investor, however, they make all final decisions

Question 35

What is private portfolio discretionary management?

Answer 35

Individual will delegate full responsibility for making investment decisions to their advisor, with no need for authority for each transaction

Question 36

What do investment portfolios usually include?

Answer 36

Elements of cash, fixed interest securities and equities. The proportion of split of the 3 will reflect economic and personal circumstances and requirements.