Just when we all thought the EU/UK withdrawal agreement was done and dusted, it looks like we will have to suffer many more months, or possibly years, of uncertainty over investments and Brexit.
There has been much publicity surrounding the Irish border question and fishing rights, but many other issues need to be negotiated before the FTA is finally completed. Financial services are such a complex area; a final agreement couldn’t have been completed by the 31st December 2020. Accessing each other’s markets is vitally important for both sides, especially when there is a lot of money involved.
One of the early winners on issues relating to investments and Brexit is the Amsterdam equity exchange. As the ‘equivalence clause’ no longer includes the UK, several large equity platforms moved their operations to Amsterdam to continue dealing in European securities. In January alone, Amsterdam experienced a fourfold increase in business compared to December 2020.
This change in operations means Amsterdam trades more equities than London, averaging €9.2billion per day against London’s €8.6 billion. This represents a drop of some €6.5 billion for London. Other sectors, such as the Fixed Interest and currency trading markets, have also been dramatically affected.
Investments and Brexit: The Temporary Permissions Regime
What does this mean for the retail investor? The key issue is the ‘equivalence clause’. When the UK was a member of the EU, free trade in financial securities was an automatic right under Freedom of Capital movement rules. This is no longer the case. Despite the UK having left the EU, the Financial Conduct Authority (FCA) has introduced the Temporary Permissions Regime (TPR) as a transitional scheme to enable EU companies to continue their UK operations for up to 3 years. This will help EU financial institutions plan for the future and either withdraw from the UK entirely or become fully regulated in the UK.
Individual investors who hold EU funds in their portfolios can continue to hold them and invest further for the time being. Insurance companies and pension providers are in the process of informing their clients of the current situation, although it has to be noted that much confusion remains.
Independent Financial Advisers based in an EU country can also benefit from the TPR if they need to service clients in the UK, or even take on new ones. They will, however, have to decide whether to apply for full FCA membership within the next 3 years.
Now, here’s the rub: the EU hasn’t reciprocated. Well, not as yet. This means UK financial services companies, with clients based in an EU country, can no longer service their investment and pension policies. We are already seeing evidence of this, with several major UK banks closing the accounts of EU residents’ and pension providers effectively suspending activity.
If UK financial companies wish to continue seeking new business and servicing their EU-based clients, they are going to have to establish an EU office. The high street banks who have withdrawn from the market either don’t already have an EU base or don’t intend to open one. The same applies to all financial services companies, including investment fund providers.
The result is that some EU investors can no longer access UK funds as they are based in London. Many UK fund managers have already moved their European operations to Dublin, Amsterdam and Luxembourg. Even arch Brexiteer, Jacob Rees-Mogg, moved his European funds to Dublin a few years ago when Euro clearing was relocated to Frankfurt!
The conclusion is that if you are resident in an EU country and hold investment funds via a UK pension, ISA or Unit Trust portfolio, or are a client of a UK adviser, you need to check your options going forward. You may have to change your providers to reflect the new environment, even if you don’t want to.
It’s unlikely that this issue was given the scrutiny it deserved before the Brexit vote. Either way, the new reality is now upon us and we need to react accordingly. The good news is that solutions are available. Locally compliant investment accounts, QROPS and International Self Invested Personal Pensions can all play a part in helping maximise opportunities and avoiding restrictions.
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