The banking crisis in 2008 undermined the financial strength of institutions such as banks and insurance companies, and people are now once again concerned about the safety of their savings. The only certain way for investors to achieve security from institutional failure is through a state controlled investor protection regime.
Luxembourg stands out among EU Member States with its exceptionally strong culture of investor protection. It has a regime which provides maximum security to investors without limit.
The Grand Duchy is in the top 10 financial centres worldwide. It is the second largest investment funds centre after the US and the leading private banking centre in the Eurozone. It has attracted banks, insurance companies and investment fund promoters from across the world. Many of its institutions specialise in unit linked life assurance, an increasingly popular vehicle for wealth management.
It has built a reputation for investor protection, tax certainty, anti money laundering practice and banking confidentiality.
Historically many high net worth individuals used offshore financial centres for confidentiality and tax mitigation. However, apart from a lack of regulation and investor protection, they have also been under attack from European and international bodies, with the result that investors who use them are placing their assets at risk for no real or sustainable benefits.
In contrast, Luxembourg’s regulations are governed by EU directives that require strict financial controls and supervision to provide investors with a secure onshore regime that still offers tax benefits.
Luxembourg’s investor protection is unique within Europe. The cornerstone of this regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the State regulator, the Commissariat aux Assurances (CAA). This arrangement involving the CAA, custodian bank and insurance company is known as the “Triangle of Security”.
These are the key points:-
• The regime ensures that the legal separation of clients’ assets from the insurance company’s shareholders and creditors, so investors are protected from exposure to the company’s credit risk.
• The insurance company maintains a register of all assets and how they are invested, which is monitored by the CAA.
•All policyholder assets are deposited with a custodian bank.
• The bank is required to ring-fence clients’ securities (eg investment funds, shares, bonds etc) – i.e. they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts.
• The bank is bound by the regulator’s legal powers to protect the assets on behalf of investors.
• 100% of the policyholder’s securities are protected. Cash deposits are not securities and so are not segregated, but cash held in monetary funds is treated as securities and so are protected.
Over the years Luxembourg has finely tuned its financial services industry into one offering unparalleled investor protection, client confidentiality and legitimate tax planning opportunities. Many British expatriates in countries like Spain, France and Portugal and Cyprus have already taken advantage of Luxembourg’s favourable arrangements. A consultation with an experienced tax and wealth management adviser such as Blevins Franks can help with structures suitable for your individual circumstances.
By Bill Blevins, Blevins Franks Financial Correspondent
14th June 2012