CEO of Simcocks Advocates and Director of its subsidiary, Juristrust, Phil Games discusses the potential pitfalls of an individual acting as protector on a trust and the benefits of appointing a corporate protector.
The Transparency Regulations
The Common Reporting Standard (CRS) was developed by the Organisation for Economic Cooperation and Development (OECD) to facilitate the automatic exchange of information, thereby replacing the previous model of information exchange upon request as the globally prevalent standard. Financial institutions and trustees of trusts which are classified as Reporting Financial Institutions must report financial information with respect to reportable accounts and account holders to the local tax authorities.
The OECD's CRS Implementation Handbook states that a "protector enforces and monitors the trustee's actions, such as overseeing investment decisions or authorising a payment to a beneficiary", and the OECD FAQ (June 2018) states that "the protectors must be treated as an account holder, irrespective of whether it has effective control over the trust".
Under CRS therefore, the protector of any trust is treated as an accountholder, and therefore is subject to the requirement of exchange of information with tax authorities where the protector resides.
Failure to report, or report accurately and completely, can have severe consequences. In many jurisdictions such a breach is considered a criminal offence that can result in a hefty fine or imprisonment.
The body of UK PSC legislation (in relation to persons with significant control over companies registered in England and Wales) has evolved over time. On 9 February 2016, the Companies Act 2006 (Amendment of Part 21A) Regulations 2016 were published. The regulations amend section 790C of Part 21A of the Companies Act 2006 of England and Wales. The regulations require increased levels of corporate transparency regarding ultimate beneficial ownership and control, and the current requirements are now set out in a new Part 21A of the Companies Act 2006 and in new Schedules 1A and 1B. Under the Companies Act 2006 of England & Wales therefore, where a trust owns more than 25% of the shares of a company and a person (typically a protector) has the right to appoint and remove trustees of that trust, then that person is deemed a "person with significant control" and his or her name and details are to be provided to Companies House to be entered on the public register of the company.
Similar to a breach of the CRS regulations, failure to comply with the PSC legislation can result in a fine or imprisonment.
This reporting of individuals, through the operation of CRS or the UK PSC legislation, creates a perception of wealth which is not always in the best interest of an individual - typically a relative or family friend of the settlor, who agrees to act as a protector - and in such a situation a corporate protector can provide the ideal solution.
You can appoint a corporate protector that is based anywhere in the world, irrespective of where the trust is established or administered, and it can provide several advantages.
- Expertise: Trust experts have the experience, knowledge and skills that one individual can sometimes lack.
- Oversight: A trust expert as a corporate protector is well placed to review actions taken by trustees and to provide added peace of mind.
- Impartiality: As the protector acts as a completely impartial party this avoids the pitfalls of family politics.
- Continuity: Whereas an individual will die or may become incapacitated, a regulated corporate protector provides the assurance of continuity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.