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Advisers with overseas clients endure passporting confusion

Political infighting forces some to consider dropping permissions business despite deal hopes

Just as the senior members of the government signed off a draft Brexit agreement last week, the resignation of Brexit secretary Dominic Raab fuelled further confusion about what deal the UK will really end up with.

This confusion is filtering down to financial advisers, according to compliance experts, who say that some firms are starting to give up business or permissions instead of waiting for new regulatory standards that might be harder to navigate.

This is particularly the case with so-called “passporting”, where firms apply for authorisation to conduct services in other EU member states or across borders.

Earlier this month, the FCA went into detail on its plans for a no-deal Brexit, saying that it was working with the government and Bank of England to ensure a smooth transition for EU firms and funds currently passporting into the UK.

The regulator said that its contingency plans for a hard Brexit would mean that “UK and overseas investors will continue to be able to access global market infrastructures established in the UK after Brexit”.

A temporary permissions regime is being consulted on which will allow EU firms and investment funds to carry on regulated business in the UK for a limited period after Brexit, pending full authorisation.

However, efforts to ensure the right to passport services from the UK into other jurisdictions seem not to have been as prevalent.

TCC managing director for advisory services Andy Sutherland says: “What you see with Brexit is there are some powers the FCA is going to have to make life easier for firms passporting into the UK, but there’s been nothing reciprocated from Europe. One place where firms are really being let down is those relying on a passport to go into Europe.

“Any firms reliant on a passport are in a shaky place… In the event of a no-deal the shutters come down on that in March.”

He notes a number of firms which have international clients, but where the advice is effectively given in the UK, will still need to use a passport.

In the wake of Mifid II, he saw some larger firms who dealt with a lot of international business set themselves up as Article 3 exempt – effectively removing themselves from parts of the Mifid II regime due to the restrictions. Sutherland says: “On the back of Brexit, those that didn’t might start thinking about [dropping permissions]. It doesn’t feel like a good outcome; an expat happily receiving advice would have to come back over here.”

B-Compliant director Vicky Pearce says she has seen a handful of advice firms opt to drop overseas clients rather than go through the process of arranging passporting rights into different countries.

Pearce also notes that some smaller advisers, who do not have a centralised investment proposition and products across multiple platforms, are finding it tough to meet other EU regulatory requirements, like Mifid II’s rules for ex-ante and
ex-post charges disclosure.

However, others have seen the draft withdrawal agreement as a huge step forward for investor clarity over rules when dealing with the EU.

For instance, Investment Association chief executive Chris Cummings says: “This is a significant breakthrough in the Brexit negotiations.

“European savers and the industries that serve them can take some comfort from the announcements, which mitigate some of the worst feared cliff edge effects of a no-deal Brexit and provide a clearer road ahead. Although there are still important political hurdles to clear in the coming weeks, and firms will continue to keep their contingency plans under review, the details published will give firms more clarity on the shape of the future relationship between the EU and the UK.”

He adds: “There is still much to be negotiated but the announcements take us closer to a new relationship with the EU.

“All efforts must now be focused on securing a final agreement that protects the interests of European savers and investors, and which allows the asset management industry to flourish.”

Willis Owen head of personal investing Adrian Lowcock says overseas business may well pick up when there is more certainty over the shape of the deal.

He says: “The fact of the matter is that Brexit is not a simple case of ‘deal or
no-deal’ and there are plenty of opportunities for more twists and turns in this story. International investors are unlikely to dip their toes back in the water until they are much more confident they understand the final terms of any agreement and that it will be supported by both the remaining 27 EU states and the British parliament.”

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