A reader asks: 'Can we keep our clients when they go abroad?'

A reader asks: 'Can we keep our clients when they go abroad?'

One of the hardest questions for many UK-based advisers to answer for themselves is whether they should continue to look after clients of theirs who go abroad, particularly if the clients ask them to, and if the clients say they’re only planning to stay abroad for a few years.

Is it, such advisers wonder, in the best interests of the client to agree to remain the adviser of record, and if so, what potential dangers and blind spots need they be aware of? Is there a point at which they should recuse themselves in favour of another, perhaps differently-regulated, entity?

Here, in the first of a new International Investment series, in which we invite readers to send us their technical questions on the subject of looking after international/cross border clients around the world, Sator Regulatory Consulting Ltd’s Helen M Hatton, pictured, replies to a reader’s question.

(This article first appeared in the May issue of International Investment.) 

The question:

I work for a UK-based investment manager, which provides discretionary, advisory and execution-only services. We also have an IFA service, which provides holistic financial planning advice.

Although we are perfectly comfortable with the Financial Conduct Authority’s rules as far as our UK clients are concerned, and there are passporting provisions with the European Economic Area that apply to most of Europe, the FCA does not have any jurisdiction over – or real interest, it seems – in people living beyond the EEA’s borders. Even if they’re British.

It is not easy, therefore, for us to understand what obligations we may have when we are asked to provide services to non-UK residents who are not physically present in the UK or EEA.

But we are finding that UK clients who then move abroad are an increasingly common phenomenon in our practice.

To what extent, then, should we then be looking at the local regulations in the place where the client now resides?

And do the requirements vary, depending on what type of service they want from us? Should we tell them to sign up with a wealth adviser in the jurisdiction in which they plan to live, even though they might not get as good a service as we are able to provide?

From what we can tell, the majority of UK firms don’t really investigate this matter, and simply continue to provide the same services they would offer at home to their clients, even after they’ve moved overseas. But I’m concerned that, in some cases at least, this may be a breach of local regulations, at least in some places.

What should we do?

(Go to Page 2 for Helen Hatton’s response)

Helen Hatton’s response:

As all investment wealth managers know, clients do have a habit of changing their circumstances, in ways that oblige a wealth manager to take action.

They may divorce. Or they may start a family, and begin to focus on school fees planning and insurance; they may decide to buy a bigger house. They may sell the company that they’ve been diligently growing for 20 years; they may decide to turn a long-nurtured pension into an annuity, in order to obtain some day-to-day income.

All these scenarios, and more, are everyday occurrences for professional wealth managers everywhere.

But one of the most disruptive scenarios, from a wealth structuring perspective, is when one’s established, UK-based client decides to up and move to another, non-EEA jurisdiction, whether it’s for a temporary, two- or three-year contract; longer; or even, for good.

As you will have noticed, this quite rightly sets off the alarm bells in the offices of the client’s UK wealth manager. For one thing, there is the possibility that a good, fee-generating client of long standing may be about to walk out the door forever. And if they don’t themselves end the relationship, there is the question which you have posed, which is: are you regulatorily able and qualified to continue to advise this client after they’ve gone, if they want you to?

The short answer is that there really isn’t a single, short answer.

And in fact, we at Sator are often asked to advise upon whether a particular firm can continue to deliver the services required by the client after he has left the UK for another country, and still be in compliance with their own regulatory structure – which is to say, in compliance with Financial Conduct Authority rules.

The first thing to say is that, generally speaking, regulatory authorities support each others’ regimes – this means that if you do fall foul of an overseas regulator, in the way you look after your client on their turf, the chances are that your home-state regulator will take a dim view of your having breached the rules of its sister organisation.

The second thing is that things are changing in the offshore world. In Thailand, for example, the regulator has begun to crack down on a number of financial advisers who had been looking after expat clients, on grounds that they had been operating an “unlicensed securities business” in that country, even though it had never made its concerns known to such firms previously.

So – how do you stay within the rules?

Obviously, the law in each jurisdiction differs, and the correct position needs to be checked thoroughly in advance, according to the particular products involved in each jurisdiction in which a client moves to.

However, as a broad generalisation, there are a number of criteria, or concepts, which tend to be treated in much the same way around the world. (Quoted phrases below indicate expressions commonly used by regulators.)

1. Investment advice is usually considered to be “given where it is received”. Advice given over the phone or by email, is RECEIVED by the client, therefore most regimes would deem you to have given advice in that country – even though you were not physically present in it.

2. Execution-only services are usually considered to be “undertaken where the business (or business representative) receives the instruction to execute a transaction.” In this scenario, you are the recipient and, as you are located in the UK, the act of receiving an instruction is deemed to have happened in the UK and therefore is not in breach of the overseas rules.
3. Dealing, or discretionary management, is usually considered to be “undertaken where the decisions regarding the dealing and management are made by the dealer or manager”. In practice, what this means is once more, that as you are dealing or managing in the UK and licensed for that activity, you are in the clear.

4. Most jurisdictions do not allow you to “hold out to conduct investment business” in their jurisdiction without a licence. This means that you should not business, advertise your services, cold call, run seminars, write to prospective clients, etc.
Please note that some jurisdictions would include a website which can be read in an overseas jurisdiction as evidence of “holding out to conduct investment business”.

5. Most jurisdictions require an insurer to be authorised prior to underwriting risk in its country.

This means that if you want to pop some stocks and shares, which the client owns, into an ABC Insurance UK Ltd life wrapped broker bond – and ABC Insurance is not authorised in the country where the life insured lives – you and ABC may be in trouble.

6. Many insurers require notification of any change of residence on the part of their policyholders, and retain the right to withdraw cover when the insured relocates to a higher-risk country. If the client doesn’t tell them about the move, cover could be invalidated.

7. Some – please note, not all – regulatory regimes have some form of “overseas persons exemption”, by which an investment business is excused the need to obtain regulatory approval when operating in that jurisdiction, providing certain criteria are met.

The criteria would often include that the customer was an existing customer prior a particular piece of business being done; and that the customer was not acquired through unauthorised solicitation.

There are also often additional qualifiers to benefit from, such an “overseas persons exemption”, for example, that the unauthorised business is regulated in an “equivalent jurisdiction” (equivalent in the eyes of the regulator); that you meet the local conduct of business rules; and/or that you notify the regulator that you are servicing existing clients.

Or, perhaps that you gain the prior consent or acknowledgement from the regulator that you are servicing existing clients under their overseas persons exemption rules.

8. Some trade zones operate “passporting” arrangements for certain types of products and services, whereby your home state authorisation is good enough for you to be able to, as the saying goes, “row straight in and fish their markets”. (You alluded to one such trade zone in your question, that of the EEA.)

Other possible pitfalls for UK advisers looking after clients who’ve moved abroad:

• Visas/work permits: Many jurisdictions require a visiting business person to disclose to immigration officers on arrival, or on visa documentation completed previously, the purpose of their trip, and to disclose who they are visiting. It is really not a smart idea to pretend you are on holiday, and then transact what may be unlawful investment business.

Regulators definitely have access to border control information these days, and a false declaration to officials at airports merely elevates a relatively simple regulatory infringement, with respect to a non-national, into a serious criminal offence against the state.

• AML/CFT registration: Most jurisdictions take compliance with anti-money laundering/counter financing of terrorism standards seriously. The Financial Action Task Force – which sets AML standards – requires that persons who conduct investment business are supervised under Proceeds of Crime-style legislation.

You will be automatically subject to such rules in the UK, but you would not normally, as a matter of course, be registered in the overseas country in which your client is to reside, and this could be seen as an offense in certain situations, if, for example, they were to be benefitting from the proceeds of crime in some way.

If this were to happen and you were to become suspicious that your client might be up to something, you might need to consider filing a SAR, (suspicious activity report); and you would need to consider (and possibly take advice) on whether to file in that country AND in your home state.

Remember that you need to know enough about your client’s overall financial affairs, exposures and net worth to be able to give suitable investment advice; but also, that you have to know enough to understand the rationale for his structures, and be satisfied as to his source of wealth and sources of funds.

Today more than ever before, cross-border arrangements, and the involvement of certain countries, are likely to increase the client risk assessment in your AML procedures; and you would also need to beware as well of “sanctions risk”, which may occur if a client has gone to live in a country subject to UK, EU, UN or US sanctions, or is deriving his income from a proscribed person – for example, some Russian companies, including some banks, are subject to sanctions.

Sator Regulatory Consulting Limited is a Jersey-based firm specialising in regulatory, governance, risk and compliance issues for offshore, emerging market and cross-border financial service business.

It points out that this article does not constitute legal or tax advice, nor is it a solicitation to obtain clients to provide such advice to them. The company urges readers to consult a licensed attorney or tax preparer regarding the suitability of any strategy, or the applicability of any rule or law, referenced herein, to any specific individual’s legal or financial circumstances.

Readers who have technical and/or regulatory questions they would like Helen Hatton or other experts to answer, in print, are invited to contact Helen Burggraf at [email protected]