FSCS protection post BREXIT transition

You may have seen some coverage in the trade press over the past year or so about changes to FSCS protection as a result of BREXIT. The UK left the EU on 31 January 2020 but nothing much changed as we immediately went into a transition period to enable a future trade agreement to be negotiated. The outcome of those negotiations is still not known at time of writing despite there being only a matter of days before the transition period ends on 31 December 2020. However, it is worth remembering that, even if a trade deal is agreed, it will not cover services and so will make little difference to the regulatory situation after 1 January 2021 in the UK which is basically that all regulation is created under the auspices of the UK not the EU. The FCA has done a lot of work to ‘onshore’ financial regulation and, for most adviser firms and their clients, life will continue as before.

However, there are some changes around consumer protection that firms need to be aware of and, in turn, ensure clients are aware of.

FSCS protection for UK-based customers of UK authorised firms will not change as a result of the UK leaving the European Union (EU). In most cases existing FSCS protection will continue, including after the Brexit transition period ends at 11pm GMT on 31 December 2020.

However, FSCS protection may change if a customer and/or their firm is based in the European Economic Area (EEA). The EEA includes EU countries plus Iceland, Liechtenstein and Norway.

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) set the rules and scope of FSCS protection. The FSCS has published the answers to a few anticipated questions on its website based on those rules. It is worth looking at these as there are many subtly different possible scenarios.

There are around 9,000 EU based funds that will continue to be able to be sold to UK investors even though the FCA will have no regulatory oversight of the products and FSCS protection will probably not be available.

From January, in general, UK investors will have to apply to foreign compensation authorities if a product collapses, including for funds run by UK asset managers but domiciled in a EEA jurisdiction.

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 situation is still unclear in some respects and we are seeking clarification from the FSCS. Meantime, it is apparent that firms that use non-UK based funds and products will need to consider the consumer protection situation and inform clients appropriately.

As to which funds, products and providers are affected, there is no easy answer. The FSCS website simply suggests that firms and consumers need to check with the relevant provider to identify whether FSCS protection applies and, if not, whether and from whom protection is available. It’s not easy to predict a future “Woodford” but this may be an opportunity to revisit due diligence.

Action Required By You

  • Firms should identify the client/fund population affected and the extent of the issue;
  • Seek proactive clarification from the individual fund and providers if necessary;
  • Consider if existing recommendations remain suitable in light of the changes;
  • Investment committee /research process should include reference to this as a factor;
  • Clients should be notified of any changes and the implications; this could be a suitability report and/or separately in writing to existing clients who have previously received a recommendation;
  • Firms may also wish to add a caveat to their Terms of Business/Disclosure documents;
  • Check PI coverage to ensure that there are no exclusions currently (and also be vigilant at renewal);
  • Contact ATEB for further guidance if required.
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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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