Overseas Persons Exclusion and the UK Third Country Regime
The UK maintains its traditional openness to international business even post Brexit, with the departure from the EU offers UK authorities the opportunity to take a fresh look at the entire UK overseas framework and the various regimes within it. Since the 1980’s, the UK implemented a varied range of third country regimes to ensure that its markets can be accessed from abroad. Similar to Europe, whilst part of the UK overseas framework is based on mutual recognition and equivalence regimes, a significant part thereto does not rely on any form of authorisation, recognition or registration for the third country firms in their home states. This is the case of the UK Overseas Persons Exclusion.
The importance for the UK to retain the position as a global financial centre after Brexit is demonstrated by a succession of various call for evidence to overhaul the entire UK Overseas Framework. An opportunity for the third country regimes and rules to catch up with the changed reality and align with significant economic, social and technological changes occurred in the past fifteen years or so.
And whilst the overall feedback from stakeholders is not to change dramatically the UK Overseas Persons Exclusion, deemed a vital mechanism for third country firms to access UK markets, some inevitable changes might derive indirectly to it through a very recent consultation to revise the exemptions to the Financial Promotion regime for high net worth individuals and sophisticated investors.
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The Guidance Puzzle for the UK Overseas Persons Exclusion
The consultation process kicked off in light of Brexit and specifically focussing on the UK Overseas Persons Exclusion returned some interesting feedback on the obscurity of the rules governing the regime. The use of this specific third country regime is made – unnecessarily – more complex and expensive due to the fact that related governing provisions are scattered in different guidance texts issued both by the HM Treasury and the UK FCA. As part of the proposed overhaul, it was suggested to consolidate the rules in a single guidance.
As defined in the relevant sections of the UK FCA perimeter guidance, which in part governs the UK Overseas Persons Exclusion, an overseas person is a person who carries on what would be a regulated activity but who does not do so, or offer to do so, so from a permanent place of business maintained in the United Kingdom. Of course, reliance on the UK Overseas Persons Exclusion is justified only in case the activity is regarded as being carried out in the United Kingdom. This is where things can become a little more blurred. Suffice to say on the point that a person based outside of the United Kingdom may also be carrying on activities in the United Kingdom even if he does not have or maintain a place of business in the United Kingdom. This is clearly the case of occasional visits, use of the internet or other telecommunication systems in order to carry out the activity.
In simple terms, in these situations, the UK Overseas Persons Exclusion allows overseas firms to provide financial services in the UK, which otherwise would require to be regulated, without the need for an authorisation from the UK FCA. Differently from equivalence or other mutual recognition type of arrangements, the ability to make use of the UK Overseas Persons Exclusion is not at all linked to any existing registration or standard of regulation applied in its home state to the overseas person. Most typically, the UK Overseas Persons Exclusion covers a wide range of regulated activities, including dealing in investments as principal, arranging deals in investments etc.
Intersection with the High Net Worth and Sophisticated Investor Exclusions
Article 72 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) contains additional provisions on the UK Overseas Persons Exclusion. Most notably, it allows for an overseas person to enter into a transaction as principal with a person in the United Kingdom, if the transaction is the result of a legitimate approach. And it is the legitimate approach which represents the link between the UK Overseas Persons Exclusion and the Financial Promotion Exemptions. A legitimate approach is in fact an approach to, by or on behalf of an overseas person that does not breach the Financial Promotion restriction, such as the case when the overseas person relies on one of the exemptions to the financial promotion restriction.
As the majority of foreign firms rely on the Financial Promotion Exemptions as a way to be able to operate in the UK on the basis of a legitimate approach under the RAO, any proposed change to the Financial Promotion Exemptions will have an effect on the UK Overseas Persons Exclusion.
Financial Promotion Exemptions and Proposed Changes
The Financial Promotion Exemptions allow unauthorised firms, also from third countries, to communicate financial promotions without the requirement of prior approval of the promotion by an authorised firm. As part of the recent consultation of HM Treasury, three specific exemptions have been taken into consideration for an overhaul – i) Certified high net worth individuals; ii) Sophisticated Investors; iii) Self-certified sophisticated investors.
The rationale for the initial introduction of these exemptions was essentially to empower small and medium sized enterprises to raise capital from so called business angels without having to suffer the cost of compliance with the financial promotion regime. The importance of the role played by this type of private individuals in the financing of early-stage firms was coupled with the fact that sophistication and experience of these individuals made the degree of investor protection afforded by the financial promotion restrictions unnecessary and disproportionate. Of course, the intersection with the Overseas Persons Exclusions allows also for third country firms to be able to approach these same individuals without requiring regulation in the UK.
These exemptions were already object of a review in 2005. At that time, the main change was to introduce self-certifications for the status of both high-net-worth individuals and sophisticated investors, along with the obligation to produce also specific investor warning. With the consultation at issue, the HM Treasury seeks to address effects of inflation as well as digitalisation in order to ensure that the Financial Promotion Exemptions can reflect accurately the reality of the current times. Accordingly, whilst undoubtedly there is a continued case for the Financial Promotion Exemptions, the consultation focusses on the following changes:
- Increasing the financial thresholds for high-net-worth individuals;
- Amending the criteria for self-certified sophistication;
- Placing greater responsibility on firms to ensure individuals meet the criteria to be deemed high-net-worth or sophisticated;
- Updating the high-net-worth individual and self-certified sophisticated investor statements;
- Update names of the exemptions.
Conclusions
Lastly, the overall UK Overseas Framework should not be seen in a vacuum, rather in conjunction with the European MiFIR framework, as onshored in UK regulation in preparation for Brexit. Here an equivalence mechanism is provided whereby, should an equivalence determination be finally made, third country firms – whether European or not – might be able to operate in the UK under MiFIR rather than the Overseas Persons Exclusions.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UK Overseas Persons Exclusion.