Now that the UK has left the EU with a last-minute deal, Liz Booth looks at what the future may hold for the financial advice profession
After the years of arguments, debate, negotiations and breakdowns, the Brexit trade deal with the European Union (EU) finally crossed the line on Christmas Eve and the UK formally left the EU on 31 December.
But – and there is a big but – not everything was settled. Financial services is one of the areas where the deal did not provide much clarity.
Guy Soussan, a partner at law firm Steptoe & Johnson, explains: “In relation to trade in services, including financial services, the EU-UK Trade and Cooperation Agreement largely reproduces World Trade Organization rules and does not seek any ambitious level of access. The agreement does not even include a standalone chapter on financial services.”
He adds: “Financial services are generally covered in the same way as in other EU free-trade agreements with third countries. As a result, the UK financial services providers no longer enjoy passporting rights to access the EU market (and vice versa).
“Furthermore, the agreement does not include any elements pertaining to equivalence frameworks for financial services. They will remain unilateral decisions from the European Commission.”
However, this may change later this year. Mr Soussan points out that both parties have agreed to adopt, by March 2021, a memorandum of understanding establishing a framework for regulatory cooperation on financial services.
However, in a note of caution, lawyers at CMS warn: “The EU has largely carved out financial services from the most-favoured nation provisions for investment liberalisation and cross-border trade in services, which means that in theory the EU is free to offer better terms on financial services to other jurisdictions in the future without offering the same to the UK.”
Delving into the detail
So, with that premise, what has and has not changed? There are plenty of myths swirling about, according to Pollyanna Deane and Chris Finney, both partners at Fox Williams.
The first of those is that the agreement has nothing to say about financial services. But they found that the agreement actually mentions “financial services” 90 times. “On some occasions, it is only to say that a ‘provision does not apply to financial services’, but that is hardly enough to justify this myth,” they argue.
The pair go on to explain there is a “prudential carve-out”, which allows the UK and the EU to adopt and maintain their own prudential measures: a) for the protection of depositors, investors and policyholders; and b) to ensure the integrity and stability of their own financial system.
Both the UK and the EU are obliged:
- To use its “best endeavours” to ensure that internationally agreed standards are implemented and applied.
- To allow banks, insurers, investment firms and payments businesses from the other territory, but established in its territory.
- To supply a new service in its territory, if it would allow its own banks, insurers, investment firms and payments businesses to supply that service in the same situation; however, this does not apply if new laws, or existing law changes, are required, and it does not apply to branches.
The agreement confirms the existing EU position: that subsidiaries in the EU are entitled to provide their services, and to establish branches, across the whole of the EU, but third-country branches in the EU are not. It also lists the individual member state laws that apply to third-country providers.
Another myth that the Fox Williams pair want to bust is: “Although I have EU customers, my business is run entirely in and from the UK. So, I’m not using the financial services passport and don’t have to worry about losing it.”
Wrong, they say: “The financial services passport is in two parts. If your business is run entirely in and from the UK, you might not be using the UK part of your passport. However, if you have customers in the EU, you are probably using the EU part.”
If you are, you have not been able to lawfully serve those customers since 11pm on 31 December 2020, unless: a) the law in the country where your customers are based allows you to do so; and b) you have done everything you need to do under those local laws, to maintain your existing rights.
The PFS does have an agreement with other awarding bodies across Europe for advisers who still want to practise in the EU. Through the PFS’s membership of the European Financial Planning Association (EFPA), PFS members automatically have an EPFA certificate that is recognised by qualification bodies in 11 countries in the EU.
Finally, Ms Deane and Mr Finney have a stark warning for any financial planner thinking: “It is all so last minute that regulatory action is unlikely. They’ll give me time to adjust.”
Wrong again, they say: “Nothing could be further from the truth. From the perspective of the regulators, the direction of travel has been clear for a long time. UK firms with customers in the EU, and EU firms with customers in the UK, would therefore have to make other plans (and have had plenty of time to do so).
“If you are still relying on the passports and you carry on your business after 11pm on 31 December 2020 as if the passport still existed, that will be unlawful and regulatory action may follow.
“Even if the regulators do not act, in some countries the business you do and the contracts you enter into may be void, voidable or unenforceable – and your customers could sue. If you haven’t therefore adjusted your business yet, time is of the essence.”
While much may seem to have little to do with the day job of serving your clients, financial planners must consider where those customers are based – after all, plenty of UK citizens still live in Europe but want the financial advice of a planner based in the UK – and also consider the location and rules around the companies providing financial products.
Liz Booth is contributing editor of PFP