A combination of recent events, plus extensions to EU financial directives and the onset of the RDR have highlighted the progressively greater importance of European aspects for UK IFAs. Last summer, the issue of passporting came to the fore following a suggestion by Aifa that UK-based IFAs should not rule out the option of passporting their businesses back into the UK from another EU state. Fresh developments have further highlighted the possibilities of this approach.
Temple Bar IFA managing director Simon Mansell recently received confir-mation from the European Commission that inwardly passporting firms will be able to avoid certain aspects of the RDR. It is our understanding, for example, that if advisers are physically based in the UK but passport in from elsewhere in Eur-ope, they will need to meet UK rules around remuneration but they may not need to comply with the RDR’s rules in rela-tion to qualifications. The FSA has made it clear, however, that it will not allow firms to operate on a cross-border basis in the UK simply so as to avoid meeting the standards here. It is not clear how this could be fully proven, policed or enforced.
The ins and outs of passporting
There are, of course, many matters to consider in this regard, not least of which are regulatory and legislative. Generally speaking, there is a need for an office of an IFA within the “home country” from which passporting can then take place to any other EU “host” country. This passporting can take place under freedom of services or freedom of establish-ment rules. Under FOS, advisers can “trip” into the host country but cannot be permanently based there. This may be an option for IFAs or advisory businessowners who had already seriously considered emigrating to another EU state. It would then allow them to continue servicing existing clients in the UK, for instance, while perhaps also developing new ones in their new location.
Under FOE, the company must open a legal branch in the host country and any adviser would need to be employed and resident there. This approach may or may not require the IFA businessowner to be officially resident in the home country, dependant on local rules and laws. This approach has thus become potentially relevant for advisers who want to remain in the UK but work under what they see as a more sensitive regulatory regime. One can immediately see that a number of major issues need be taken into account if a passporting strategy is being considered, not least of which would be the requirement for significant knowledge and understanding of labour laws and tax systems in the new home country.
Alternatively, there are European networks and firms that provide passporting facilities for individuals and companies to operate in a host country, in this case, the UK, using the regulatory status of the network or firm’s location. A number of member companies of the Federation of European IFAs are already developing this strategy.
IFAs need to decide whether to passport under the insurance mediation directive or the markets in financial instruments directive or both. In simple terms, the former relates to advice involving insurance contracts, including life insurance and investment-related policies, while the latter relates to advice with regards to other investments, which would usually be collective investments such as unit trusts and Oeics.
Potential clients may be more comfortable and feel more protected with a company that is regulated within the UK rather than elsewhere, whether that is really the case or not. Second, it is one thing being able to legally provide advice, it is another to be practically able to submit business. Agencies with a wide range of companies are required and these may be difficult to acquire for non-UK companies. It is possible that an advisory business might only need access to one or two platforms, a couple of Sipp providers and a range of offshore bonds.
A number of aspects relating to mainland Europe are of increasing relevance to UK IFAs. The next few months and years will be interesting for us all.