Advisors Should Demand Accurate ERI Data To Protect Clients

Originally published on Wealth Briefing, on 1st February 2024.

The following article examines the detail of Excess Reportable Income – the money that’s earned during a reporting period that is not distributed. If firms don’t track ERI thoroughly, investors can be punished. Getting data right is therefore essential. Michael Edwards, managing director of Financial Software Ltd (FSL), examines the ERI topic, and how wealth managers should address it. 


Time is running out for wealth managers to obtain accurate, actionable data on what’s called Excess Reportable Income. Regulators will fine and punish investors on the tax due if ERI is not properly accounted for.

As financial advice firms use digital technology to streamline operations and improve client experience, the appetite for managed portfolio service (MPS) solutions is at an all-time high. A consequence is that more investors have a holding in an offshore reporting fund. Some are aware of their offshore position, and some aren’t. Crucially, when the reporting fund is held within a general investment account, they must report excess reportable income (ERI) to HMRC, i.e. the income earned from that fund during a reporting period, which isn’t distributed. If ERI information is missing or recorded incorrectly on their tax return, investors can be fined up to 200 per cent of the tax due, plus interest and potential late payment penalties.

While this issue doesn’t affect every investor – only those with unwrapped investments containing offshore reporting funds (ORFs) where there is a potential tax implication – this is where we are seeing significant growth, so industry reporting standards must keep up.

Furthermore, we know that HMRC is clamping down on offshore interests. Around 24,000 nudge letters were sent in the 2022/2023 tax year – an increase of 31 per cent on the previous year. And HMRC claims to have recovered £526 million ($666 million) in tax receipts from offshore initiatives since 2019. Overall, tax penalties have increased by 25 per cent from £681 million in 2021/2022 to £851 million in 2022-23, marking a record high.

Advice firms and platforms have been telling us about the challenges of ERI reporting for a long time. They know the knock-on effect it is having but struggle to find a way forward. These conversations catalysed a recent white paper we commissioned from the lang cat [a communications, analysis and regulatory organisation] to understand the topic in more detail.


Accountability and client responsibility

Frustratingly for everyone, accurate ERI information is extremely hard to find. Investment funds aren’t required to provide ERI data in a standardised way, and it isn’t always accessible on their website or may not be up to date. Even though the fund’s status is displayed on HMRC’s list of reporting funds, this information doesn’t flow down easily.

Our report found that 93 per cent of investment platforms offer offshore funds, yet only 52 per cent offer ERI reporting as part of their tax packs. While more are moving in the right direction, there is still a big gap. It’s not that platforms don’t want to help. In fact, many said that if the assets are with them and they’re reporting on other tax, they would prefer to assist with ERI. However, many can’t justify the extra work and are not legally obliged to do so.

It’s not an advisor’s responsibility either. The onus is on the investor to file a correct tax return. Although, if professionals have a tough time with the data, investors are even more likely to falter. And that’s where the serious question of Consumer Duty comes in. You could argue that offering offshore funds to invest in, without being able to satisfy ERI reporting requirements, is not providing investors with the support they need to avoid foreseeable harm. Some platforms make it clear to advisors and investors which funds are or aren’t ORFs. Likewise, some advice firms won’t touch platforms that can’t provide ERI data to a good level. But clearly more needs to be done and we should all be committed to providing the right details to investors.


What’s creating the reporting burden?

The sheer volume is one of the hardest aspects to handle. Exposure to offshore funds is broad, largely due to the trend in outsourcing investments and the significant uptake in MPS. When more advice firms were running their own models and picking their own funds, platforms would add funds to their ranges based on individual demand from advice firms. Since then, MPS providers have been adding ranges to platforms in their droves, increasing the spread of offshore funds.

Another hurdle is timeliness. The payment date for ERI is always six months after the accounting period end date for the fund, whenever in the year that may be. This six-month delay means that ERI data may cross two tax years in line with the legal requirements, and taxpayers don’t realise they have tax to pay on a complex investment until after the deadline for paying it. Platforms are also at the mercy of the data provided from offshore fund managers. Alongside the timing issue, there’s inconsistency in how this data is interpreted and reconciled. There is an example from one fund manager that listed every fund in every share class in a PDF in a font size so small it’s practically inscrutable.

As a result, some advisors are resorting to manual processes to get data directly from managers or fund factsheets, or using multiple platforms, some with ERI reporting, some without. No wonder mistakes arise when it comes to aligning everything. This is a huge challenge for the big firms, never mind the small ones. Still, as we know, ERI reporting is key, so that investors get their tax right and avoid penalties, plus sales become more tax efficient due to the increased book cost. It is also crucial for advisors to protect against the reputational risks of getting ERI reporting wrong.


Campaigning for change

We must work together to raise awareness of the problem and increase education across the industry. It’s unreasonable to expect the average investor to understand every single quirk of the regime. However, they should receive enough information to fill out an accurate tax return, especially when the penalties are high.

As industry professionals, we’re responsible for protecting investors as well as offering more choice. Three areas we can focus on are transparency, consistency, and clarity. Realistically, things aren’t likely to move quickly unless regulations enforce reporting funds to change the way they publish their information, so that it becomes standardised. That said, we can all look for ways to raise the topic up the agenda, because it’s currently poorly understood, underestimated, and often overlooked.

As the centre of gravity for most advice firms, there’s a consensus that platforms are the natural place for reporting when they already provide a tax pack. We would urge them to speak to their fund groups and raise it with the regulator.

What can you do as an advisor? Shout about it from the rooftops and keep up the pressure to receive ERI data from platforms. They know it makes ethical and financial sense if they want to grow their clientele.

You could say we’ve been operating on borrowed time when it comes to ERI, and that time is running out. It’s not long before we see more investors hit with unexpected fines, and risk broader reputational damage to investing.


Contact us to learn more about how we can support with accurate ERI data.