We often get a question that goes something like this …
“I have (stumbled across) a client who has
<insert large amount of money> to invest.
He lives in <insert name of any country except the UK>,
can I advise him/her?”
This question comes up with the regularity of a Swiss watch (or insert the name of any other country).
Our response is always the same and rests on consideration of two aspects:
- Can the firm advise?
- Should the firm advise?
Can the firm advise?
This is largely a question of regulation. Not UK regulation but regulation in the relevant country. We have to divide countries into two blocks, those in the EU/EEA and those that are not.
It is fairly well known that, while the UK was in the EU, advisers could apply for a passport to advise a client resident in another EU/EEA country.
Passporting allows firms authorised in an EEA state to conduct business within other EEA states based on their ‘home’ member state authorisation.
The EU/EEA countries are Austria, Belgium, Bulgaria, Croatia, Cyprus (Republic of), Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.
However, the UK has now left the EU and is in a ‘transition period’ which is due to end in December 2020, following which the UK will be fully outside the EU with or without an agreed deal on the nature of the future relationship . It is possible that this end date could be extended but the Government has set its face very publicly against any extension (as at 20 May 2020).
Passporting remains valid during the transition period. However, firms should not expect current passporting arrangements to continue after the transition period ends. This means that firms need to start considering a range of possible scenarios for the end of the transition period, including that activities currently performed under passporting might not be covered by any future arrangements agreed between the UK and the EU.
At the time of writing, despite the FCA creating a bridging process for EU firms to continue to operate in the UK, the EU has not reciprocated in a similar way for UK firms operating, or wishing to operate, cross border in the EU/EEA. Short of any future agreements, the current advice to UK firms wishing to operate cross border is to check with the relevant financial regulator in the EU/EEA jurisdiction in question.
Details of all regulators in the EU/EEA can be found here.
Some firms have clients resident in an EU/EEA state, but for whom ALL advice and regulated activity takes place exclusively during the client’s regular visits to the UK. That is fine because such advice would not usually be considered ‘cross border activity’ for which a passport would be required. However, it is much more difficult to be certain whether a passport is required when there is any degree of contact while the client is not in the UK, for example by email or telephone. This could well be considered cross border activity and only permitted if the firm has passporting rights.
It is all very well for firms to have relied on the ‘only when the client is in the UK’ scenario in ‘normal’ times. But we are not in normal times. We are aware of firms without passporting having been caught short because a client in another EU country has an urgent need for advice or perhaps to encash some funds but cannot travel to the UK for the foreseeable future because of the widespread COVID-19 travel restrictions.
So what about non-EU/EEA countries? Well, to start with, passporting does not apply – that is purely an EU invention. It is not uncommon, or even surprising, that UK firms often come across clients who are resident in other parts of the world, particularly in English speaking countries – Australia, New Zealand, Canada, South Africa, the United States. Many Brits have taken up permanent residence in those countries but have a deferred pension benefit from their time in the UK that they wish to transfer. Where the value of the safeguarded benefits is in excess of £30,000, those individuals can only transfer their pension fund if they take mandatory financial advice in the UK. But financial regulation is not exclusive to the UK and EU. Many countries have a financial regulator, including those countries listed above. Firms who want to engage with clients resident in non-UK/EU/EEA countries can be pretty confident that the FCA is unlikely to have any interest in the matter but equally confident that the relevant local regulator will have a great interest. Firms need to identify what the regulations permit and do not permit in that jurisdiction. Carrying on regardless is not an option. So firms need to consider whether the lure of the large investment really justifies the money, time and effort required to operate compliantly – not just initially but on an ongoing basis.
Should the firm advise?
Regardless of the regulatory position, this question is, in many respects, of more fundamental importance. And the answer is, in many cases, no. Or at least it should be.
This aspect is about competence to advise. To be competent to advise UK clients, advisers have to possess a certain familiarity with investments, pensions, state benefits, UK taxation and applicable regulations, for example, FCA or Data Protection requirements. Clients resident in the EU or elsewhere in the world all have one thing in common – they are subject to different taxation and legal regimes to those that apply in the UK.
UK advisers’ competence and knowledge is gained and maintained at great effort through qualifications and CPD. So it is difficult to imagine that similar competence could exist in relation to another country’s tax and laws without a similar level of time and effort being put in. So our recommendation is usually along the lines that UK advisers should think long and hard about whether they genuinely have sufficient understanding of the taxation and legal implications of any advice they give to a non-UK resident.
Then there are the practicalities.
- If the client is taken on, it is not a one time deal. There are all those future annual reviews to consider. There might be some profit up front but is that sustainable in the longer term?
- Does the firm’s PI cover advice to non-UK residents?
- Is the client informed adequately about any restrictions in protection if things go wrong?
- Is the client missing out on advantageous investment options in their country of residence because the adviser is unaware of them while, at the same time, being ineligible for many investments in the UK, for example ISAs?
- Does a disclaimer about only advising on UK tax and legal implications really cut it in the event of a future complaint?
- How might the delay in obtaining any required wet signatures affect the situation?
- Can the client even invest here? There are few opportunities for US citizens or US residents to invest in non-US investments. That is partly because of US restrictions and different tax treatment on investments that a UK adviser would normally consider straightforward and simple and partly because UK investment houses are often unwilling to accept investments from a US citizen of resident in order to avoid having to do FATCA reporting. The US Foreign Account Tax Compliance Act (FATCA), generally requires that non-US financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their US account holders or be subject to withholding on withholdable payments. FATCA applies to US residents and also to US citizens and green card holders residing in other countries.