Tens of thousands of investors who have ploughed more than £60bn into EU-based funds will not be covered by the compensation scheme post-Brexit in a serious blow to consumer protection.
In a controversial move, the Treasury has agreed to continue allowing 9,000 EU-based funds to be sold to UK investors despite the fact the Financial Conduct Authority (FCA) will have no regulatory oversight of these products.
The government has not secured a reciprocal agreement that UK funds can continue to be passported into the EU after the Brexit transition period ends on 30 December.
The Treasury launched a consultation on passporting in March, which closed in May and was published earlier this month. The government has now decided that investors in EU funds, such as Dublin-based Lindsell Train Global Equity and Polar Capital Global Technology, will not have recourse to the Financial Services Compensation Scheme (FSCS).
Currently investors in these funds are protected by EU compensation schemes as well as certain FSCS protections. The latter depends on a number of factors, including the type of firm or fund, the location of operations and the type of claim. From January, UK investors will have to apply to foreign compensation authorities to get their money back if a product blows up.
At the same time, the FCA will only be able to suspend or revoke the licence of EU-domiciled funds. It will no longer have any oversight of them, as it will exit the EU’s financial watchdog board, and will not be able to initiate and carry out investigations into any fund that fails.
The Financial Services Consumer Panel (FSCP) has criticised the loss of protections, warning over the risk of UK investors being unaware their investments are not covered by the FSCS.
‘Without this we believe there is a risk that consumers will build a portfolio of investments (across UK and EU funds), and make investing decisions, without the knowledge that some funds may not offer protection via the FSCS,’ the FSCP said responding to the consultation.
‘While there may be an appropriate alternative dispute resolution facility in the overseas country, the expense and difficulty in accessing such a service (for example the consumer may need to raise their complaint in the overseas language) may be prohibitive for the average retail investor to pursue a claim.’
The Financial Ombudsman Services (FOS) will also cease covering EU-domiciled funds, which previously were under the body’s compulsory jurisdiction.
The Treasury dismissed concerns, saying: ‘The government does not consider it necessary to extend the jurisdiction of the FSCS to operators or depositaries of overseas funds.’
It added: ‘Although a small number of respondents, including the Financial Services Consumer Panel, requested that overseas funds be brought into the scope of FOS, the government did not find evidence that would suggest bringing overseas funds into FOS is necessary or justifiable.’
However, the FSCP highlighted how confusing the post-Brexit funds landscape would be for investors.
If 9,000 EU-domiciled funds are allowed to be marketed alongside the 3,000 domestically-based mandates, the universe available to investors will be dominated by those not covered by the FSCS redress schemes or Ombudsman services.
It is not clear whether there will be any requirements on fund platforms to inform investors of the loss of recourse to redress.
Citywire understands the changes, which will affect clients already in EU-based funds, have not been widely communicated to investors.
Many UK asset managers have some or all of their fund ranges domiciled in the EU. US and Asian investment firms entering the European market have also often historically favoured launching funds in Dublin or Luxembourg that can be sold across the EU. This was far cheaper and more efficient than launching mandates in individual countries.
Popular fund groups, including Polar Capital and Tilney Bestinvest, already have entire fund ranges based outside the UK, including funds that are bought by UK advisers and retail investors. These will now fall outside the jurisdiction of the FCA, FSCS and FOS.
The Treasury said its decision was based on the fact that the majority of respondents ‘had seen no examples of investors in the UK requesting compensation from overseas schemes’.
At the time of publication the Treasury had not responded to questions put to it by Citywire. The FCA declined to comment.