The decision of the UK to leave the EU is having a major impact on the financial services industry, including brokers that serve EU clients from the UK and the ones that have UK clients and are domiciled in an EU member state. BrokerChooser surveyed the key impacts of Brexit on the brokerage industry and looked at individual service providers that will need to change their operations as a result of Brexit. We also selected some brokers that took timely measures to mitigate the impact and listed a few that are still scrambling to come up with a solution.
Brexit transition period ending
When the transition period for the United Kingdom to actually leave the EU ends on Dec. 31, 2020, the full reality of the country’s exit from the European bloc will hit on both sides of the English Channel. Even though Britain left the EU on January 31, 2020, the country remains under its rules until the end of the year while it tries to establish the terms of its new relationship with the Union.
Regardless whether the two sides manage to strike a last-minute deal on still-unresolved issues, life will never be the same either for UK inhabitants or for the 27-member bloc after January 1, 2021. The reverberations of English voters’ historic decision to quit the common European project will be felt by people all around the globe and from all walks of life.
The post-Brexit future of financial services in the EU and the UK – one of the key industries in Britain given London’s prominence as a top financial hub worldwide – is an issue closely followed by investors internationally. Although the Bank of England reassured financial markets in December that the island nation’s financial stability was not in jeopardy even in the event of a no-deal Brexit, UK central bankers warned that financial services could experience “disruptions” when the transition period ends. BrokerChooser investigated how brokerages and their clients will be affected by Brexit and what will be the main changes starting from 2021.
What impact will Brexit have on brokers?
As the final date of the UK effectively leaving the EU looms large on the horizon, the brokerage universe is in upheaval. If UK leaders fail to reach an agreement with Brussels, this would leave EU customers cut off from UK-based market operators if no contingency measures are set in place. Some brokers have been ahead of the game in setting up new entities in EU countries while others are scrambling to find a solution in the 25th hour. Worse even, some brokers seem to have done nothing to mitigate the impact of Brexit on their operations or whatever measures they took are non-transparent or not communicated properly.
So which brokers are impacted by Brexit one way or another? As a general rule, there are three scenarios under which a brokerage can be impacted:
- UK brokers serving EU clients, or non-EU brokers serving EU clients from the UK via an entity regulated by the FCA
- Brokers holding an EU license and serving UK customers
- Brokers where EU clients can open an account either with an EU- or UK-regulated entity
BrokerChooser has so far reviewed 79 brokers on its platform and our data shows that roughly 20% of these brokers will see their business activity affected by Brexit. The list includes some global leaders such as Interactive Brokers, Pepperstone, Revolut or DEGIRO.
EU regulations provide some leeway for UK-based brokers that do not wish to change their business model at all. Under the MiFID II legislative framework instituted by the EU to regulate financial markets and improve investor protection, there is a provision that allows brokers operating in a third country to serve EU customers at the exclusive initiative of the client. In practice, this means that financial service providers established in a non-EU country will not need EU authorization to serve EU retail clients if the service is provided at the explicit initiative of the client. There is a caveat, though. The law states that an initiative by such clients will not entitle the third-country firm to market new categories of investment products or investment services to that client otherwise than through the branch. This will significantly impair a broker’s ability to gain new clients.
The British regulator has proved more lenient than its EU counterparts have. The FCA announced in November that it would allow UK market participants to keep trading shares in EU-based venues through March 2022 to avoid disruption in the equity markets. On the other hand, EU regulators only allow investors in the bloc to buy and sell European shares on UK exchanges if the trading occurs in British pounds, a case so rare that it is barely representative.
In light of all the above, traders and investors should check to see if their broker is affected by Brexit and if so, whether it has a separate license that permits it to serve EU or UK customers from January.
It is recommended that traders check which country their broker’s business entity is domiciled in, including the entities referenced in their customer account agreements, as this will directly affect the relevant regulations and place of jurisdiction. In a post-Brexit scenario where UK firms regulated by the FCA lose their EU-passporting rights, traders should check whether their firm has a separate independent registration with another EU regulator (not just a passport), and also check if the firm has obtained EU passporting through that regulator, or if they already have direct regulatory licenses in their country of residence within the EU.
If your brokerage account is affected by Brexit and you have doubts about the changed regulatory environment, you may consider changing service providers. Check out our recently revamped, comprehensive broker comparison tool to see if your current broker is still the best match for your.
Brokers that managed the Brexit challenge
Some of the affected brokers have taken timely steps to expand their regulatory profile and geographic reach. Without aiming to provide an all-inclusive snapshot of all the brokers that have so far successfully managed the Brexit challenge, BrokerChooser has compiled a list of some of them with a brief description of what they have done. Brokers that decided to set up shop in Germany to continue serving EU clients are the ones that managed the challenge most successfully given the solid track record of the German regulatory environment.
A global leader in providing CFD trades, IG Group has tackled the Brexit crisis by setting up a German subsidiary, which is regulated by the German supervisory authority BaFin. EU client accounts are migrated under this German entity.
London Stock Exchange-listed CMC Markets, a global CFD and forex broker, will also be serving its EU clients through its BaFin-regulated German entity.
Australian FX broker Pepperstone that onboarded EU clients through its FCA-regulated entity has kicked off operations in Germany after it has received a financial services license from the nation’s regulator, BaFin. The broker has also secured a financial services license in Cyprus. Pepperstone has informed its clients whose accounts are affected by Brexit to transfer their accounts to one of its two entities in the EU. The transfer is a fully automated, seamless process and won’t interrupt any positions that clients have open at the time.
Dutch brokerage DEGIRO said it will make use of the FCA’s Temporary Permissions Regime to be able to provide services to UK residents starting from 2021. Even though the broker communicated that the current situation does not affect clients’ ability to trade or hold an account with DEGIRO, certain EU-listed products will not be allowed to be listed on the London Stock Exchange from next year and this will have an impact on certain trading positions.
UK-based CFD and forex broker FXCM has obtained a license from the Cyprus regulator CySec and has migrated EU client accounts to this entity, called FXCM EU. FXCM EU clients benefit from a range of protections including complaint management, compensation systems, and client money protection. ESMA protections including negative balance protection, margin close out, leverage limits on opening positions and marketing restrictions will continue to apply. Open positions will be closed at the original open rate of the position and a new identical position will be opened in your FXCM EU account. All your pending orders will be moved over seamlessly, conserving all stops and limits. The total ending balance will also be transferred in its entirety.
The Swiss service provider acquired Luxembourg-based Internaxx Bank in 2018 to secure access to EU markets that its London hub faces losing after Brexit. The brokerage shifted EU retail clients to Luxembourg. One question that still remains to be solved is CFD trading as this is currently under FCA regulation at Swissquote.
UK-based CFD and forex broker ETX Capital also holds a Cypriot entity under CySec supervision, which allows the broker to serve EU clients.
Brokers where Brexit questions remain
In contrast to the above listed brokers, some have not been at the top of their game in managing operational challenges posed by Brexit. Here’s a compilation of the most important laggards that are still scrambling to get their act together ahead of the Dec. 31 deadline.
The US giant, which serves EU retail clients through its UK legal entity called IBUK, seems behind the curve. Although the broker is setting up a new legal entity in Ireland called Interactive Brokers Ireland Limited (“IBIE”), the process has not yet been finalized. IB’s plan is for accounts, investments and services currently provided by IBUK and IBLLC to EU customers to be provided by IBIE. The transfer will only take place when IBIE is authorized by the Irish financial services regulator, the Central Bank of Ireland. The broker has also established an entity called ‘Interactive Brokers Central Europe Zrt., (IBCE)’ in Hungary, which has been approved by the Hungarian regulator in early December. IBCE will serve customers from the CEE region.
US forex broker Oanda serves EU clients through its UK-based entity. The broker said earlier that it intends to set up a new entity in Germany, but currently there is no available information on the status of this project. To the best of our knowledge, Oanda has not taken the necessary steps to be able to serve its EU customers onboarded through the FCA regulated subsidiary post Brexit.
The combined product offered by Interactive Brokers (IB) and TradeStation, is registered in the UK under FCA oversight. The company has been tightlipped – to say the least – about its plans for a post Brexit world. While IB is planning to shift its Brexit-affected client accounts to either Luxembourg, Ireland or Hungary (at a yet unannounced time), there is no word from TradeStation Global on what they will do.
EU clients of the UK fintech startup that launched commission-free stock trading services in 2019, will be able to continue trading with Revolut (RTL) if they accept and acknowledge the following:
- They will be trading with RTL at their own initiative
- They are trading with RTL on the basis of an ongoing relationship
- They have been made aware that the trading service is not provided by an investment entity authorised in the EU
- They are aware that they do not have the benefit of any EU regulatory protections or investor compensation schemes by trading with RTL
Alternatively, they can close down their positions, transfer their cash from their investment wallet and close their account by 31 December 2020. This does not appear a comprehensive handling of the Brexit issue.
Investor protection and safety post-Brexit
There is no doubt that Brexit will result in substantial changes to the EU’s financial architecture over the coming years. Especially when it comes to derivatives clearing, investment banking activities as well as securities and derivatives trading as the reliance on UK financial firms is more pronounced in these areas and the provision of such services is currently linked to the EU passporting regime. One key factor is the extent to which regulatory and supervisory frameworks in the UK may diverge from EU ones, as alignment is a precondition for recognizing the UK as an equivalent jurisdiction under the EU’s existing third-country regimes.
What will surely happen is that on 1 Jan. 2021, tens of thousands of investors will experience significant changes with respect to compensation schemes and consumer protection amounts. EU residents that have so far enjoyed FCA regulatory oversight will lose FSCS protection on their investments, which amounts to £85,000 per account. The majority will most probably be covered by investor protection schemes offered by Germany’s Bafin, the CySec in Cyprus, Luxembourg’s SIIL and France’s FGDR.
|Country||Regulator||Max. protection amount/account|
|Germany||BaFin||€100,000 for cash
€20,000 for securities
|Luxembourg||CSSF||€100,000 for cash
€20,000 for securities
|Ireland||Central Bank of Ireland||€20,000|
The quality of financial market oversight and applied standards in certain countries may also prove a concern for investors.
The regulatory landscape is set to change for UK residents as well. Investors in EU-domiciled funds will not have recourse to the UK’s Financial Services Compensation Scheme (FSCS) and will have to apply to foreign compensation authorities to get their money back should something go wrong. The UK government has agreed to continue allowing 9,000 EU-based funds to be sold to UK investors even though the FCA will have no regulatory oversight over these products.
What is the impact of Brexit on financial service firms?
The UK and EU were entangled in negotiations on a free trade agreement (FTA) until the very end of the transition period. The FTA covers the broad arrangements for trading goods and services between the UK and EU. According to the Bank of England, the ability to provide cross-border financial services between the UK and the EU is largely determined by regulatory decisions made autonomously by the UK and EU, distinct from the broader FTA negotiations.
Under EU law, financial service providers have four means of providing services to EU citizens:
- Under World Trade Organization (WTO) terms
- Based on the principle of equivalence
- Under free trade agreements (FTAs)
British financial service providers (i.e. banks, brokerages, wealth managers, etc.) and non-EU firms with an entity set up in Britain use passporting to serve EU clients. What exactly is passporting? In basic terms, firms based in EU member states, and non-EU states that are members of the European Economic Area (EEA) are allowed to sell their services freely within the bloc under a system known as ‘passporting’.
Starting from 2021, UK banks, brokerages or other brokers that serve EU clients through a UK entity will no longer be allowed to passport their services. In practical terms, this means that financial institutions overseen by the UK’s Financial Conduct Authority (FCA) will no longer be able to provide financial services to EU citizens.
The most obvious way out of this conundrum is for UK financial institutions to establish an entity within the EU in order to continue to provide services within the bloc. This will require UK financial institutions to relocate to another jurisdiction within the EU from which they can passport their financial services.
Another option for continuing their business with the EU is by relying on equivalence. How does equivalence work? Certain EU directives permit third country firms (i.e. firms that are not located in the EEA) to provide some cross-border services in the EEA without requiring the third country firm to be licensed within the EU, provided the third country has laws that are deemed to be “equivalent” to those of the EEA. However, the availability of these rights will be subject to an “equivalence” determination by the EU Commission, which has discretion to determine whether UK laws and regulations provide regulatory protections that are equivalent to EU laws and regulations. In addition, equivalence is not applicable to a number of services, such as banking or payments. Furthermore, the process of evaluating equivalence is often a lengthy one and requires careful consideration.
With the UK quitting the EU, the financial services industry is set to experience significant changes. Naturally, brokerages will not be spared either as some service providers will be directly affected by Brexit. Investors need to be alert as well and should act if they hold an account with a broker whose operations are impacted by Brexit. Regardless whether the UK and the EU will manage to strike a last-minute deal, the world of financial markets will change substantially on Jan. 1 2021.