Financial protection post-BREXIT

In December 2020, we reminded readers about the expected changes to FSCS protection after the EU withdrawal period ended on 31 December. You can read that article here.

The transition did end when expected and with last minute agreement on a trade deal, which was not so certain.

However, the agreement did not cover financial services and so the situation regarding financial protection has changed and firms need to consider the implications.

The headline implication is that firms must accurately assess whether clients are covered by the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service now the transition period has ended. The FCA has published some updated guidance, which is summarised below.

What’s the same … and what’s not?

The circumstances in which investors of UK UCITS and UK non-UCITS retail schemes may be able to claim on the FSCS or refer a complaint to the ombudsman service have not substantively changed as a result of Brexit.

Broadly speaking, complaints or claims in relation to UK firms carrying on regulated activities from the UK relating to distribution/intermediation of retail funds, for example advising on investments, continue to be covered by the FSCS and the ombudsman service, provided the investor is eligible under the terms of those schemes.

Investors in funds with a UK management company and managed from the UK, are still covered by the FSCS and the ombudsman service for complaints or claims relating to the management company’s management of the fund, provided the investor is eligible under the terms of those schemes.

However, investors in EEA UCITS that are managed by an EEA management company and marketed into the UK are unlikely to be able to claim on the FSCS or refer a complaint to the ombudsman service in relation to the management of the fund by the EEA management company. This was the same before the end of the transition period.

It is possible that the home state of the EEA fund and/or its management company provides an alternative dispute resolution and/or an investor compensation scheme for UCITS investors. The scope of such schemes might be limited to investors in the EEA, meaning that UK investors in EEA funds may have lost access to redress and compensation in the relevant EEA state from 1 January 2021. This will depend on the legislation and rules in the EEA state in question. Firms should assess this and consider the implications for their interactions with their UK-based clients.

Investors in EEA-domiciled retail funds with a UK alternative investment fund manager (UK AIFM) are not generally covered by the FSCS for claims relating to the UK AIFM’s management of the fund. An investor in such an EEA-domiciled retail fund may be able to refer a complaint to the ombudsman service about the AIFM’s management of the fund if the fund was managed from an establishment in the UK. This position is the same as before the end of the transition period.

More information on FSCS coverage can be found here.

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

The FCA has stated, “Where you provide UK clients with information about relevant redress or compensation arrangements in the UK or in EU member states, the information must be fair, clear and not misleading. It should also be kept up-to-date and accurate. You must also make sure that any reference in advertising to an investor compensation scheme is limited to a factual reference to the scheme.” Firms should consider whether to amend wording in financial promotions and terms of business to reflect the possibility that FSCS/FOS protection may not be available. And any suitability report recommending an investment in a non-UK managed fund should include an explicit statement of the protection situation.

Action Required By You

For the most part, financial protection has not changed. But it is vital for firms to identify where recommendations are made that include funds where the ‘standard’ protection provided by the UK FOS and FSCS does not apply. This is an additional factor that firms will need to consider as part of research and due diligence. And clients will need to be clearly informed in this regard.
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With a wealth of consultancy experience, we like to think that Huw has aged well, like a fine wine. Considered and practical in his approach, he will help you to demystify the complex world of regulation and provide a sympathetic shoulder to lean on.

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