In January this year HM Revenue & Customs (HMRC) and HM Treasury published a technical consultation “Fifth Money Laundering Directive and Trust Registration Service”. The consultation outlined how the government intended to implement changes to the Trust Registration Service (“TRS”) as required by the Fifth Money Laundering Directive (“the Directive”).
The Government sought views and evidence on the extension of TRS including the draft legislation and proposals on the types of trusts that will be required to register, on processes for data collection and sharing, and on penalties.
As part of the technical consultation it was proposed that where the trust consists solely of a policy which is a pure protection policy and payment is not made until the death or terminal illness of the insured, these trusts would not be required to be registered on TRS as that would be disproportionate to the risk of them being used for money laundering or terrorist financing activity.
The draft regulations also made reference to permanent disablement suggesting that a policy paying out on total permanent disability in addition to death and terminal illness would also be excluded from the need to register.
While this was positive news the definition of a pure protection policy for regulatory purposes goes wider than payments on death, terminal illness or permanent disablement. Industry bodies such as the Association of British Insurers and the Investment and Life Assurance Group responded to the consultation asking for a wider definition to also exempt trusts for policies which provide benefits on diagnosis of a critical illness and temporary disability such as income protection plans written as part of a menu.
Those with longer memories also called for whole of life plans and endowment policies which acquire a surrender value and therefore do not meet the definition of a pure protection policy but have a low risk of being used for money laundering to also be exempted.
On the group risk side, where trusts are used such as excepted group life, there were also calls for clarity on how these would be treated as it simply wouldn’t be practical to continually update the details of the beneficiaries and the amount of their interest.
The risk of money laundering is also low so requiring them to be registered would be disproportionate to the risk.
Last month, HMRC and HM Treasury published their summary of responses and confirmed that the government has taken respondents’ views into consideration when determining which trusts will be exempt from registration. In general, the following types of trusts will be exempt from registration on TRS:
- Trusts imposed by statute, where these do not result from the clear intention of the settlor. For example, the statutory trust arising on intestacy
- UK registered pension trusts
- Charitable trusts regulated in the UK
- Pure protection life insurance policies and those paying out on critical illness or disablement, including group policies
- Trusts used by Government and other UK public authoritiesTrusts for vulnerable beneficiaries or bereaved minors
- Personal injury trusts
- Save as you earn schemes and share incentive plans
- Maintenance fund trusts
- Certain trusts incidental to commercial transactions
- Certain trusts used as part of financial markets infrastructure
- Authorised unit trusts
At first glance this looks very positive for the protection industry as the definition appears to have been extended to all trusts holding pure protection policies whether individual or group.
The definition also appears to have been amended to include specific mention of critical illness and the reference to permanent disablement has been replaced with just disablement. However, as always the devil is in the detail.
The draft regulations contain the definition of excluded trusts in Schedule 3A. Clause 4 of that schedule defines trusts of insurance policies as:
A trust of a life policy or retirement policy paying out only
(a) on the death, terminal or critical illness or permanent disablement of the person assured; or
(b) to meet the cost of healthcare services provided to the person assured
So while the reference to critical illness has been inserted as we had hoped and been led to believe, the reference to permanent disablement is still there. This therefore means that should someone take out a menu plan which includes say life cover and income protection and this was written under a split trust so that the life cover was gifted but the income protection retained, that trust would still need to be registered as the policy can pay out on temporary disablement and therefore doesn’t meet the definition of a excluded trust.
That is of course only the case if the income protection forms part of the same insurance policy.
Different providers structure their menus in different ways.
Some offer a single insurance policy under which multiple covers are payable on different events. The whole policy is therefore subject to the trust and the right to income protection payments is carved out for the benefit of the policyholder by the wording of the trust. This trust would need to be registered.
Others offer each cover written as a separate insurance policy with a multi-policy discount. As each cover is a separate contract it is possible to only make the life cover policy subject to the trust. This trust wouldn’t need to be registered.
There is also no exemption for plans that can acquire a surrender value, no matter how small that may be. This means that whole of life plans and endowment policies that were taken out many years ago and written in trust with no real prospect of them being used for money laundering will need to be registered by the 10 March 2022 deadline.
Trustees also need to be aware that a claim under the policy could mean that the trust needs to be registered.
For claims on death we have some relief that this is only the case if the benefits are still held subject to the trust more than two years after the death. This gives the trustees some breathing space to decide whether to pass the benefits to the intended beneficiaries without additional reporting requirement being imposed immediately.
But there is no such exemption for claims for critical illness or permanent disablement and the trust must be registered within 30 days of it no longer being an excluded trust.
While this may not be a problem for many there will be cases where the trustees fall foul of the regulations, so careful, clear communication is needed to help them decide whether they need to register or not.
The proposed legislation has been laid for consideration by the European Statutory Instruments Committee in the House of Commons and the Secondary Legislation Scrutiny Committee in the House of Lords.
There is still therefore a possibility that further amendments will be made to address some of the issues that remain.
But providers and advisers should be preparing to give both new and long-standing customers a more detailed explanation of which trusts need to be registered and by when.
This shouldn’t be seen as a reason not to write policies under trust. The number of policies written under trust is already much lower than it should be. It is an opportunity and a reason to build a long-standing relationship with the customer to make sure that they don’t fall foul of the regulations.
Ian Smart is the Product Architect at Royal London