Trust Scotland Act 1921 centenary prompts call for reform

Emily Deane TEPThe Edinburgh Tax Network celebrated the 100th anniversary of the Trust Scotland Act 1921 by hosting a web event for stakeholders this week, which STEP attended. The centenary of the Principal Statute on 19 August has prompted the Scottish Law Commission to submit a draft bill for potential reform, the Trusts (Scotland) Bill, to the Scottish Parliament.

The web event panel consisted of Lady Ann Paton (Chair of the Scottish Law Commission), The Hon Lord Tyre and Lord Drummond-Young who discussed the overwhelming need for modernisation. They noted that current legislation has been heavily amended, making it convoluted and difficult to use, and much of the content is now largely obsolete.

The panel stressed that reform is essential in order to shape an innovative and high tech economy, comply with the more modern applications of trust law, and support businesses recovering from the pandemic.

The Scottish Law Commission’s proposals for reform include, but are not limited to, the following:

  1. recognition of trusts’ inherent simplicity and flexibility;
  2. appointment of Protectors;
  3. recognition of the commercial use of trusts. The current legislation fails to deal with commercial trusts, which have significantly developed in the last 40 years;
  4. express recognition of private purpose trusts;
  5. trustees’ powers should be flexible and wide, similar to a natural person managing his or her own affairs;
  6. courts given simplified and effective powers to deal with trust litigation;
  7. courts given power to remedy defects in the exercise of fiduciary powers;
  8. coherent provisions governing decision-making by trustees, beneficiaries’ information rights, delegation to agents, trustees’ liability for breach of trust and trustees’ liability to third parties.

The Scottish Law Commission’s review runs concurrently with the announcement of the Law Commission of England and Wales to reform trust law earlier this year under its 14th Programme of Law Reform. The EW review will focus on modernising legislation that has not been updated since 1925, and will explore modern and efficient structures in other jurisdictions to bring it up to international standards.

Both Law Commissions say it is essential to update trust legislation to uphold competitive economies and maintain their status as international financial centres.

STEP will continue to keep members apprised on both of these legislative developments.

Emily Deane TEP, STEP Technical Counsel

Progress on digital legacy planning from internet service providers

Two leading tech firms have announced significant changes to digital legacy options.

Apple

Robert CaringtonApple is to offer a digital legacy service for user accounts, according to reports from CNET and Digital Legacy Management. The move, announced at its annual Worldwide Developers Conference this week, follows reports of families taking service providers like Facebook to court to gain access to deceased family members’ accounts. Users can either permit access to a named individual, the ‘administrator’, or choose to have their accounts deleted. The new function is expected to be released later this year, though no date has been set.

The administrator will sign in through a ’legacy contact Apple ID’ and will need an access key to see password-protected data on Apple devices. He/she will also be able to view data stored in iCloud, Apple’s cloud service, which can then be downloaded, but will not have access to payment information, such as stored credit cards, or logins stored on a user’s Keychain.

While the service has not been officially released, Apple has already set up a dedicated web page. The user needs to enter their Apple ID login to get to the digital legacy page, which gives them the option to specify that their account be deleted when they die.

However the main question, which is yet to be answered by Apple, is how the service will work if the designated legacy contact does not use any Apple products. It is also unclear whether the administrator will be able to access the new system from devices using other operating systems, such as Android.

LinkedIn

LinkedIn also now offers options for those authorised to address a deceased person’s account, memorialise or close a deceased member’s account, according to a blog by Sharon Hartung TEP. Whilst these are not classed as pre-planning tools (advance selections) with respect to addressing an account member’s wishes and preference upon death, they do allow the fiduciary to either request a LinkedIn profile to be closed or memorialised.

Next steps, and STEP’s Thought Leadership work

Both moves follow in the footsteps of Google’s inactive account manager, which has been going for some years. It is hoped that other vendors and tech providers will respond to consumer expectations and follow suit.

In the meantime STEP continues its Digital Assets Thought Leadership work, which is focusing on engagement with service providers, and documenting the difficulties that professionals and members of the public may encounter with digital assets and service providers across various jurisdictions, in particular regarding estate planning and digital legacies.

STEP and the Microsoft-funded Cloud Legal Project at Queen Mary University of London have recently jointly undertaken a survey to ascertain the awareness, experiences, and concerns of practitioners in dealing with digital assets, in relation to both estate planning and digital legacies. The information gathered will subsequently inform and set the framework for resulting activities and education of value to practitioners, service providers, policymakers and the public.

Robert Carington is Policy Executive at STEP

Invitation to STEP/Law Commission free webinar on its 14th Programme of Law Reform

Emily Deane TEPThe Law Commission of England and Wales has announced a public consultation on its 14th Programme of Law Reform and has published a scoping document providing background on the programme and ideas for potential projects.

STEP is hosting a joint webinar with the Law Commission on 19 May to discuss the proposals in further detail. The major areas of focus are:

The Wills Project, paused in 2017, will review the Wills Act 1837 to give it a radical overhaul, including possible reform of key principles of the legislation, modernising the language and reforming any ambiguities. Many consider that reform in this area is long overdue and there is a need to review testamentary capacity, statutory wills, supported will-making, the formalities, the protection of vulnerable testators, and of course digital aspects such as electronic signatures and execution. We understand that the Commission hopes to pick this project up again by early 2022.

The Trust Project will be an initial scoping study investigating problems with English trust law, with a view to modernising and updating it in line with international standards. It will explore the current limitations with trust law and examine how it could be updated to facilitate more competitive trust services in a global market.

The project will review alternative trust and trust-like structures available in other jurisdictions, for example, Jersey’s Foundation Law and Cayman’s Star Trusts, and will consider whether similar structures could be implemented. The project will also review the law governing certain categories of statutory trust, and identify technical trust law issues that may need general updating and reform.

The scoping document acknowledges that English trust law has not been comprehensively reviewed since 1925 and notes that Singapore and New Zealand have updated their laws and been creative in maintaining a healthy trust market, whilst other countries have implemented new trust and trust-like structures to meet demand.

The Commission has clarified that the trust project will not make recommendations regarding the taxation of trusts, for which HM Treasury has policy responsibility, and the project will therefore exclude the law of mistake which has significant tax consequences.

STEP members and non-members are welcome to join our free webinar on Wednesday 19 May at 4.30pm (BST) entitled ‘Modernising trust law for a global Britain’ in which we will explore the Law Commission’s 14th Programme of Law Reform with a specialist Law Commission and STEP panel.

Emily Deane TEP, STEP Technical Counsel

MoJ announces consultation on court fee increases

Emily Deane TEPThe UK Ministry of Justice (MoJ) has announced a public consultation on increasing selected court fees in line with historical inflation dating from August 2016 to April 2021, or from the year the fee was last amended (capped at August 2016).

The proposal is limited to fees which are under-recovering compared to the estimated cost of the service, and to fees which are enhanced so that they can legally be set above the cost of service. The impacted fees are included in the following fee orders:

  • Family Proceedings Fees Order 2008 No 1054 (43 impacted fees);
  • Civil Proceedings Fees Order 2008 No 1053 (67 impacted fees);
  • Court of Protection Fees Order 2007 No 1745 (3 impacted fees);
  • Magistrates Courts Fees Order 2008 No 1052 (20 impacted fees).

The proposed fee increases will raise an estimated additional net income of GBP11-17 million a year for HMCTS after fee remissions.

In addition to increasing fees, the government also proposes to widen access to the Help with Fees scheme. This includes raising the income thresholds in line with inflation, including the couple and child premiums, backdated to August 2016. The extended scheme is intended to benefit those who feature disproportionately among low income groups, including women, people from black and minority ethnic backgrounds, disabled people and younger people.

Responses are invited by 17 May. Feedback can be submitted via an online survey using the link below, by email: [email protected], or by post to: Fees Policy Team, Ministry of Justice, 102 Petty France, London SW1H 9AJ.

STEP will continue to keep members apprised of any developments.

Emily Deane TEP, STEP Technical Counsel

STEP attends FATF meeting to discuss beneficial ownership regime

Emily Deane TEPSTEP attended a virtual meeting held by the Financial Action Task Force (FATF) on 18 March to discuss potential amendments to FATF Standards Recommendation 24 and its implementation. FATF announced its intention to review this area, which may lead to a comprehensive overhaul of the system of beneficial ownership (BO), at a private sector consultative forum in November 2020.

The meeting aimed to garner additional views on the key proposals for amendment to Recommendation 24 from Designated Non-Financial Business and Professions (DNFBPs) which include lawyers, trust and company service providers, notaries and other independent legal professionals.

The principal issues for discussion included:

  • The verification of BO information provided to the registry and whether a DNFBP could hold the information instead.
  • Whether DNFBPs have sufficient access to the BO registries in order to identify and verify the relevant beneficial ownership information.
  • Whether physical paper bearer shares are still necessary?
  • How can the sector define and adequately control nominee arrangements?
  • How could the process of identifying beneficial ownership be improved?

STEP noted the issue that the application of the rules around beneficial ownership is complex, which can create an ambiguous outcome due to confusion around the identification of natural persons. This confusion can lead to the rules not being applied correctly, resulting in inaccurate information being held. Licensed third parties which are obliged to hold information, such as trust companies, have a more rigorous process of identification and this could be beneficial to adopt.

STEP suggested that FATF target the accuracy of the information held, its effectiveness, and how often it is collected. It also suggested it would be preferable for jurisdictions to have multiple options, rather than the current highly prescriptive rules of identification, to ensure the accuracy of the information collected and verified. The overarching objective for review should be to strengthen the measures in place, and mitigate the obstacles to transparency and risks of misuse.

FATF confirms that it will continue to consult with the private sector and will publish a full consultation on written proposals in June. STEP will continue to keep members apprised of these developments in due course.

Emily Deane TEP, STEP Technical Counsel

Trusts and AML-CFT registers of beneficial owners: I’m a trustee, do I need to register somewhere?

Robert CaringtonOn 11 February, STEP Europe held a webinar to examine how various jurisdictions have transposed the Fifth Anti-Money Laundering Directive (5AMLD), and particularly how those Member States have chosen to define a business relationship.

The panel included Stéphanie Auferil TEP from France; Dr Petra Camilleri from Malta; Aileen Keogan TEP from Ireland; Filippo Noseda TEP from the UK; Paolo Panico TEP from Luxembourg; and Nicola Saccardo TEP from Italy; with Dr Anthony Cremona TEP moderating. The event was sponsored by IQEQ.

Many trustees based in the EU, and other jurisdictions with regulations similar to the EU’s central Register of Beneficial Ownership (RBO), are familiar with the need to register trusts. The details are sent to the competent authority and disclose information on all persons who fall within the definition of ‘beneficiary’, with respect to trusts in the appropriate RBO form. However, non-EU-based trustees are less likely to be familiar with the new requirement to also have the trust registered when the trustee enters into a business relationship in the EU, whilst in a number of countries EU based trustees have already been required to register (France).

The panel members each explained how their own countries have implemented the following provision from the Official Journal of the European Union regarding article 31, as covered in this discussion document (pdf).

Some of the key updates per jurisdiction were:

Ireland: It still has not implemented 5AMLD as the legislation does not yet fully transpose 5AMLD. It is difficult to see how it would work in the country, due to the number of trusts to be found in many aspects of society (house purchases, pensions and to protect the vulnerable) and how the directive would affect daily life. Ireland has already removed statutory trusts, unit trusts and pension trusts from the definition of an express trust, though further clarification is needed. However as yet there has been no carve-out for trusts known already to be of minimum risk, such as those for the vulnerable and charities.

Italy: The RBO of trusts is not yet operative and the legislation refers to implementing provisions which have been made available in draft for public consultation, but not yet issued. Under the legislation, trusts have an obligation to register non-EU trustees either for a business relationship under the EU directive, or if under Italian law, trusts have tax consequences pursuant to Article 73 of the Income Tax Code. The draft implementing provisions are being considered and will cover both resident trusts and non-resident trusts with Italian source income/gains.

France: The country already had reporting obligations from 2011 for EU or non EU trustees and those with French connections (such as resident settlor or beneficiary or French situs assets). It transposed 5AMLD in February 2020 and extended reporting to non-EU trustees acquiring French real estate or entering into a business relationship in France.

Robert Carington is Policy Executive at STEP

The future of EU policy on preventing money laundering and terrorist financing

Robert CaringtonOn 27 January 2021, Paolo Panico TEP, the Chair of STEP Europe, moderated a webinar hosted by Anti-Money Laundering Europe (AME) on the future of the European Union’s policy on preventing money laundering and terrorist financing.

The panel included Steve Ryan, deputy head of the financial crime unit in the Directorate-General (DG) Internal Market and Services of the European Commission (EC); Eero Heinäluoma, Member of the European Parliament (EP); and Roger Kaiser, Senior Policy Advisor, European Banking Federation.

The EC stated that it planned to unveil its consultation feedback and a new legislative package in the near future following the May 2020 action plan.

The consultation feedback had reportedly showed support for EU action in this area as well as significant support for further harmonisation in all areas, particularly for obliged entities and beneficial ownership registers.

The proposed legislative package will focus on only three out of the six pillars of the action plan, which are a harmonised rulebook; EU level supervision; and a coordination and support mechanism for financial intelligence units (FIUs). The plan is for the package to be adopted in spring 2021.

The main proposals of the package for each pillar are:

  • to put in place a more integrated framework;
  • to establish a new AML authority at the centre of an EU AML supervisory system. This should have direct supervisory powers over financial institutions and oversight/coordination powers in the non-financial sector;
  • to set up a mechanism to coordinate and support FIU work, fully integrated in the new AML authority. It will provide technical support and assistance to analysis produced by FIUs, including joint work.

The EP representative called for an updated rulebook to keep up with new developments like crypto-assets, and noted that supervisors should be supported with appropriate tools and resources. It stressed that reform is needed and was looking forward to receive the EC proposal.

Industry representatives called for a single EU rulebook and supervisory convergence and stressed the need to avoid a ‘tick the box’ approach, or any regulatory or supervisory fragmentation. It also called for guidance to help balance out GDPR and AML requirements.

 

Robert Carington is Policy Executive at STEP

The OECD reviews the Common Reporting Standard

Emily Deane TEPHM Revenue & Customs (HMRC) invited some of the UK’s financial industry experts, including STEP, to join an overview of the OECD’s current review of the Common Reporting Standard (CRS).

The OECD will launch a consultation later this year, but has requested early input from industry experts on the improvements and changes that they would like to see. The purpose of the review is to enhance the general efficiency and operation of the CRS, and especially the quality and usability of its data.

In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. Some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. HMRC intends to consult the crypto-asset industry on technical changes and improvements and e-money industry experts, an area which was previously excluded, but some countries have called for it to be included in order to reach a single and consistent view.

HMRC also discussed some trust related issues for consultation, including:

Rules on reporting of joint accounts

While each joint account holder is required to report specific information, the schema does not recognise the number of account holders. HMRC suggests developing an indicator or flag to identify each individual account holder.

Controlling persons of passive non-financial entities (NFEs)

The schema is currently unable to assess the identity of the controlling person (ie settlor, protector) making the data less useful for tax risk purposes. HMRC suggests introducing  a mandatory field to specify the role of the controlling person.

Account holder where a trust is a financial institution (FI)

HMRC suggests the schema should be able to identify the type of equity interest the account holder has for risk assessment purposes.

Other trust-related issues that will be addressed in more detail include:

  • the treatment of reporting in relation to trustees, protectors and controllers;
  • inconsistent value reporting on the value of trust accounts;
  • reporting of trust loans as payments and potential avoidance issues;
  • consistency over reporting of issues on protectors and other ‘controllers’ who have no financial interests in the trust;
  • cross-over issues on reporting controllers – AML principles and FATF guidance;
  • reporting on ownership of corporate trustees in the context of controlling persons/equity interest holders;
  • relevance of cash as an asset in the context of classifying entities, particularly in the financial institution/passive NFE distinction.

HMRC has confirmed that it will form a focus group to look at the CRS and specific trust aspects, and we will keep members updated as the consultation progresses. In the meantime if members have any additional trust-related feedback please email the policy team at [email protected] by 1 February 2021.

Emily Deane TEP, STEP Technical Counsel

The UK replaces DAC6 with the OECD’s model Mandatory Disclosure Rules (MDR) post-Brexit

Emily Deane TEPThe disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.

Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), HMRC confirms that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD’s Mandatory Disclosure Rules (MDR).

The regulations have been amended and laid before Parliament to ensure the rules work correctly post-Brexit, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:

  • Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
  • Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
    • that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
    • are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
    • where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.

The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS) will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond it.

The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. The government intends to consult on draft legislation to introduce MDR, and STEP will keep members apprised of the situation accordingly.

Update 6 January 2021: HMRC has confirmed to STEP that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.

Emily Deane TEP, STEP Technical Counsel

FATF holds consultative forum to inform review of beneficial ownership system

On 24 November, the Financial Action Task Force (FATF) held its private sector consultative forum on beneficial ownership of legal persons, which focused on Recommendation 24 Transparency and beneficial ownership of legal persons of the FATF Recommendations. FATF stated that it is undergoing a major review of this area, which may lead to a comprehensive overhaul of the system of beneficial ownership to address issues such as inconsistencies across many countries, privacy concerns, centralised registries, legitimate purposes for access, and how information should be verified.

The forum was divided into two sessions with the first being chaired by Jennie Haslett and featuring Maira Martini, Transparency International; Jason Sharman, University of Cambridge; and John Cusack, the Global Coalition to Fight Financial Crime. The panel gave a third-party view with the aim of defining and understanding the nature and scale of problem. The following challenges were identified by the panel:

  • the quality of the information and how it is being verified;
  • the importance of flexibility and adapting requirements to the risk of the jurisdiction (as it was stated that a one-size-fits-all approach does not work);
  • that rather than implementing new laws, existing ones should be properly enforced; and
  • the need for increased collaboration between all players.

The second panel was chaired by Alexandra Kadet and featured Young Led, Department of Treasury, USA; Michela Maggi, European Commission; and Mariano Garcia Fresno, Ministry of Justice, Spain. The panel shared its views on the effectiveness of the measures being implemented and the potential problems and solutions. The discussion focused on who should have access to beneficial ownership information, the balance between what needs to stay private and what can be made available, the challenge faced when involving legal entities outside of the EU, and the need to have it centralised.

The overarching consensus from the forum was that this is a very challenging issue with no perfect solutions. FATF confirmed that a number of significant challenges were identified that needed to be addressed, such as complacency among some gatekeepers, the need for discrepancy reporting to make sure registers don’t work in isolation, consequences for non-compliance, and the need for consistency of global standards and practice.

Robert Carington is Policy Executive at STEP