The EU passporting facility ceased for UK firms at the end of 2020, as you are almost certainly aware.
Whilst the UK acknowledged regulatory equivalence for EU entities, the EU has not confirmed the same in the opposite direction – and there is little if any sign of that happening.
The UK has also ensured continuity of business – through frameworks such as the TPR and FSCR – but the EU has not reciprocated in a similar manner. There are different regimes in various countries across Europe but none of them offer the same, relatively easy, continuation options – and some offer literally nothing at all.
Therefore, at present, for a UK financial advisory company to assist clients in an EU Member State (MS), it will need to meet the local law requirements in the MS in question.
Reverse Solicitation
Whilst some see this as a potential solution for UK advisory firms in certain circumstances, it needs significant care; legal advice is recommended, in my opinion, and any strategy should be viewed on an individual MS basis.
In January 2021 ESMA issued a public statement on the MiFID II rules concerning reverse solicitation (general details here and the actual statement here), which was an overt message to UK firms post-Brexit. It clearly highlights the considerable limitations with this approach to business
Reverse solicitation, in this context, is when a client established within the EU initiates “at its own exclusive initiative” the provision by a third country firm of investment services or activities. It potentially allows a firm to advise EU clients without triggering local licensing requirements. However, the third country firm cannot then market or advise on new investment products or services to that client (as that would no longer be reverse solicitation). Therefore, for most advisory firms, it is effectively unworkable if an ongoing relationship is desired and necessary.
Solutions
The following possible solutions are therefore the main (if only) viable solutions for most FCA-regulated advisers, with clients elsewhere in the EU:
- Set up an operation in an EU Member State and become “locally” regulated there. It is not a quick answer of course; becoming regulated from scratch tends to take at least 3 to 6 months in most MSs and that is assuming a full understanding of the system and a good level of language proficiency. In addition, this approach usually requires at least one (and sometimes two) key individuals to be based and resident in the country concerned. It is thus logistically impractical in most cases.
- Operate under a Europe-wide network based in the EU and passported across all MSs (or at least those required by the UK advisory firm). This may well be the best approach where the number of clients (and the revenue that they generate) is sufficient to make this practically and financially worthwhile.
- Work under the umbrella of a company already regulated in the EU. This could be a different company for different countries or one that covers all of the countries required. In most cases, the latter is quite likely to be the more favourable option, of course.
- Arrange a B2B relationship with a firm regulated in the EU. This is probably an appropriate approach where there are only a few clients concerned and the end objective is for the EU advisory firm to eventually fully take over the relationship with those clients within a pre-planned timescale.
We are very concerned that Brexit, and the subsequent actions, or inaction, of the European and national regulators across the EU, is leading to client detriment, not least consumers being disenfranchised from advice. This is one of the main reasons that we have offered help to UK advisers and advisory firms at no cost.
It would be nice if all of the regulators did what they instruct the advisory sector to do; namely, put the client first! However, that seems not to be the case in the wake of Brexit. But we are here to help you.
Paul Stanfield, CEO
FEIFA (Federation of European Independent Financial Advisers)
Quarter 1 2022