The impact of Brexit on Financial Services and the FS Compensation Scheme
As we stand right now (December 2020) The UK is leaving the European Union (EU) on 31 December 2020. EU law will continue to apply to the UK financial services regulations through the existing agreement for UK firms to do business throughout the EU without obtaining further financial services authorisation (something known as Passporting) until then.
Passporting has allowed firms authorised in the European Economic Area (EEA) to conduct business within the EEA based upon member state authorisation. The FCA has given guidance to firms that we should NOT expect these current arrangements to remain in place once the transition period ends on 31 December 2020. As current negotiations regarding a trade deal never included any discussions regarding financial services, you should assume that any financial interests you may have abroad, will no longer be protected by the FSCS once passporting arrangements between the UK and the EU end.
You may need to take action, in order to be ready and protected following Brexit. Which is why I have outlined a number of likely scenarios that UK customer with funds invested in EU jurisdictions may be facing. Obviously this also applies to EU citizens with funds invested in the UK.
Either way, there are things you may wish to consider to ensure that you and your money remain protected from 1 January 2021 onwards.
Financial Services Compensation Scheme post Brexit
The FSCS is there to provide protection and compensation to customers or investors of authorised financial services companies that fail or go out of business.
For UK based customers of firms authorised in the UK, the FSCS will not change post Brexit. However, for customers and/or firms based in the EEA (including Liechtenstein, Norway and Iceland) there maybe changes to the protection and compensation available.
Deposit Protection with the FSCS
Protection via the FSCS will depend upon where the firm in question is authorised and which jurisdiction the firm uses to hold your deposits. My advice is to check with the firm for more information. In order to find where a financial services provider is based or authorised, the Financial Services Register is a good place to start,
Any deposits held in a UK branch of an EEA bank will be covered by the FSCS and your funds will be protected up to £85,000 post Brexit.
Deposits held in UK branches of firms based in Gibraltar are seen differently and are not covered by the FSCS; and will continue to be the responsibility of the Gibraltar Deposit Guarantee Scheme.
Deposit Protection outside of the FSCS
At 11pm GMT on 31 December 2020, any FSCS deposit protection for funds held in EEA branches of UK firms will cease.
Although there should be an automatic transition to protection provided by an EEA deposit guarantee scheme. However this will be dependent upon the specific rules that apply to each EEA jurisdiction. Any change in, or loss of, protection should be notified to customers by firms prior to this date, but it’s always worth being proactive and checking things out yourself.
Post Brexit, anyone with funds in EEA-authorised firms within the EEA will see no changes in their current deposit protection, as laid out in the EEA deposit guarantee scheme.
Further information is available by contacting the firms in question, or visiting www.efdi.eu/full-members for a full list of EEA deposit protection schemes.
Investment protections covered by the FSCS
If you are currently a UK based customer of an EEA authorised investment firm that operates within the UK, then you are currently protected by EEA compensation schemes. Following Brexit, the protection that the FSCS provides will be extended to customers of EEA firms with UK branches; in the same way that cover is currently provided to customers of UK firms.
However, it’s important to note that all customers of EEA authorised firms without a UK branch will no longer have access to the FSCS. The only exception is where there is already established FSCS cover for the operations and activities of certain fund managers. If you are in any doubt, my advice would be to contact your provider and find out for sure if your investments are covered by a relevant compensatory scheme.
Whether you live in the UK or the EEA,customers of a UK branch or of a UK authorised investment firm, will continue to benefit from the protection provided by the FSCS pre and post Brexit. This is because the FSCS has no residency requirements in order for investors to qualify for cover.
Investments no longer covered by the FSCS
If you are a customer of a local EEA branch of an existing UK authorised investment firm then you may not be protected by the FSCS post Brexit.
It is probable that the FSCS will not protect customers of defaulting (insolvent) EEA branches of UK authorised firms after 31 December 2020.
However, you may be protected by the local jurisdiction’s investor compensation scheme, but it may not provide the same protections as the existing FSCS scheme (up to £85,000 of cover). If you are in any doubt, please contact the provider and seek clarification prior to the Brexit deadline.
As always, if you have any questions regarding current FSCS protections, or if you have any questions regarding any aspect of your finances, then please don’t hesitate to contact one of our team at Bridgewater Financial Services; where one of our independent experts will be on hand to help in any way.