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Once again it has been a tough year for the offshore bond market.

Changes to the capital gains tax regime proposed in the pre-budget report in October last year, put the future of the unit linked bond - both offshore and onshore - in doubt, and the March budget saw no concessions to the original proposals.

The five months between the pre-budget report and the budget was a period of uncertainty for the industry, and there is no doubt that for many providers new business acquisition has been tough. The figures for new business for the first quarter of 2008 saw a fall of some 15 per cent over the previous quarter.

Last year also saw the publication of the FSA’s retail distribution review, painting a future distribution landscape where the direct link between commission paid and business acquired is to be cut. This is to be a fundamental change in the way providers do business with the adviser community.

The year before that, we saw changes to trust legislation which effectively brought a halt to estate planning business for several months.

And yet, the offshore bond market continues to grow. According to ABI figures it saw an increase in new business of some 11 per cent during 2007 and overall there has been an increase in new business of over 160 per cent since 2004. Will this momentum be maintained? And what can the offshore bond industry do to narrow the gap between themselves and their onshore counterparts?

As far as the potentially damaging changes to the CGT regime are concerned the five months of uncertainty have been put to good use by the industry. As well as vigorous, but ultimately unsuccessful lobbying, we have seen acres of column inches arguing the cases of both onshore and offshore bonds versus alternative investment mediums, and the general consensus is that both onshore and offshore bonds will still meet the needs of clients in many circumstances, in particular income seekers.

With the uncertainty now over, offshore bond providers can concentrate on promoting their products to suitable clients, focusing again on new business acquisition. They need to remind the adviser community about the benefits of these products and work hard to understand the needs and habits of those advisers.

A survey of 123 IFAs carried out in June 2008 indicated that sentiment towards offshore bonds had not changed in 12 months, despite the changes to the CGT regime apparently benefiting alternative product types. There were 118 advisers who were still recommending bonds - offshore and onshore. This will be of some comfort to the providers given the ‘doom and gloom’ headlines following the PBR, some claiming that bonds were dead in the water. A similar survey last year saw four respondents out of 125 did not recommend unit-linked bonds of any sort – to all intents and purposes, no change.

Of this survey sample, some 27 per cent claimed never to have used offshore bonds. This is a high percentage for a product that is becoming more mainstream. The question is why?

There is clearly still some work to be done by the offshore bond marketing departments in educating some IFAs as to the benefits of offshore bond investing.

Further, of the 69 per cent of the sample who do recommend offshore bonds, it is up to the providers to keep pushing their key messages so that offshore bonds are at least considered when a non-pension tax wrapper is considered suitable.

So, given new business in offshore bonds is broadly only 25 per cent of their onshore counterparts, and some 27 per cent of advisers surveyed had never recommended offshore bonds what are the key messages that these offshore providers are failing to get across? In our investment satisfaction study conducted at the turn of the year we asked what the key reasons were for recommending offshore bonds. The top five, in order were as follows:

•Tax control

•Estate planning flexibility

•Tax advantages for cash investing

•Increasing likelihood of clients moving abroad

•Investment flexibility

No real surprises here, the results remaining consistent with previous years. The offshore bond certainly seems to fit the bill as a tax efficient, internationally portable, multi-currency investment solution. Growth in this section of the industry does seem to indicate that the messages are getting across, but more can be done.

Offshore bonds are perceived by many as being an expensive option. The reality is that the cost gap between offshore and onshore is minimal, and the providers should certainly be doing more to highlight this. Of course, when the RDR is fully implemented, the providers will be competing on true cost of product and this should have the knock on effect of removing expense from the equation.

Offshore bond investing is also perceived by many advisers as being a premium option – low volume, high ticket business. This is underlined by research that indicated that the average investment across the sample was £127,000 offshore bonds, £70,000 onshore bonds. One would expect a superior service to be associated with this model, but there is no evidence to suggest this.

Service is one area where the offshore market could steal a march from its competitors. With RDR removing the possibility of buying business through high commissions, providers could retain some of the adviser dependence on them by initiating programmes to help advisers achieve the higher standards proposed in the review, while at the same time reinforcing the key messages of offshore bond investing. This will also afford the providers the opportunity of putting forward less obvious uses of the offshore bond such as an investment vehicle for those that have reached their lifetime pensions cap.

Staying with service, research has shown that product features and flexibility are not necessarily the key in securing new business. With the advance of technology and the advisers’ drive to make their businesses more efficient, it is the ancillary services that are often the clincher in winning new business. The platform industry of course has built its proposition on the provision of excellent supporting technology, and it does seem that the bond industry is some way behind here.

As part of an exercise in rating offshore bond products the ancillary services provided were looked at. The results are shown in the chart.

It is clear that there is still a lot of work to be done here to compete with platforms. However, the good news is that there is a considerable amount of work being done behind the scenes here, and we would expect these figures to increase dramatically over the next year or two.

The fundamentals remain positive for this market in terms of demographics and estate planning. There is still innovation in the market as offshore bonds continue to be used as the basis for other financial planning solutions such as QROPS and lifetime guarantee products, sometimes known as variable annuities or third way.

If costs continue to edge downwards, ancillary services continue to improve and the marketing departments of the offshore bond providers keep ramming home to the adviser the key benefits of offshore bond investing, we would expect the trend of continued growth in this market to continue.

Fraser Donaldson is head of investments of Defaqto