There will inevitably be investment regulation changes post-Brexit. The rules on how expats purchase investment funds and who they can be advised by are set to alter. UK pension providers are already preparing for the post-Brexit world by making it difficult (or even impossible) for their expat clients to continue to receive benefits or contribute to their pension plans.
All investment funds have to be situated somewhere. UK Unit Trusts are mainly based in London, although many providers also have operations in EU countries such as Ireland or Luxembourg to cater for their non-UK customers. These funds are usually regulated EU versions known as UCITS (Undertakings for Collective Investments in Transferable Securities), or OEICS (Open Ended Investment Companies) and are available to all investors directly or via platform structures.
International Securities Identification Numbers
Funds have a unique International Securities Identification Number (ISIN) which might look something like this: GB123456PL04. The GB prefix identifies a fund as being based in the UK. Dublin funds start with IE and Luxembourg LU.
One of the lesser-known consequences of Brexit is that those who hold GB prefixed funds and are tax resident in an EU state will be required to change the fund to an EU equivalent. This is fine for fund management companies who have EU operations, however, those which don’t might have to advise their customers to cash the fund in and reinvest elsewhere.
Many expats in Spain hold Spanish Compliant Investment Bonds (SCIBs). In France, they opt for Assurance Vie products. One of the requirements which enable people to benefit from the considerable tax advantages is funds must be UCITS regulated in an EU country. Holdings in GB prefixed funds will no longer be permitted; that part of a portfolio which is not changed to an EU prefix after Brexit will therefore no longer qualify for the tax benefits. The effect of this could be an unwelcome and unnecessary tax bill.
Investment regulation changes post Brexit: the end of passporting
Up until now, UK financial institutions were able to ‘passport’ their services around the EU. Once the UK leaves the EU, passporting will no longer be available for UK funds. There is talk of a special arrangement for some investment providers, however, this is unlikely to last very long. It is doubtful that EU countries would allow a non-EU country to fully benefit from being a member state.
Passporting will also affect UK-based financial advisers who have clients residing in an EU state. In the past, these advisers have been able to offer cross-border services under the ‘Freedom of Provision of Service’s ‘rules as long as the UK was a member of the EU. This will not be the case post-Brexit; we are already seeing UK advisers inform their clients that they will no longer be able to deal with them, and/or being unable to take on new clients.
If that isn’t enough, the EU has also introduced new regulations for financial advisers, under the MiFID 2 directive. MiFID stands for Markets in Financial Instruments Directive. This legislation provides greater levels of transparency and accountability for clients. However, some advisers are finding it hard to comply with the demands of the MiFID 2 directive and are thus struggling to continue to provide services to their clients.
Solutions to investment regulation changes post-Brexit
Below is a checklist which should help ensure that your financial planning will be just as effective after Brexit as it was before:
- If you hold a ‘compliant bond’ in an EU country, which benefits from tax efficiency, contact your provider and ask if any changes have to be made to the underlying funds.
- Consider your tax residence status. As there will, inevitably, be changes to rules post-Brexit, you may find it more beneficial to become fully tax resident in the country you live in. Third-country nationals (anyone not a national of an EU member state) will have to comply with more restrictive visiting rules and may be taxed higher than those fully resident.
- Contact your pension provider and find out if their processes will change post-Brexit.
- If you have advisers based in the UK, you should confirm whether they will still hold the necessary permissions to continue dealing with you.
- Review your whole financial plan with a suitably authorised financial adviser who understands expat status and holds a Mifid investment license.
It looks as if the ‘transition period’, which is scheduled to last until the end of 2020, will be adopted whoever becomes the new UK government. There is a real possibility, however, that it may need to be extended; Boris Johnson has stated many times that he is not prepared to consider this. This means that if the negotiations are not completed by December the 31st 2020, the UK could still crash out of the EU without a deal. If this turns out to be the case, it is likely that even more dramatic changes would follow. We should, therefore, ensure that our financial planning strategy is capable of coping with all potential outcomes.
Feel free to contact us for further guidance on investment regulation changes post-Brexit