I am writing to update you with our position with regard to non-UK Resident investors as we approach the end of the transition period for the UK to leave the European Union, on 31 December 2020.
The FCA have issued a number of statements around how firms should be working toward this date and considering the best interests of their EEA-based customers. This guidance is directing our decisions and actions set out within this message and throughout this email we have included, in blue text within quotation marks, excerpts directly from the FCA website.
"As part of your preparations for the end of the transition period, you should be clear whether the services you provide to EEA-based customers are regulated by EU law (eg MiFID II, the Insurance Distribution Directive (IDD) or Solvency II) and local law, and how your ability to service those customers might change after the transition period."
Previously firms were able to 'passport' their services to other EEA Member State residents, however the ability to operate on that basis ends on 31 December 2020. Our understanding is that where individual UK regulated firms wish to continue to offer regulated activities and services to EEA-based customers, following the end of the transition period, they will need to ensure that they have satisfied themselves that they are either able to rely on a legal exemption under the law of each individual state involved or that you obtain individual authorisation or licence, as appropriate, within that individual Member State (eg. if you wish to continue to provide services to individuals resident in Spain [even if these individuals are UK nationals], you would need to ensure that you are fully up-to-speed with current Spanish legislation and regulations as to whether the basis on which you plan to continue to offer services is permitted within that area).
We are aware that it was possible, prior to Brexit, to rely on what is known as the 'reverse solicitation' exemption in order to provide services to certain customers who had, perhaps, approached your UK based and regulated business, or who had previously been resident in the UK, but then relocated elsewhere within the EU, and who asked you to continue to provide their existing services following their move. Relying on this exemption would not have allowed you to 'market' your services within any other EU states, but it did at least usually allow you to continue to offer services to long standing customers. Please note though that we believe the position to be slightly more 'strict' following 31 December 2020:
".....if you intend to rely on reverse solicitation to service existing EEA-based customers without local authorisation (eg under a Member State’s implementation of Article 42 of MiFID), we strongly encourage you to seek legal advice on your plans and understand the national law in each Member State in which you conduct business, to ensure this is permitted in the relevant country and how this impacts your planning. You should also bear in mind that national regimes may change over time and this could affect your business model in the future."
The FCA are making it clear that the onus is very much on you to ensure that you are only offering services on the 'reverse solicitation' basis where you have taken proper legal advice and have a good understanding of the individual country's current regulatory system, as well as the ability to continuously monitor this going forward to ensure that you don't stumble into providing services without proper or legal standing, in the future.
We at Hubwise are a UK Platform Service Provider, providing platform services and platform solutions to the UK Adviser and Discretionary Management market. We know that some of our client partners do have a handful of non-UK Resident customers and if you are one of these partners, we will be sending you a current list of your accounts that could fall into this group via Freshdesk. We realise that it may be that customer data has not been set up correctly and that it is unclear from some accounts whether the investor is UK resident or not, so these accounts will also be included within this data, and we would ask please that you review all data that you receive from us in this regard, carefully and diligently, to ensure that none of us are accidentally slipping into offering services where we are not permitted.
If you do have a specific number of customers that you wish to continue to serve - and you have taken the appropriate steps to obtain legal advice and understand the position for the individual country involved - then we would ask that you update us with your position and the advice you have received, so that we can review our own position and decide whether or not we feel we can continue to provide a platform service to the investor(s) involved. Our services are, as you know, regulated activities, and we are - for most of our client partner firms - providing custody (Safeguarding and Administration) directly to your customers, so it is just as important that we are able to justify our decision and position where we continue to offer these services to non-UK Resident customers.
"If you have decided to stop servicing customers in the EEA after the transition period, we expect you to treat your customers fairly when winding down or transferring business. This includes communicating your decision to customers early, considering what would be a fair timeframe for winding down or transferring business and supporting customers while they are in the process of finding alternative providers."
From what we can establish, there is always the possibility that things might change should the overall position with the UK leaving the EU change in some way; however as things stand the passporting rights that were available to FCA regulated firms previously will come to an end on 31 December 2020 and we should all now be working collaboratively to ensure that we are comfortable with our position as we move into 2021, following the end of the transition period, or that we are treating our customers as well as we possibly can as we wind down our business with them or transfer them to an alternative service provider. It is of course possible that when you approach any non-UK Resident customers that you have, you will find that - given their new classification as "third country nationals" following Brexit (ie anyone not a national of an EU Member State), they will possibly be considering obtaining full tax residency if they intend to stay where they are. This will then prevent them from having to comply with more restrictive visiting rules or higher tax rates than those who are fully resident where they are living.
I think it goes without saying that we will not be allowing you to add new non-UK Resident investors to the platform going forward and you may find some changes to the account opening process to restrict this in the coming weeks - you will be notified about these in the usual way. Of course, should you have obtained specific legal advice or guidance and wish to liaise with us about how this affects your business and whether we can consider 'mirroring' the position - again for individual cases - then please do speak to us directly.
Just for your information, it's quite possible we will all see some more far-reaching changes as we move into 2021 - for example, as things stand at the moment, a UK fund which is usually based in London, will normally have an ISIN which starts with GB; following Brexit, tax residents within EU states who hold any such funds will be required to change their fund to an EU equivalent. This will be fine, of course, for fund managers who have EU operations, but of course those who don't and who are based solely in the UK may end up having to advise their non-UK investors to cash in their holdings and to reinvest elsewhere....
If you feel that we have misunderstood any of the current guidance around the end of the transition period, or would like to engage with us in conversation specifically around your customers, please do contact Lynn Johnston, Head of Client Relations, in the first instance (lynn.johnston@hubwise.co.uk)
Many thanks,Helen
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