FSL commissions the lang cat to uncover the risks of ERI reporting

“For all the innovation that goes on in our sector, the exchange of data between parties is often at odds with the standards we’d all expect.” Those were the views expressed by Mark Polson, Founder of financial services consultancy the lang cat, in our new white paper – “Excess Reportable Income: Borrowed Time.” We shared the report with industry figures and select media during a breakfast briefing on 16th November, 2023.

At FSL, we’re committed to solving the challenges facing our customers and their clients. And Excess Reportable Income (ERI) is a topic that keeps coming up. We already know there are significant difficulties around obtaining, interpreting and providing accurate ERI data, but we wanted to gather a broader view to establish the full picture. That’s why we partnered with the lang cat to source independent feedback from platforms, advisers, and investment managers.

First, a bit of background

With adviser appetite for Managed Portfolio Service (MPS) solutions at an all-time high, more investors have a holding in an offshore reporting fund. Crucially, they must report ERI to HMRC when the fund is held within a general investment account – i.e. the income earned from that fund during a reporting period, which isn’t distributed. However, major issues around the availability and accuracy of ERI data could lead to investors being fined up to 200% of the tax due, plus interest and potential late payment penalties.

Investment funds aren’t required to provide their tax position in a centralised way, and ERI data isn’t always accessible on their website, or it may not be up to date. Platforms are not legally obliged to report on ERI, meaning many don’t. And it’s not the adviser’s responsibility either. The onus is on the investor to file a correct tax return. However, if platforms and portfolio managers have a tough time with the data, investors or their accountants are even more likely to struggle.

Findings from the report

Here is an overview of feedback from the different groups questioned:

Platforms

• 93% of investment platforms offer offshore funds, yet only 52% offer ERI reporting as part of their tax packs used by accountants and investors.
• Platforms know that the volume, timeliness and interpretation of data is impacting investors but they feel powerless to help.
• What’s more, these issues also affect their bottom line: some advice firms won’t touch platforms that can’t provide ERI data to a good level.
• Consumer duty – it could be argued that offering offshore funds to invest in, but not being able to satisfy ERI reporting requirements is not serving their target market effectively.

Advisers

• The tranche of unwrapped investments containing offshore reporting funds where there is a potential tax implication is growing.
• One of the UK’s major exchange-traded funds (ETF) providers, revealed that of the 1,225 funds listed on its website, only 14% are UK domiciled.
• Many advice firms use a platform that doesn’t offer ERI reporting or a mix of platforms with varying degrees of ERI information.
• They often have to resort to manual processes to gather information, which is a huge drain on resources, especially for smaller firms.

Investment managers

• There is often a trade-off between platform availability of offshore funds and the reporting.
• For some DFMs, the level of ERI reporting available from platforms is crucial to how they run their models. If a platform doesn’t do this well, then they can expect reduced business.
• In one example, the manager has access to a universe with 13 available UK domiciled funds and 189 offshore. Some 95% of the top performing funds are offshore reporting funds, but can’t be included because of the lack of consistent ERI reporting.

Clearly, change needs to happen for everyone’s sake. A key step to improving the problem is improving the quality of data, making it widely available in an easy-to-read, concise and usable format so an investor can satisfy the tax requirements on their offshore investments.

It’s crucial that we all do our bit to speak up about this poorly understood and often overlooked issue putting investors at risk. Plus, it risks damaging the reputation of offshore investing as a whole.

To learn about ORF – our trusted data source for tax on offshore investments and ERI click here.