On 30 December 2020, the UK and EU formally signed the Trade and Cooperation Agreement (TCA) – a legal contract that forms the basis of the ongoing relationship between the UK and the EU. This agreement makes little reference to financial services.
Financial ‘passporting’ in the EU means that if an EU member state maintains its financial regulation, its local authorisation and ongoing assessment of local financial businesses to EU rulebook standards, then firms from that member state can obtain and maintain approval to ‘passport’ their financial products and services across other EU member states, writes Jason Porter, director at Blevins Franks.
By 2016, there were 5,500 UK authorised firms passporting their services across Europe. As a result, most UK nationals would find their existing banks and investment managers in the UK could continue to advise them when they moved to the EU.
Brexit and the Trade & Cooperation Agreement changed that.
The UK is now deemed a ‘third country’ for the purposes of EU legislation. Without passporting or any special arrangements, our financial regulatory requirements would need to be deemed ‘equivalent’ to those of the EU in each individual area for the UK to gain access to these markets.
But while passporting allows UK firms to access the whole range of financial services across Europe through nine broadly-based EU rulebooks, equivalency only opens up 75% of the European financial landscape – and importantly, excludes deposit-taking and discretionary management.
The 40 areas of equivalence each require individual approval, where the EU reserves the right to cancel authorisation in most cases with only 30-days’ notice.
UK banks and investment managers without existing EU operations, or those who failed to act quickly enough to establish one, found themselves writing to their clients in the EU, to advise they would be closing the person’s account or could no longer manage their investments.
When it came to UK financial advisers, the EU-based entity route was generally not feasible, as their size meant it was not an economically viable route to take.
There remained two realistic options, which often might be combined – ‘reverse solicitation’ and only advising clients when they were present in the UK.
‘Reverse solicitation’, permitted under Mifid II, can vary greatly between member states. In general terms, this is where a service is provided at the exclusive initiative of the EU resident client, and it is only that category of products and services requested which is provided, and the adviser does not solicit, promote or advertise any new products or services in any way.
In 2021, the European Securities and Markets Authority (Esma) was forced to issue a public statement, stating they were seeing “some questionable practices” around reverse solicitation, which could result in the client losing protections granted under the relevant EU rules, which might include access to any investor compensation schemes.
Individual member states also flexed their regulatory muscle, with France’s Prudential Supervisory and Resolution Authority for example writing to remind UK financial institutions that from 1 January 2021 they needed to provide their customers with personalised information on how their services would continue – or cease – to be provided in France.
From a financial planning perspective, the UK FCA does allow advisers to continue to deal with expat clients, providing this only occurs when they are present in the UK.
But neither of these options allows the financial adviser the freedom to devise and recommend solutions from the breadth of offerings available across their platform, nor often at a point in time when they may be urgently needed.
More importantly, a UK adviser is unlikely to be able to fully consider the particular client circumstances now present – the fact the person is resident in another tax jurisdiction with rules which may make UK solutions at their best ineffective, and at their worst possibly generating a larger tax bill, as well as not being compliant with local regulation.
In some ways, reverse solicitation and the FCA’s position enables UK advisers to refrain from pointing out these deficiencies when they are advised a client has left the UK, but even pre-existing investments and financial products need to be re-examined to account for a significant change in circumstances.
Even what might be considered a simple investment like an Isa has no tax efficiency in the EU, and any future investment is not allowed while the owner lives overseas. Similarly, it is very important for retirees to understand their pension options, including that their 25% tax-free lump sum may no longer be tax free if taken after they have moved to an EU member state.
Any UK national living in the EU who has a UK financial adviser can and should ask if they are authorised to act for them. If the answer is yes, then be prepared to explain on what basis you believe you are qualified to do so.
This article was written for International Adviser by Jason Porter, director at Blevins Franks.