EU vs non-EU Third Party Investment Advice – Part 2

by | Feb 28, 2024

EU and Non-EU regulations require that consumers be extremely cautious

EU vs Non-EU investment advice: Does it matter? Yes, investment advisers must follow strict rules to keep clients’ money safe.

If your adviser is licenced only to sell insurance products, they have an IDD licence. To be able to provide you with investment advice, you should use a MiFID investment firm that is licenced to provide investment advice. Learn more about these licences: MiFID vs IDD.

However, often IDD firms market themselves as capable of offering investment advice within insurance products such as an insurance bond, or they state they are introducers or part of another investment firm. Consumers should be extremely cautious of all these claims, as often the IDD firm recommends (or is attached to) a MiFID firm that is not licenced in the EU.  

It matters if the investment company is licenced in the EU or outside the EU. 

IDD firm using an EU MiFID investment firm

The key understanding is that an IDD firm recommending an EU investment firm portfolio is only legal if the client is getting advice about the investments under contract from the EU investment firm. 

Why? The IDD firm, even where it introduces a client to another MiFID investment firm, CANNOT provide the investment advice. Only the EU investment firm has the licences to provide its services (portfolio services generically and individual advice) to the client.  

Whilst the EU investment firm can legally promote or distribute its portfolios in the EU, it cannot be confused with the IDD firm (even where it is the same name or part of the same group of companies).  

Key things to watch out for
  1. The IDD adviser misrepresents themselves as “Wealth Management” or “Investment Portfolio Managers” or similar. They are actually no different than an IDD-only firm, as they are insurance intermediaries only. 
  2. The IDD adviser provides all the investment advice directly to the client, and says that “someone else” is the investment manager, and then asks the client to sign a document saying that the IDD adviser has provided no investment advice, and / or a document which says the client has received advice from the EU investment firm directly (even though the client has never met or spoken to any other party from the investment manager). 

Typically, this occurs with Cyprus MiFID firms that passport their services in the EU as Cyprus automatically bestows passporting onto all MiFID firms without any further checks are authority outside of the Cypriot border. 

IDD firm using a non-EU MiFID investment firm

The key understanding is that it is not legal for an IDD firm to recommend a non-EU investment firm portfolio.  

Why? The non-EU investment firm is offering its portfolio services generically and not to an individual consumer as advice, as it is illegal for it do so.  

Further, the non-EU investment firm cannot legally promote or distribute its portfolios in the EU and is unlikely to have PII cover for advice to EU residents. In this case the IDD firm in the EU, when recommending a non-EU investment firm portfolio, is acting outside its permissions as it is actually giving unregulated investment advice to its clients. Its PII insurance does not provide any protection to the consumer.  

Key things to watch out for

The regulator allows “reverse-solicitation” where an individual, not sponsored or directed by the IDD firm, is allowed to go to a non-EU investment firm, but solely on the basis of their (the client’s) own initiative. 

Additionally, a contract or terms of business must be signed between the client and the non-EU investment firm. The regulators have a very strict definition of this.  

  1. Some IDD firms try to get around regulators by asking their “clients” to sign away the clients’ rights and say they approached the non-EU investment firm, and likewise, this means the client is acting on their own, thus waiving all their rights against all parties effectively. 
  2. In practice, this means that any IDD firm in the EU that directs clients to non-EU investment firms are doing so without PII, any client protection and are operating illegally especially if the receive any earnings, soft commissions or inducements for so doing.
Use of EU and non-EU investment firms via an IDD insurance licence

Clients lose important protections: 

  • No Warranty Fund 
  • Lower capital adequacy and lesser qualifications 
  • Lower level of regulatory supervision 
  • PII cover is unlikely to cover investments nor investment advice 
  • Lower level of consumer protection for the investing public 
  • If a company goes bust no protection for the investments 

Additionally, when using an EU investment firm: 

  • EU firm only provides consumer protection on the advice it gives to the investor- IDD advice not covered.  
  • EU advice firm must give advice to the client. 
  • IDD licence provides no protection for investment advice given by the EU firm- confusing for the investor

Additionally, when using a non-EU firm 

  • No annual SREP Review  
  • Non-EU firm cannot be recommended to investors by an IDD firm 
  • EU regulators provide no protection or regulation for non-EU DFM 
MiFID and IDD in one firm offers full protection

In this case, consumers receive the best of all worlds. Investment advice and strategic Wealth Management planning come from qualified, legally licenced EU investment combined insurance firms.  

Additionally, independence often means all products are selected for a retail client’s individual needs, with oversight in place for local compliance. A securities MiFID licence can also lead to the buying and selling of securities and individual holding of assets in products such as Individual Saving Accounts (ISA) for example.  

We think that this is likely to be the only way a retail client is able to fully protect themselves with their limited technical and regulatory knowledge. The consumer has a full suite of protection on both investments and insurance policies based on regulatory requirements (warranty and PII) through to complaints and whistleblowing processes and published terms of the company. 

What Should Investors Know About Differences Between MiFID and IDD Advisor Licences?

The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

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Post written by:

James Pearcy-Caldwell

James founded and runs Aisa with an emphasis on a pro-client and transparent approach. He is always looking for the most suitable solution for the benefit of the client. He has been in the field of investment advice since 1998, and therefore fully understands the necessity of open communication and honesty. James is certified in many financial areas in several countries and also holds the most prestigious European certificate in investment planning EFP (European Financial Planner).

Aisa International is the only financial advice service company specialising in advice for expats that is regulated as a Securities Trader in the Czech Republic, USA, and UK.