PII will not cover UK advisers with EU-based clients

The end of passporting between the UK and the European Economic Area came into effect in January this year when the Brexit transition period ended.

This means unless advisers take action to understand the various rules and regulations of different jurisdictions, they will not be able to serve their clients in Europe.

Blevins Franks has warned that PII will not cover business transacted in the Eurozone, presenting potential problems for the 5,500 UK-authorised firms who, in 2016, were passporting their authorisations into Europe.

Jason Porter, director at Blevins Franks, said: "Some EU members states are already starting to flex their regulatory muscle.

"The financial regulator in France, the ACPR, has written to remind UK financial institutions they need to provide their customers with personalised information on how their service will continue – or cease – to be provided in France.

If they have not taken one of the various routes to obtain authorisation in the EU member state where any clients are located, this is likely to result in a denial of PII coverage in respect of those clients. Jason Porter

"This puts UK firms in a difficult position in terms of PII. While the FCA requires that all UK regulated firms maintain PII, the demise of passporting means they are no longer authorised to provide advice in the EU."

Porter stated: "If they have not taken one of the various routes to obtain authorisation in the EU member state where any clients are located, this is likely to result in a denial of PII coverage in respect of those clients."

He warned that even if equivalence negotiations deliver an agreement sooner rather than later, one of the UK’s main aims in leaving the EU is the ability to diverge from the EU’s financial rulebook.

Therefore Porter added: "UK financial advisers who have not already obtained authorisation to advise should be immediately writing to their clients in the EU to confirm they can no longer act for them."

Keith Richards, chief executive of the Personal Finance Society, said: "It is true to say that under the terms of our agreement with the European Union on our exit, the process known as passporting has ended for financial institutions in the UK.

“However, it is worth mentioning that because of onerous prudential requirements under Mifid, most advice firms have never had the right to passport into other EU markets for the full range of investment products, and so the impact won’t be as sharp as seen in other fields."

But he added: “PII remains a major concern for the financial advice market and beyond. While most PII agreements do cover working abroad, they are subject to geographical and jurisdictional limitations, which will be set out in a policy schedule.

"In some cases it may need to explicitly state what countries/jurisdictions you can operate in and therefore its always worth checking with your insurer.

"With the difficulties seen within the advice market around obtaining and renewing PII cover, it would not be outrageous to perceive this to be an issue that will impact advisers attempting to provide regulated advice outside of the UK."

He said the PFS was continuing to work with its members and engage with HM Treasury and the regulator to bring forward a solution to the issues within the PII market.

The rules

UK firms must either stop operating in the countries they passported into previously and give up their clients located there or obtain separate authorisation in each of these states via a subsidiary or branch, or passport in from another EU member state.

While many UK financial advisers have written to their clients in the EU requesting they appoint new advisers, others are either unaware these clients actually left the UK in the first place, Porter warned, and the problem may not just be restricted to smaller IFA businesses.

The mess Brexit has created for businesses has not been mentioned once in the Budget, but it should have been on top of the agenda.Alex Altmann

According to Porter: "UK networks may not realise the businesses they are supporting are providing compliance and advice services to clients living in the EU, if the businesses themselves have not kept up to date with their clients’ movements."

Problems foreseen

Kate Troup, partner for financial services regulation and funds at law firm Charles Russell Speechlys, outlined the rules now that passporting into the EU is no longer possible.

She wrote: "This affects firms and funds based in the UK that conduct certain types of business in the EEA, and firms and funds based in the EEA that carry out certain types of business in the UK.

"If firms intend to do business in the EEA, they should ensure that they follow local laws and local regulatory expectations, eg seeking authorisation with a local authority where appropriate."

According to Alex Altmann, partner at accountancy firm Blick Rothenberg and head of the company's Brexit advisory group, chancellor Rishi Sunak had a perfect opportunity to address "urgent issues businesses face on trade with the EU", but failed to do so in the most recent Budget.

Brexit provides an opportunity to reshape our current regulatory environment to ensure that it better reflects the needs of UK consumers and firms.Tim Fassam

Altmann said: "The mess Brexit has created for businesses has not been mentioned once in the Budget, but it should have been on top of the agenda.

"We are in the midst of a bitter divorce from the EU, which has left large parts of our economy struggling with more red tape, higher compliance costs and less opportunities to trade."

His comments came as adviser trade body Pimfa called on the government to take the opportunity offered by the completion of Brexit to reshape the regulatory environment for financial services in the UK (see box-out).

HM Treasury launched its Financial Services Future Regulation Framework Review in October last year. While it is closed to submissions, the Treasury has said it is reviewing all the submissions made by the industry. An announcement had been expected this quarter.

Revealing its submission to the review, Pimfa said there was a "clear opportunity to create a regulatory architecture that improves supervision and enforcement and leads to better outcomes for consumers".

Tim Fassam, director of government relations and policy at Pimfa, said: “Pimfa and its members understand the UK needs a strong regulatory system to protect its status as a leading centre for wealth management and financial advice.

"Brexit provides an opportunity to reshape our current regulatory environment to ensure that it better reflects the needs of UK consumers and firms.

"We want to see a regulator that is effective and uses consistent mechanisms for supervising regulated markets and firms, while also ensuring that bad actors are removed from the industry.

“Changing the regulator’s focus to good outcomes would ensure we avoid the assumption that a customer who has not taken action is protected."

simoney.kyriakou@ft.com