The Golden Opportunity With Sunseekers

Wealth management services are essential to high-net-worth (HNW) individuals throughout all life stages. In our recent research study of 770 wealthy investors, we recognised a specific segment of these HNWIs – the Sunseekers.

Typically retired or looking to relocate to Spain or Portugal, they are ready to put their feet up and enjoy pursuing their hobbies and passions again.

At this stage of their lives, they have accumulated their wealth and require support from their wealth managers to ensure a hassle-free cross-border move. A golden opportunity lies here as only 13% of Sunseekers feel that the advice they receive in relation to their international assets is high quality – and when it comes to sourcing advice for their relocation concerns, friends, family and lawyers come to top of mind rather than wealth managers.

Click on the following image to download our e-book about the relocation journey:

Managing Wealth For The Jet-Setters

As international relocation becomes a lifestyle for high-net-worth individuals, wealth managers must adjust to the needs of these global jet-setters. Our most recent research involving 770 wealthy individuals found that only 8% of relocators felt their wealth managers were helpful in the process.

As a result, 41% of millennials would have no reservations about changing to a new wealth firm following a move. The main reasons being the perception that their current wealth manager would not understand their international financial needs and that the digital services on offer would not enable them to manage wealth remotely.

By understanding the needs of various client demographics such as Sunseekers, Entrepreneurs and Travellers, the products and services offered can be expanded to meet their essential international requirements.

Read more by clicking on the Slide Share logo:

How was 2017 and what can be expected/hoped/feared in 2018 ?

January is the month of Janus, the two-faced Roman god, and it’s a good time to look both ways: how was 2017 and what can be expected/hoped/feared in 2018 ?

2017 was definitely a grand cru year for equity investing: nearly all stock markets delivered double digit returns, in local currency terms that is of course. In Euro terms, it was a little harder since the relative political tranquillity meant that the common currency was never really under pressure during the past year and thus it strengthened versus nearly all major currencies.

Fears of populist victories in countries like the Netherlands didn’t come true, and in the countries where they did progress and had an impact on government building (Germany, Austria), the market didn’t seem to care that much. The big change on the European political level turned out to be the newcomer: Emmanuel Macron not only realised a complete reshuffle of the political landscape in France, but looks set to become a major force at the European level too. He might even succeed in implementing some real economic reforms in his country, where they were more than overdue.

One country that still struggles with both politics and (lack of) real reforms seems to be Italy. Nothing catastrophic in 2017, but most observers feel that in the longer run we might encounter difficulties. Not so much the rise of the Cinque Stelle movement or even the return of phoenix Silvio Berlusconi in the upcoming elections cause undue worry, but much more so the loss of productivity compared to the rest of the Eurozone: over the last decade Italy has built a gap of over 30% versus the likes of Spain, France or Germany. Quite unsustainable in the long run, especially when combined with the largest public debt within the Union at >130% of GDP (only preceded by Greece, who is “hors categorie” in this field of course).

That brings us to an area where making profits in 2017 was slightly harder than in equities: bonds.
Even if consensus had it that rates in the Eurozone will remain « lower for longer », no one will deny that the risks for rates are now on the upside. A change in ECB leadership in 2019, inflation gradually shifting higher, unemployment substantially lower and economic growth rates reaching potential: all of these factors will eventually lead to a shift in central bank policy. Whether it will be a further gradual lowering of the monthly amounts used to buy bonds, or indeed a first minor hike in short-term rates, that remains to be seen. Either way it will mean the end of Quantative Easing as we know it and might temporarily shock markets, as did the “tapering” comments in the US a couple of years ago.

But so far, so good: despite rates having a rising tendency, even euro area government bonds turned in a modest positive total return over the calendar year 2017. It is not certain that this will be the case in 2018…

In the US there seems to be a large consensus around a continued gradual rise in short-term rates (2, 3 or 4 hikes for 2018 ?), but the effects on long-term rates remain uncertain. Over the full year, that was not sufficient to unnerve markets or result in negative 2017 returns. Only very recently did markets seem to get a bit nervous around the 2.60% mark. Somewhat amazing, since a scenario with 3 or 4 hikes on the short end for the next 12 months will inevitably see long rates go well above 2.50%.

Unless the market prices in an inversed yield curve? That might give more reason for concern, since it has historically often announced the beginning of a recession. And frankly, after having witnessed a bull market soon headed into its 10^th year (remember the post-global financial crisis trough was in March 2009), one shouldn’t be surprised to see some signs of fatigue or even fear popping up.

Which brings us to the 2018 part of the two-faced look on markets. There seems to be a large consensus that equities are still the place to be for decent returns in the new year. Expectations are high for European markets, that might be entitled to a catch-up with US markets since they did lose some 3 years in the post-financial crisis rebound process due to the Eurozone worries in 2011-2013.
Emerging markets are clear favourites as well. Even if the market at times seems nervous about rising US rates, these countries today look a lot better equipped to withstand the traditional downturn we saw when they had mainly debts in USD, rather than today’s sometimes enviable FX reserves.

And even Japan is on the radar for quite some observers as an attractive destination for international equity investors. Not only does the Yen really look like it should go up from here, but on top of that Abenomics are now supported by a shift in corporate governance that should benefit shareholders.

The US has fewer fans today: it’s true the markets have had quite an impressive run with new all-time highs nearly every week, which creates some fear of heights. And despite the expected (and sometimes feared) rise in interest rates just about everybody warns on USD weakness in 2018. A factor that might be detrimental for returns for non-USD based investors, especially with FX hedging becoming more expensive with the rising interest rate differential.

Maybe this should be pointed out as the major risk for 2018: consensus seems so big on a large number of assets and markets that the danger might be hidden there. What happens to all those crowded trades if all of a sudden market sentiment turns around? Maybe due to the inevitable moments of surprise and nervousness around themes like Brexit discussions, North Korea aggression, or the unknown unknowns we might encounter in 2018. Until then, the phrase that in our view best describes the attitude of most market participants is probably “rational exuberance”…

Ruben De Roover

The complementary combination of human and digital

After a 2017 which saw growth and development of its in-house talent, the OneLife teams are starting 2018 in the best of ways, with a fresh impetus, innovative projects and exclusive partnerships. Wim Dieryck, Chief Commercial Officer, comments on the digital ambitions of the Luxembourg life assurance company by announcing, in particular, a partnership with a 100% digital fintech company, redefining life assurance standards.

Following the launch of the OneLife mobile application at the end of 2016, data exchange through aggregation, 2017 was highlighted in particular by “social selling”. “With an SSI – Social Selling Index – of more than 50%, we are progressing faster than the life assurance industry in the Grand Duchy. Then, when you see that 30% of the commercial business originates through social media, we owe it to ourselves to invest in these new ways of selling” the CCO explains, specifying that social selling need not be in opposition to other ways of working. “On the contrary, they must all be knitted together and integrated to go in one and the same direction. At OneLife, digital gives everyone new marketing and prospecting possibilities”. More traditional events like roadshows, which aim to promote OneLife’s differentiating products on the Spanish, Portuguese and Latin American markets, will therefore also be in the diaries of Wim Dieryck’s teams..

By combining all these activities and with the arrival of new digital tools, the idea is to offer end customers and partners this opportunity to choose their favourite communication and interaction channel, thus making “human-digital-human” interchangeability possible. For the Chief Commercial Officer, “many topics still require human contact, a meeting, but digital provides real added value and enables the various customer and partner needs to be met.”

New digital announcements

Over the next few weeks a digital sign-up test phase, incorporating an electronic signature and providing the opportunity to carry out operations on clients’ life assurance policies, will be launched in Belgium. “Market demand is strong: everyone – end customers and partners – is looking to make their life easier and to use tools via a smartphone” Wim Dieryck explains.

In line with this initiative, the life assurance company is announcing its partnership with Advize, an online savings management platform. “OneLife’s “Ma Sentinelle Lux “will thus be the first Luxembourg product distributed on the French market via a 100% digital channel. Advize proposes distribution through several partners, making a totally integrated tool available” the CCO explains. As soon as it is launched, which is scheduled for the first quarter of 2018, several configurations will be available: the definition of the customer’s profile with an investment in a combination of limited funds based on ETFs, or the definition of the client’s project, based on the timeframe and amount. As for the selection of the funds, it is combined with a robo-advisor. As Mr. Dieryck underlines “We are thus aligning ourselves with developments in ETF trackers with much more innovative management – a highly attractive combination”.

OneLife is thus proving its ability to digitalise many of its processes, possible thanks to the commitment of staff and their desire to take an active part in the (digital) transformation of the life assurance sector.

“We are investing hugely in the training of our people. And if we are now delivering on these topics, it’s because we have set the entire organisation on the path to digitalisation. E-learning, for example, is contributing to the success of these strategic developments and is bringing a new dynamic with it. I’m convinced of one thing: #Digital, it’s ALL about people!” the Chief Commercial Officer adds.

OneLife, non-traditional assets’ expertise in life insurance

The current demand of our partners for non-traditional investments has enabled them to revitalise their portfolio, with growing interest in internal dedicated funds (IDF) or Specialised Insurance Funds (SIF).

The Luxembourg insurance regulator [Commissariat Aux Assurances] allows a very competitive and flexible range of options in terms of the types of underlying investments within a contract, while providing a protective framework for policyholders.

Putting financial market developments in perspective, together with the significant demand for regulated or unregulated non-traditional investments, require new keys skills for OneLife, which has chosen to surround itself with top-level experts.

According to Wim Dieryck, Chief Commercial Officer at OneLife:

“These experts are highly appreciated by our partners (asset managers, Family Offices, brokers, international private banks, etc.) who are able to receive specific and technical answers to all their questions. The ultimate goal is to best serve their clients’ needs”.

According to Anthony Lorrain, Director Unquoted & Traditional Assets at OneLife:

“It is essential to be surrounded by these new key skills from specific areas to represent the industries of private equity, real estate or securitisation. Each customer is different, so we aim to meet their needs in the best way possible by forming a team of specialists who support our sales representatives throughout the life cycle of the contract (wealth engineers specialising in taxation and local contract law, experts in smart investments, etc.)”. He went on to add: “For example, OneLife is a member of the LPEA (Luxembourg Private Equity Association) and wishes to show its commitment to other sectors of business that are complementary to the world of life insurance.”

OneLife is an innovator in life insurance and offers its clients sophisticated, tailor-made solutions. Against a backdrop of low – or even negative – interest rates, non-traditional assets are proving to be a strategic element that insurers must now be able to offer their customers within a controlled and secure framework for all parties.

Non-traditional assets are a real trend in wealth management. As a partner of wealth managers, we have decided to invest – voluntarily and strategically – in our abilities to provide qualitative support in these areas. The world of non-traditional assets is too specialised not to bring in expert services in the field.

What you should expect for 2018 regarding Flat Tax, IFI, CSG ?

After a rocky legislative process, Emmanuel Macron’s campaign promise comes with a series of reforms affecting the taxation of movable assets. This is an overview of the new tax landscape in France, including the life assurance regime:

Objectives and legislative path

Tabled on 27 September 2017 the Finance bill for 2018 presents the far-reaching reforms required by the new president Emmanuel Macron to:

boost the French economy,
direct savings towards the financing of the real economy
simplify and make the tax regime for moveable assets more readable

The bill was discussed at the National Assembly from 17 October to 21 November 2017, and finally adopted at first reading on 21 November 2017. The amended text was submitted to the Senate. As OneLife announced in its article on the subject dated 15 November 2017, the text was met withthe strong opposition of the Senate and was largely amended then submitted to a Joint Commission consisting of National Assembly and Senate members.

Faced with wide dissension within the Joint Committee, the text went back and forth between both chambers. It finally went to the National Assembly, which has the last word for this type of text and which adopted it on 21 December 2017 (subject to the approval of the Constitutional Council after right- and left-wing deputies and senators referred the matte).

The Constitutional Council finally rendered a decision approving the text, which was thus definitively adopted on 28 December 2017 and published in the Official Journal of 30 December 2017.

Main provisions

The law of 30 December 2017 on the Finance Law for 2018 includes three provisions of particular interest to savers:

An increase of the CSG rate by 1.7% resulting in an overall increase in social contributions from 15.5% to 17.2%
The introduction of a 30% flat tax (or PFU – Prélèvement Forfaitaire Unique – in France) on savings income (including social security contributions)
Replacement of the Solidarity Tax on Wealth (ISF) by the Tax on Real Estate Assets (IFI)

The PFU: a cure-all for the saver?

PFU is the French term for what is widely known in Great Britain and the United States as a “flat tax”. In France, the PFU is an innovative taxation method by which a uniform rate is applied to a broad category of different situations and sources of income.

The French system usually customises taxation to the individual situation and according to the type of income. This is, therefore, a significant change in the tax approach in Emmanuel Macron’s presidential programme.

The basic idea is to simplify the taxation of the capital of French residents by applying a single rate applicable to a full range of savings accounts, investments and income:

by applying a single rate to all financial income
to avoid the complicated application of the income tax for different categories of financial income (life assurance income, interest, dividends, capital gains…)

This apparent simplification actually makes the taxation of financial income more complex, especially as concerns life assurance.

a. Affected policies

The PFU applies to all financial investments held by French residents as at 1 January 2018 and, for life assurance, retroactively from 27 September 2017.

This includes fixed-income investment products, bond coupons and dividends which now see the 40% tax allowance removed unless one opts for dividend taxation by the progressive scale of the French Income Tax (IR).

However, the PFU does not affect:

Regulated savings accounts (Livret A, Livret de Développement Durable et Solidaire) as well as savings products exempt from income tax (company savings scheme, retirement savings scheme…)
Investments heavily weighted towards equities such as the equity savings plan (PEA). An exception consistent with one of the government’s goals of promoting investment in the real economy
Property income, which is nevertheless affected by the proposed wealth tax reform as a real estate tax

Thus, neither life assurance nor bank savings accounts (including the Home Savings Scheme [Plan Epargne Logement] and the Home Savings Account [Compte Epargne Logement], but only those opened as from 1 January 2018) are exempt from the PFU.

b. PFU or the fixed-fee scale of the IR?

The PFU rate is set at 30%, i.e.:

2% of social contributions and
8% of income tax

In principle, therefore, savings income will be taxed at the rate of 30%, but the investor may want to consider the option of having the progressive scale of the French income tax applied instead!

The option must then be chosen in writing, and the choice is irrevocable and general, i.e. it covers all the income from movable assets of the investor for one year.

As from 1 January 2018, the Prélèvement Forfaitaire Obligatoire (a fixed levy at source equivalent to the rates the PFU, i.e. 17.2% of social contributions and 12.8% of income tax) isdebited from all income from movable assets received by investors. This deduction does not entail full discharge.

If the option to apply the IR scale is not available, the PFO will entail full discharge. In other words, PFO = PFU.
If the investor chooses to apply the IR scale, the PFO will be credited to the amount of IR to be paid, with the investor being entitled to a refund in the event there is a surplus.

Low-income individuals in France may want to opt for the application of the IR scale.

PFU and life assurance

Is the PFU more advantageous than the old applicable taxation anyway?

The government’s initial intention was to limit the application of the PFU to policies taken out on or after 27 September 2017, and to policies taken out before that date but with premiums over €150,000 and €300,000 for a couple, and only for the premiums paid as at 27 September 2017.

Analysts logically deduced that the new regime would be less advantageous than the old one for policies over 8 years old. An amendment has corrected this issue:

The PFU (30%) applies to all products attached to premiums paid as from 27 September 2017 for policies under 8 years;
For policies of more than 8 years,
- the rate of 24.7% remains applicable if the amount of the premiums paid on the policyholder’s life assurance policies do not exceed €150,000.
- If the amount of the premiums paid on the policyholder’s life assurance policies exceeds €150,000,
  - the rate of the PFU is applicable for the products corresponding to the portion of premiums paid after 27 September 2017,
  - The rate of 24.7% is applicable for products corresponding to the portion of premiums paid before 27 September 2017

This share is determined according to the following calculation: Sum of products * ((150,000 – premiums paid before 27 September 2017) / (premium paid as from 27 September 2017)).

This proportional calculation has not, unfortunately, been drafted in the simplest terms for investors. Similarly, while the original bill provided that the threshold to be used was €150,000 for a single person and €300,000 for a couple, the threshold of €300,000 finally disappeared from the law as it was passed.

The €150,000 threshold must, therefore, be taken into account at an individual level only.

However, and fortunately, the allowances of €4,800 and €9,200 for a couple have been preserved for policies held for more than 8 years. Similarly, the option for IR taxation at the progressive rate has been maintained.

The situation has, therefore, become infinitely more complex and less clear for investors and insurers. This can be summarised as follows:

Click on the table to enlarge it

The IFI – a gift for the rich?

As from 1 January 2018, the Solidarity Tax on Wealth (ISF) has been transformed into a Tax on Real Estate Assets (IFI).

a. The principle

The ISF traditionally taxed assets of more than €1.3 million by a progressive rate linked to wealth. The principle of the IFI is the same as that of the ISF with the (major) difference that the IFI only taxes real estate assets. Simplification or hoax?

For French residents, the IFI applies to all real estate assets or rights, units or shares of real estate companies held in France and abroad by the persons making up the tax household.

For foreign residents with real estate assets in France, the taxable base for the IFI is as follows:

The value of real estate assets or rights in held in France by the tax household residing abroad (secondary residence for example)
Units or shares of real estate companies holding real estate in France
Units or shares of real estate companies holding real estate in France and abroad, for the respective share of the value of real estate located in France

b. Scope of application

In fact, if your assets are solely composed of real estate assets (principal residence, secondary residence, OPCIs, investment properties, rentals…) and the value of your assets exceeds the €1.3m threshold, the reform will change nothing in your case.

On the other hand, if you hold diversified assets, the IFI will force you to make scholarly calculations between assets within and without the scope. Below is a non-exhaustive list of assets and rights within the IFI scope:

value of principal residence (however, the 30% allowance has been kept)
value of secondary residence(s)
buildings under construction
undeveloped property (such as land and farmland)
buildings and fractions of buildings represented by shares of real estate condominium companies
The usufruct of real estate assets and rights for the total value of the real estate asset or right (except in case of succession, where both the usufructuary and the bare owner may be taxed up to their respective share)
Shares in companies holding real estate in France, for their value representing the properties held in France directly or indirectly by the company.

It is also possible, in case of doubt about the value of a property, to use the “Patrim” online service made available by the Ministry of Finance: [https://cfspart.impots.gouv.fr/LoginMDP]

Certain real estate assets and rights are not included in the definition of the IFI’s taxable wealth base, and partial or total deductions are available for:

buildings used for professional activity,
woods and forests set aside for exploitation or professional use,
rural properties leased for the long term or for professional use (farmland, buildings and farm equipment),
furnished housing rented under the loueur en meublé professionnel (professional landlord for furnished accommodation) tax regime.
the bare ownership of a property that is totally exempt

For foreign residents, the law has also removed the notion of société à prépondérance immobilière française (a predominantly French real estate company) to avoid artificial adaptations (and thus all real estate assets, regardless of how they are held, are included in the tax base of the IFI).

c. Deductions

The IFI is applied to the net taxable assets, i.e. assets net of existing debt as at 1 January of the tax year.

Regrettably, however, many ISF-specific deductions have been done away with (such as family loans and housing tax), and legislators have eliminated the possibility of reducing the tax base via debt.

At least the 30% allowance on the principal residence is still there.

The following expenses, among others, are deductible, provided that one produces the receipts:

expenses for the acquisition of real estate assets or rights,
improvement, construction or expansion expenses,
expenses for the acquisition of units or shares in proportion to the value of real estate assets and rights,
taxes due on the property concerned (such as property tax).

d. Conclusion

Overall, this tax reform is a step in the right direction as it simplifies, for the future, the applicable rules.

In the short term, however, the new rules add a layer of complexity to the taxation of movable assets by stacking the applicable norms, especially regarding the taxation of dividends and life assurance.

These adjustments render Luxembourg life assurance an even more attractive choice for French residents, and OneLife stands with its clients and partners to guide them through these changes.

Author: Jean-Nicolas Grandhaye

Unit-linked life insurance as a wealth planning solution for Peruvian investors

What is a unit-linked insurance contract?

A “unit-linked” product is an insurance contract under which the policyholder bears the full investment risk of the underlying financial assets of the policy. Therefore, under “unit-linked” products, the performance of the investments is not guaranteed by the insurance company in the short-, medium- or long-term.

The “unit-linked” product allows policyholders to combine in an efficient manner, financial, succession and tax planning in a single contract which complies by default with the tax and legal framework of the jurisdiction in which the policyholder is resident in order to avoid any legal or tax requalification risk.

What are the relevant components of a unit-linked insurance contract?

The main components of a unit-linked insurance contract are the following:

Policyholder(s): investor who subscribes, signs and pays the insurance premium. Could be an individual or a company.
Insured person(s): risk element covered under the insurance contract. Could be one or several persons.
Beneficiary(ies): person or entity that will receive the insurance indemnity upon the occurrence of the insured event.
Asset manager: professional entity duly licenced in its home jurisdiction to perform portfolio management activities. The asset manager may be entrusted by the insurer to manage the financial assets on a discretionary basis under the insurance contract based on the investment strategy chosen by the policyholder at inception.
Custodian bank: financial institution which provides custodial services in relation to the financial assets held under the policy(ies).

What are the main benefits of subscribing a unit-linked product with a Luxembourg insurer?

The main advantages of unit-linked insurance policies issued by Luxembourg insurers are the following:

Asset protection: The Luxembourg authorities, and more specifically the Luxembourg Insurance Regulator, the CAA (Commissariat aux Assurances), have designed a unique scheme under which the assets of the policyholders are segregated off-balance sheet from the insurer’s and custodian bank’s balance sheet. As a result, in case of insolvency or bankruptcy of the insurer or the custodian bank, the assets of the policyholder remain fully protected from any ordinary creditors’ claims.
Confidentiality: Luxembourg insurers and its professionals are fully bound by strict professional secrecy rules which ensure full confidentiality for the policyholders and any possible beneficiaries.
Investment flexibility: Luxembourg investment rules allow for great flexibility as to the type of financial assets in which the premium contributed by the policyholder can be invested. It is not uncommon to observe how investment managers invest in alternative or hedge funds and private equity through Luxembourg life insurance policies in order to obtain higher yields.

What is the tax treatment of unit-linked products for Peruvian investors?

At inception, income tax applies to an effective rate of 2,1% on the risk premiums when the latter are paid to cover risks located within the Peruvian territory, are referred to Peruvian residents at the time the contract is signed or, are referred to goods or real estate located in Peru.

In case of partial or total surrender, any capital gain derived from the policy is currently exempted from Income Tax in Peru.

There is no Wealth or Equity Tax in Peru, thus, the value of the policy will not be taxed as such if held directly by a Peruvian tax resident.

In relation to life proceeds paid to a Peruvian resident beneficiary, please note that, in principle, insurance benefits triggered as a consequence of the death of the insured, shall be tax exempt. Should the beneficiary be resident outside of Peru, please note that different taxations may apply on the receipt of the insurance indemnity depending on the jurisdiction.

Other points to consider?

Yes, in order to avoid any requalification risk in Peru, it is highly recommended to embed substantial death cover in the product.

Should you need additional information in relation to unit-linked products for Peruvian resident investors, do not hesitate to contact our Sales representatives:

José Manuel Tara, Regional Director Iberia & Latam, at OneLife

Luis De La Infiesta, Regional Sales Director Iberia & Latam, at OneLife at OneLife

Gonzalo Garcia-Perez, Wealth Planner Manager for Iberia and Latam markets, at OneLife

Author: Gonzalo Garcia-Perez

≠Success in ≠Relocation: great expectations of a HNW relocator

Did you know that HNWs under 35 are those most likely to expect Life Assurance to be available through an international wealth management proposition?

Life assurance is one of the core services European investors expect to be available through an international wealth management proposition.

Online banking tops the wish list for relocators wanting to manage their wealth from multiple locations tax advice is also important to internationally mobile HNWs who may find themselves subject to confusing and often conflicting tax requirements in different locations. Wealth managers must offer advice which reconciles jurisdictional differences and their clients’ tax priorities.

Click through to find out more: here.

≠Success in ≠Relocation: the road to relocation reality

The road to relocation reality can be a long and bumpy ride but future relocators often feel prepared ahead of their cross-border adventures.

Their expectations are evenly matched to the actual experience of their predecessors whom have already experienced the relocation journey.

Forty-nine percent of future relocators expect that they would learn about different cultures and in fact, 45% of relocators confirm that their move has indeed opened their eyes to a new realm of cultural experiences!

The harmony between the expectations and reality of HNWIs who have moved illustrates that the relocation journey can be particularly rewarding for personal development and overall quality of life.

To read more about how HNWs are faring on their relocation journey (or how they think they will fare!), click here to get the relocation e-book.

Independentism in Europe and protection of savers; the interesting answers of life insurance under freedom of services (FOS)

Scotland and Northern Ireland (United Kingdom), Catalonia and the Basque Country (Spain), Padania and South Tyrol (Italy), Flanders (Belgium), Faeroe Islands (Denmark) (1), Corsica (France) are experiencing independence movements of varying degrees of intensity.

While Scotland has implemented a popular consultation process in a constitutional framework and with the consent of the historic member state, other movements such as those in Catalonia concentrate on initiatives of a political nature outside a constitutional framework, against national and European positions with exacerbated legal uncertainty and financial instability.

The historical context, the legal framework and the state of progress of each of its movements are very different; it is virtually impossible to predict what scenarios might apply to these politically-fictional situations. At this stage, it seems unlikely that the current independence movements can be viable outside a constitutional process endorsed by the European Union and above all a negotiated solution with the historic member state, which would involve accession to the European Union in the wake of independence.

It is nevertheless interesting to see what would be the applicable standards and what mechanisms could be enforced to reduce the instability and legal uncertainty generated by these independence phenomena.

It can be noted that while supposedly the European Union does not have a role to play in these independentism processes, all aggregate European rules will remain applicable even after the possible secession(s); moreover, some existing principles and mechanisms under the applicable European rules can help to protect savers caught up in the uncertainty of secession. This is illustrated by existing rules of life insurance under the freedom to provide services of which Luxembourg has become the undisputed specialist in the European Union.

European rules expected to continue to apply despite the possible exits

(a) Given its neutrality principle (2), if these independences were to thrive at the heart of the European Union, it is not however intended to intervene and has to:

(i) maintain complete neutrality on matters concerning the internal political relations of each Member State,

(ii) ensure respect for the Rule of Law – the cardinal value of the Union and therefore not to endorse or give no effect to initiatives contrary to the constitutional order of any Member State.

(b) Another paradox is that the effective independence of a territory would not entail the automatic accession of the new State to the European Union (all Member States must unanimously vote to integrate the new state entity into the Union). However, some European Members States (and therefore the possible secessionist regions) have almost 85% of their regulations of European origin.

Consequently, even though they have become independent, these new entities would undoubtedly continue to apply this legislation by choice or by necessity, whereas there is no guarantee that they will be part of the European Union (or the European Economic Area), especially for those who would choose secession. Joining the European Free Trade Association EFTA whose members also apply European legislation (for the four main freedoms) could be an option – again, with no guarantee.

The protective mechanisms for savers resulting from the contracts taken out under the freedom to provide services

It is interesting to note that European law contains relevant principles and mechanisms addressing the financial destabilisation and the legal uncertainty triggered by these independences, particularly with regard to the protection of investors-savers.

This is particularly true for savers who have opted for life insurance under the freedom to provide services, of which Luxembourg has become the undisputed specialist in the European Union.

While these mechanisms have been created with other objectives than addressing the instability associated with the effects of independence, they remain relevant in the configuration of independence-related instability and legal uncertainty that will undoubtedly affect not only the secessionist region but also the Historic State(s) and may be even a wider surrounding geographical area.

The risks faced by investor-savers residing in the secessionist regions are essentially twofold:

(i) the risk of financial destabilisation of banking institutions located in the independent region or in the Historic State(s) resulting in restrictive measures – more or less perennial – of access to their savings; called “corralito” in reference to the severe restrictive measures of access to liquidity enacted by the Argentine authorities in 2002, a similar set of measures was applied in Greece in 2015. This risk is accompanied by a risk of a forced conversion into a devalued currency of assets whose value would undoubtedly be greatly reduced.

In this respect, the protective answers provided by life insurance under the freedom of services are remarkable:

One of the basic assets of life insurance contracts in this respect is that these life insurance investments are less likely to be subject to restrictive access measures if compared to deposits on current or securities accounts of banking institutions.

Moreover, in the case of contracts under the freedom to provide services, these assets are not located in the country taking such measures and have become the property of insurers established outside the independent region or the historic member state. A double screen that reduces the exposure of contracts to such restrictive measures.

Additionally, the payment of partial surrenders of life insurance contracts can be envisaged on policyholder’s deposit accounts located in the European Union but outside the geographical area impacted by the secession (and preferably with banks that are not conducting business or are not licensed in the secessionist region).

In addition, the more specific assets of the Luxembourg life insurance are:

benefiting from the stability and reliability of insurers based in Luxembourg
designating a custodian bank located in a country distinct from that of the policyholder’s residence (or the country of origin or surrounding geographical area that could be destabilised) offering guarantees of stability and robustness
benefitting from the segregation/cantonment of assets that are recorded off-balance sheet of the bank
benefitting from protection of assets which cannot in principle be subject of seizures, forced pledges…

(ii) The serious legal uncertainty arising from a secession insofar as the newly applicable normative framework should either be constructed from scratch or more likely derived from a hybrid creation based on European rules and new measures put in place by the new independent entity.

Here as well the life insurance under the freedom of services offers reliable solutions:

In the case of life insurance contracts taken out under the freedom to provide services, this insecurity could be countered by the option open by European law of choosing as applicable law the law of the policyholder’s nationality; originally created to protect migrant European workers, exercising this option (at inception or in case of secession) would undoubtedly allow the nationals of the Member State remaining resident in the new independent entity to have applied a set of familiar standards (the option exercise during the life of the contract should be possible as long as third party’s rights are not challenged which should not be the case with a return to the originally applicable law or similar).

In addition, the life insurer acting under the freedom to provide services remains subject to the supervision of its local regulator and to the rules governing the eligibility of assets according to the insurer’s law. This also removes a significant part of the legal uncertainty created by independence.

It is of course possible for the independent entity to invoke the protection of its public policy (ordre public) in order to take more restrictive measures (asset freezes, seizures, etc.) that may affect the assets, contracts or accounts of savers: but because there would be no international recognition, such a public policy is unlikely to materialise; moreover it would undoubtedly result in litigation especially if measures are in the long term and contrary to the savers’ interest protection.

As noted in the introduction, the secession movements are very unlikely to succeed if they are not taking place in a constitutional process backed by the local state authorities and the European Union; however, when subscribing a life insurance policy, it’s worth thinking about the benefits that the existing European regulation and mechanisms can bring to the policyholder as a saver in terms of financial stability and legal security; the life insurance contract subscribed under freedom of services – of which Luxembourg is the undisputed leader – can address most of the risks triggered by separatist activism and more generally by local financial turmoil, political instability and related legal uncertainty.

Article by Antonio Corpas, Head of Wealth Structuring and Private Equity at OneLife

(1) The Danish Faroe Islands are not part of the European Union

(2.) Article 4 para. 2 European Union Treaty: The Union respects the equality of the Member States before the Treaties and their national identity, inherent in their fundamental political and constitutional structures, including local and regional self-government. It respects the essential functions of the State, in particular those whose purpose is to ensure its territorial integrity, to maintain public order and to safeguard national security. In particular, national security remains the sole responsibility of each Member State.