The 31 December 2020 Brexit deadline seemed like a long time off and financial advice firms might have decided to wait out the storm and see how negotiations evolved to get some sort of insight on the possible options available.
But with less than five months left in the transition period, the time to wait around has passed.
Even though there have been several pressing matters; from the outbreak of a global pandemic, to lockdown measures, the transition to working from home, and the rush to adopt and enable technological tools for both clients and advisers; Brexit has not gone away.
According to the information currently available, it looks incredibly likely that passporting rights as we know them will cease to exist for the UK from 1 January 2021.
And now is the time for advice firms to decide what type of relationship, business, and presence – if any – they wish to have in the European Union come the new year.
Europe is calling
While advisers need to make a choice, a lot of Brits have already made up their minds.
Figures from the Organisation for Economic Co-operation and Development (OECD) and Eurostat show that between 2008 and 2015, on average, 56,832 UK nationals a year moved to EU states.
That annual number grew to 73,642 for the 2016-2018 period, just after the Brexit referendum.
The analysis also found that there was a 500% increase in those who seeking citizenship in an EU state after relocating there.
For instance, Germany saw a 2,000% rise, with 31,600 Brits naturalising there since the referendum.
This means there will be clients looking for English-speaking advisers in virtually all of the 27 countries remaining in the European Union.
To understand what choices financial advisers have available to them after the end of 2020, International Adviser spoke with Paul Stanfield, chief executive of the Federation of European Independent Financial Advisers (Feifa).
‘Plan for the worst, hope for the best’
“I don’t think the UK is going to have any access, over and above the normal access for a third country,” Stanfield said.
“So, if I was a UK IFA firm doing regular business in mainland Europe, I would plan to effectively be a third country and, therefore, look at how I can work in a regulated manner in whatever European countries that I wish to work in.
“Or I would plan to that and, if the negotiations bring up something more positive, then nothing is lost.
“The old cliché about planning for the worst and hoping for the best, I think, is a good approach on that.”
Seek regulation
One road advisers could go down is trying to get regulatory approval in the EU country they currently are doing, or intend to do, business in.
Stanfield explained: “In simple terms, that means they are either being directly regulated in the country or countries that they’re doing business.
“So, for instance, if you’re working in France and in Spain, you could, in theory, get regulated in Spain, or if you’ve got clients in France, then you can get directly regulated by the French regulators.”
Stanfield added that firms could even get regulated in one single member state and then use passporting rights to do business in the other 26.
Hurdles
But getting regulatory approval is not easy, he warned.
“The problem for a lot of UK firms is that, increasingly, regulators want feet on the ground. In other words, they want at least one responsible, key individual to be based in the country where you are regulated, which is understandable.
“That doesn’t necessarily work for a lot of UK IFAs, who may be travelling in and out of Spain, France, or Portugal.
“If they do have the opportunity to set up an operation in another country and do it that way, then that is a valid option.”
Looking to sell?
Otherwise, they could try and sell their client bank to a local adviser or firm.
“Often, of course, firms want to keep looking after their clients, possibly because they may have long-term relationships and often because they’re good quality clients – they tend to either be retired expats, who are high net worths, or they’re working expat for whom it’s been a career move to go out to mainland Europe and, therefore, they’re high earners.
“So, they’re not the sort of clients that you want to lose.”
But if this is not a viable route, advisers could always think about joining a network, Stanfield added.
“Those are operations that are normally able to provide a networking umbrella for advisers who can use their passports to then operate legally in another European country.
“So, I think that that’s an option for some people.”
Partner up
If selling or joining a network might not be a good fit, advice firms could look at striking a deal or a partnership with local businesses or professionals.
“If you’re a UK IFA, and you’ve got 25% of clients in mainland Europe, then setting up in mainland Europe, or joining a network is probably very viable,” Stanfield said.
“But if they have got two or three clients in Spain, then actually, is it really worth it?
“What they might want to do is work in collaboration with a local adviser or advisory firm.”
But they would need to take a step back, he warned.
“As long as they are not directly advising the retail client, they could keep a relationship, if that’s what the client wanted.
“What they could do is work with the local adviser, who is officially delivering the advice, but maybe have the investment management contracted out to the UK adviser.
“That would be a B2B approach, of course, and that’s all perfectly acceptable.”
Clock is ticking
There is never going to be a perfect solution, Stanfield said, but advisers have a choice to make: do business in the EU or don’t.
“I think for most UK advisers, probably the network approach is going to be the best, except if they’re able and they wish to set up an entity that then becomes locally regulated,” he added.
“But I would also say, if they’re going to join a network, I’d really get a move on, it can easily take up to six months to get something like that sorted out.”
