UK advisers have been feeling the heat recently over the standard of defined benefit (DB) transfer advice. But expats with UK DB schemes have found themselves at the centre of allegations relating to commissions, inducements and misinformation.
The firm at the centre of it all is deVere USA. It is no relation to the Chase de Vere familiar to UK advisers. Instead it is part of the deVere Group, which has offices across the world, including three in the UK, and an office in New York.
DeVere USA has agreed to an $8 million (£6 million) civil penalty with the US Securities and Exchange Commission (SEC) over ‘conflicts of interest’ within its overseas pension transfer advice.
The penalty was accompanied by separate charges from the US regulator against deVere USA chief executive, Benjamin Alderson, and a former manager, Bradley Hamilton.
The court documents detailed how the operation was being run in the US, but also shone a light on the British expat pensions advice market.
Between 2013 and 2017, deVere USA was advising UK expats living in the US on transferring their UK DB pensions into a qualifying recognised overseas pension scheme (Qrops). Advisers at the firm were receiving hefty commissions for recommending these Qrops products.
Clients of deVere USA were approached through social media sites, the court documents said. DeVere USA’s ‘primary business was advising these clients to elect to take a cash equivalent transfer value from their UK pension provider and transfer it to a Qrops’.
However, a litany of issues with this transfer advice was uncovered by the US regulator, including many layers of charges.
Once the Qrops was completed, the custodian firm would take 10% to 11% of the transfer value in fees, spread out over 10 years.
The custodian firms would then pay 7% commissions, which would be split between the deVere USA adviser and an overseas affiliate. This 7% upfront commission would be paid out of the custodians’ own assets. But the ‘basis for this payment was the custodian firm’s future collection of fees from the deVere USA client, assessed at 1% to 1.1% each year for 10 years’.
The SEC alleges deVere USA did not disclose the 7% commissions to their clients, ‘creating an undisclosed material conflict of interest’.
According to the SEC, a ‘draw pay system’ was used, whereby deVere USA advisers were paid a monthly ‘draw’ that was ‘offset by the commissions that they generated’. If they did not make enough commission, the adviser became indebted to the overseas affiliate.
Monday morning sales meetings were held in which advisers were ‘encouraged to shout out their recently obtained and anticipated business and commissions’, the SEC alleged.
DeVere USA advisers were also said to have ‘misled’ clients about the tax treatment of Qrops compared to UK pensions.
A spokesman for deVere USA said the firm was ‘pleased’ the SEC has agreed to ‘settle the administrative proceedings relating to certain aspects of its historical business in the US.
‘DeVere USA reached this agreement with the SEC consistent with our commitment to clients and in the interest of putting the matter behind us. The settlement clears the way for the company to continue to develop its investment advisory business in the US.’
In his 2017 Budget, UK chancellor Philip Hammond took action in a bid to crack down on poor practice in the offshore pension market.
He announced a new 25% tax charge on any Qrops transfer. This is unless the individual is a resident of the country where the Qrops is registered, or is a resident in a country in the European Economic Area.
This change prompted deVere USA to stop its Qrops business, the SEC said.
One overseas pensions adviser, who did not wish to be named, said the offshore pensions market had indeed evolved since the Budget reform—but not necessarily for the better.
He said the 25% tax charge had ‘killed off a large part of the Qrops market’, particularly for the US and Middle East. But he said it had also given birth to new products, particularly the so-called international Sipp.
Within these international Sipps, he said, offshore insurance bonds are being sold. These products are still offering 7% to 8% commissions for offshore advisers.