Advising non-UK clients

Despite the fact that the UK ceased to be a member of the EU/EEA almost a year ago, we are still asked for advice around how a UK firm can take on a new non-UK client or continue to deal with such clients that the firm had pre-BREXIT. We have written before about the general principles around advising non-UK clients – see here.

Our view on those general principles has not changed. A firm wishing to advise a non-UK client needs to ask two simple questions:

  • Can I advise?
  • Should I advise?

The answer to the first question is usually YES – but only if the firm satisfies certain conditions, e.g. becoming regulated in the country of residence of the client where necessary. The answer to the second question is usually NO – few advisers or firms are likely to have adequate knowledge and competence in the legal and taxation implications in a series of non-UK jurisdictions and, unless there is a serious intention to advise a sufficient number of clients in another jurisdiction, the cost of gaining regulated status and adequate technical knowledge is unlikely to be commercially sensible.

Some firms have placed reliance on the fact that the PERG rules indicate that “advice is regulated from where it is given not from where it is received.”

But this is not the full picture. PERG does indeed state that the requirement to be authorised under the Act only applies in relation to regulated activities which are carried on ‘in the United Kingdom’.

However, PERG goes on to note that “… when there is a cross-border element, for example because a customer is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may need careful consideration”

What does this mean in practice? Well, it depends upon the location of the client when regulated activity takes place and the regulations that might apply in that location. We can look to the FCA’s guidance on passporting to the EU/EEA that applied pre-BREXIT for a clue as to how to identify whether cross border activity is in play or not. This guidance stated:

“Do your clients always visit your UK offices to conduct business?

In this scenario, even though your clients live abroad for some of the year, you only conduct business with them on their return visits to the UK. In this case, we would not generally expect this to be cross-border services, although you may wish to check that the regulator where your client lives thinks the same.”

So even where the regulated activity is conducted purely in the UK, and this would not usually have been considered cross border for the purposes of passporting, the warning was that the ‘other’ regulator might take a different view and it is the responsibility of the UK firm to satisfy themselves in relation to that aspect, namely what does the relevant non-UK regulator have to say on the matter.

The guidance went on to state:

“Are you actively contacting your clients while they are in another EEA State? For example, do you provide advice to them by letter, email, or telephone or send them marketing communications?

If the answer to any of these questions is ‘yes’ then your firm may well be providing cross-border services. As well as considering whether you are providing investment advice, you may wish to consider whether you are providing the service of reception and transmission of orders (see chapter 13.3 of our Perimeter Guidance Q13 and 14).

Do your firm’s advisers travel out to visit clients in another EEA State?

If yes, then your firm may well be providing cross-border services.”

So, anything other than advising the non-UK resident of an EU/EEA country while the client was on UK soil, would usually have been considered cross border activity and, pre-BREXIT, would have required the UK firm to have a relevant passport that would be recognised by the resident jurisdiction OR to be formally authorised/regulated by the relevant non-UK regulator. Post-PREXIT, passporting is no longer available to UK firms, so the only mechanism by which that non-UK EU/EEA resident client can now be advised is by obtaining relevant regulated status in the applicable jurisdiction – unless reverse solicitation is applicable, see below.

Reverse Solicitation

A few firms have become aware of the concept of reverse solicitation since BREXIT and have seen this as an easy way to overcome the problems arising from the cessation of passporting for UK firms.

“… some EU counties have reverse solicitation rules which means that you cannot proactively market for these clients but if they ‘find you’ then you may provide any services they request for which you are appropriately licensed to provide …”

This simplified description of reverse solicitation is fine as far as it goes but will benefit from a little expansion.

The concept of ‘reverse solicitation’ is a peculiarly EU invention and was primarily created to permit fund managers located in one EU state to market their funds in another EU state. It has to be bent a fair bit to apply to regulated activity with an individual client.

Reverse Solicitation originates from Article 42 of MiFID II. Article 42 (provision of services at the exclusive initiative of the client) which states:

“Member States shall ensure that where a retail client or professional client within the meaning of Section II of Annex II established or situated in the Union initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the requirement for authorisation under Article 39 shall not apply to the provision of that service or activity by the third country firm to that person including a relationship specifically relating to the provision of that service or activity. An initiative by such clients shall not entitle the third-country firm to market otherwise than through the branch, where one is required in accordance with national law, new categories of investment products or investment services to that client.”

Using reverse solicitation, UK firms can (theoretically) provide investment services to EU/EEA clients following the cessation of passporting where certain conditions are met.

The relevant conditions are that the UK firm:

  • Can evidence that the relevant service was provided at the exclusive initiative of the EU/EEA client.
  • Provides only the “categories” of products and services requested by the EU/EEA client.
  • Does not solicit, promote or advertise, any new products or services (in any way) to the EU/EEA client.

The first of these requires an extremely clear audit trail of correspondence. It is difficult to evidence whether a client genuinely initiated a transaction. For example, a firm relying on reverse solicitation would need a robust audit/paper trail that evidences as a matter of fact that contact and communications in respect of the initiation of any investment services or activity came exclusively from the client without any undue influence, direction or collaboration of the firm. This is usually done using a client-disclosed attestation or affirmation in the contract but firms also need to ensure that the firm’s website and other online presence does not nullify any objective assessment that the client acted on their own and exclusive initiative. For example, if the client found the firm online through its marketing of services and responded to the website’s contact invitation, then reverse solicitation could be in doubt.

The third condition would seem to preclude the provision of any ongoing service, which is where, of course, most firms would see the long term value lies in taking the client on in the first place.

Accordingly, relying on the reverse solicitation exemption to the Article 39 requirement to be authorised in the relevant jurisdiction is vulnerable to challenge. In particular, reverse solicitation as a concept, although recognised under EU law, is not harmonised and not recognised in some national law, for example in Italy. Specifically, the boundaries of permitted and prohibited marketing vary materially across member states, such that whether a given firm could rely on reverse solicitation would likely be a matter of local law. For example, some activities that are permitted under reverse solicitation in France and Germany, will likely trigger licensing requirements in Spain. And we believe that the Netherlands authorities, for example, have declared that they will not permit reverse solicitation to be used to provide regulated services to any of their citizens as retail clients.

ATEB’s house view is that, for all the reasons indicated above, reverse solicitation is not a straightforward way out of the post passporting dilemma. If firms are determined to deal with EU/EEA clients, the only reliable answer is for the firm to liaise with the relevant regulator in the EU/EEA and identify the regulatory requirements.

Further confirmation of  why this view is probably the appropriate position to take, is provided in the following statement by the FCA on the post BREXIT position:

“You should have been clear whether the services you provide to EEA-based customers are regulated by EU law (e.g. MiFID II, the Insurance Distribution Directive (IDD) or Solvency II) and local law, and how your ability to continue to service those customers might change now the transition period has ended.

For example, before deciding to rely on reverse solicitation to service existing EEA-based customers without local authorisation (e.g. under a member state’s implementation of Article 42 of MiFID), you should have sought legal advice on your plans. This should have ensured that you understand the national law in each member state where you do business, and that this course of action is permitted in the relevant country.”

Other jurisdictions

Now that the UK is no longer a member of the EU/EEA, the UK is considered to be a third country with no special treatment as far as the EU is concerned and so the need to satisfy any local jurisdiction requirements and be regulated in the relevant country is the position as it stands. This now mirrors the situation in relation to non-UK clients that are resident in jurisdictions other than a EU/EEA state. The FCA probably has little to say on the matter beyond recommending that you check any requirements of the relevant regulator.

Finally, it is worth saying that particular care needs to be taken where a US resident is involved.

In summary

There is no one size fits all solution. It depends on the potential client’s country of residence and the nature of the regulated activity.

But the general principle is that the UK firm seeking to advise a non-UK client, should first decide whether they have the desire and competence to do so and, if so, liaise with the local regulator and/or work with a local adviser.

 

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Advising non-UK clients has always carried risks and requirements. It is for each firm to decide whether the risks and costs involved are warranted. For a firm with the opportunity to advise a significant number of clients in a non-UK jurisdiction, those risks and costs might be worth taking. Otherwise, the odd non-UK client that pops up from time to time is probably best avoided for most firms unless they can work with a local adviser to provide accurate and compliant services.

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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