Navigating Passporting: A Guide for UK Financial Services Firms with EU Clients

Passporting explained

The European Union (EU) single market is a single economic area created by the integration of the markets of all EU member states. Basically, the EU states have harmonised their rules for many products and services. Ultimately, this aims to facilitate trade and guarantee common standards across the EU. In due time, the scope of the EU single market has extended into financial services. This included the development of a single EU rulebook for financial services, resulting in the standardisation of financial regulation and supervision standards.

EU states have opened their national markets to the provision of financial services from other EU states. Specifically, this aimed to simplify the establishment of branches of banks and financial services firms from other EU states. Consequently, once a bank or financial services firm is established and authorised in one EU country, that right can extend to providing services throughout the EU. Alternatively, they can open branches in other countries across the EU, with relatively few additional authorisation requirements.

This pan-EU authorisation is known as a financial services ‘passport.’ However, these passports are not available to firms incorporated outside the EU. Contrarily, those businesses from external states are known as ‘third country’ firms. In reality, this means they face significant regulatory barriers to providing cross-border banking and investment services to EU customers. Therefore, post Brexit, the UK is now a ‘third country’ – and you’re officially out of the exclusive passporting club.

Why does passporting matter for UK financial advisers, accountants & solicitors with EU clients?

Passporting used to be incredibly precious to the UK financial services market. The UK was previously the largest exporter of financial services inside the single market. For example, in 2014 the UK exported over £20 billion in services to customers all over Europe. Additionally, it provided hundreds of billions of euros in finance each year. But that’s a distant memory. Now, passporting is equally important, due to its absence. It’s a bit like losing your actual passport – except His Majesty’s passport service won’t give you a replacement unless you set up an office in the country you merely want to holiday in.

For further information on passporting, the FCA handbook Appendix 3 provides guidance.

How Brexit changed passporting rights for UK financial services firms

After Brexit, UK providers of financial services will no longer be able to work for EU clients without establishing a local presence. This meant that UK financial services firms had to adapt and find new ways of servicing their EU clients.

That could look like this:

• Establishing subsidiaries in EU countries that can provide financial services to EU clients;
• obtaining regulatory approval in each EU country where they wish to provide services, which would allow them to serve clients in that country only;
• exploring the possibility of obtaining regulatory equivalence from the EU, which would allow them to continue providing services to EU clients under certain conditions;
• consider relocating some operations to an EU country to maintain access to the EU market;
• partnering with an EU-based financial services firm to provide services to EU clients;
• or telling their clients they can no longer work with them and recommending alternative services.

Find out more on how advisers can serve EU clients from FT Adviser.

What if you find out your client is living in the EU?

If you find out that your client is living in the EU or they’re planning a move imminently, and you don’t already have a solution in place to allow you to serve them, chances are you’re not going to be able to set up an EU operation in the required timeframe. Consequently, you must inform them that you can no longer advise them. Obviously, it would be decent customer service to send them away with a plan. So, ideally you should be able to recommend an alternative solution. Like an international professional with existing passporting rights into Europe. This will ensure that your client continues to receive the best advice possible and that your reputation comes out clean.

Can UK financial advisers with EU clients continue to offer advice?

No, you cannot continue to advise your EU client without establishing a local presence in their new country. Although you might explore the possibility of gaining regulatory equivalence from the EU – but, it’s laborious and costly. You can, however, simultaneously refer your client to an international financial adviser for their EU interests and continue to provide advice on UK matters. Obviously, they may not wish to double-up on financial advisers and opt to move on.

Are there any ways to continue advising your client beyond UK matters?If that’s what you and your client want, there is an alternative. The ideal solution could be creating a partnership with an EU firm or individual who already possesses passporting rights into the EU. This could allow you to continue advising your client with support and collaboration from an experienced international financial advisory firm and will also be your ticket to the EU single market for financial services. If this sounds like it could be an option for you, we know a guy.

How should you approach the situation if your client required EU financial advice?

You should approach the situation with professionalism and empathy. You should inform your client that you can no longer advise them and also explain to your client why they can no longer work with you and the best recommendations to make. Feel free to direct your clients to our in-depth resource on what they should do if their UK Adviser can’t help them anymore.

Does the same apply to solicitors with EU clients?

UK solicitors can work with EU clients, but they may face regulatory and legal challenges. UK solicitors are no longer able to rely on the EU’s passporting regime for their legal services, and they may need to establish a presence in the EU to continue providing legal services to EU clients. This may involve registering with local bar associations, complying with local regulations, and obtaining necessary permits[1]. Solicitors may need to obtain additional qualifications or certifications in order to practice in the EU. The EU has a much more extensive legal framework than the UK, which means that professional standards and regulations may vary between member countries.

And what about accountants?

While UK accountants can still work with EU clients, they may need to establish a presence in the EU to continue providing services for EU-based assets. This could involve registering with local regulatory bodies and complying with local regulations. It may be necessary to signpost clients to local accountants or those with an international scope.

UK accountants and solicitors should also advise their clients who are moving to the EU to consider the regulatory and legal implications of their relocation. They should provide guidance on the various regulatory regimes in the EU that may apply to their clients’ businesses and investments, such as the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD), and the General Data Protection Regulation (GDPR). Additionally, they should advise their clients on the potential tax implications of their relocation, including the possibility of double taxation and the need to obtain tax residency certificates. Finally, they should help their clients navigate the legal requirements for establishing a presence in the EU, such as registering with local authorities and complying with local employment laws.

What’s best for you is what’s best for your client

The first rule in financial and professional services is that your client’s best interest is always your focus. If you cannot advise your client, your client should not be inconvenienced by this. It’s best practice to explain the situation and recommend another adviser – but if you can’t do that in good conscience, then you must simply inform your client they must seek out an alternative themselves. We know how we would rather exit a financial services relationship – and that’s with direction and introductions.

Recommending an international financial adviser with passporting rights into Europe would be the best shout. That’s because they can provide their services to clients in the EU. One from a UK background might particularly appeal to your client if they are concerned about expat wealth management issues  or language or cultural barriers. Use our resources for help on matters like expat pensions transfers and expat wills.

If partnership is an option, then that’s great. An EU-based firm from a UK background, with extensive experience in international finance and cross-border financial services, would be the ideal solution. And we can help you with this.

We’re here to help with an informal chat

Are you a UK financial adviser, accountant or solicitor struggling with the end of passporting and its impact on your business? Perhaps you have a client in the EU and are unsure how to handle their financial needs? At Galileo Wealth, we understand the challenges facing UK financial services firms in the post-Brexit world. That’s why we’re here to help you navigate the changing regulatory landscape and explore alternative options for serving EU clients. Contact us today for an informal discussion about your specific situation and how we can support you in finding solutions. We’re here to help you succeed in the new era of UK financial services, so call on +44 (0)121 232 8668 or email info@galileo-wealth.com.