THE REGULATION OF FINANCIAL INTERMEDIARIES IN SPAIN
In Spain, financial intermediaries are regulated in the conduct of business by either the CNMV (Comision Nacional del Mercado de Valores) or the DGS (Spanish Insurance Regulator).
The distinction between these two main regulatory bodies is sometimes a little blurred in the mind of many UK expatriates because of the difference that exist in the Spanish interpretation of what is and what is not an investment.
In the UK if your adviser wishes to recommend investing in stocks and shares, unit trusts, offshore funds, insurance investment bonds, gilts etc there is one regulatory body, The Financial Services Authority, which supervises all these activities.
In Spain the two regulators are distinctly different. The CNMV regulates all “quoted” investments i.e. those which are traded on an open exchange with published pricing. The DGS, on the other hand, regulate all insurance activity, whether this is an insurance bond with €100m of capital invested in equities, bonds etc within it or whether it is insurance against rainfall at the local garden fete!
It is because of the different regulatory framework that many expatriates and advisers have become confused about who regulates whom, and in the event of a complaint that is not resolved, to whom does the complainant turn to and what remedies are available?
Before looking at what is, and what is not, available from the regulatory regime in Spain let us try to simplify what each of the national regulatory bodies does regulate.
The CNMV regulates, supervises and inspects the Spanish stockmarkets and those who sell traded securities. Their objective is to protect investors. It regulates companies which issue securities and those which provide investment services, including collective investment schemes, broker/dealers and dealers, and portfolio management companies.
Unlike the UK, companies which are purely involved in providing investment advice are not regulated in Spain. So, the adviser who simply says “I suggest that you invest in XXX” does not need to be regulated. However, the minute advice strays into effecting a transaction (which can even include as little as putting an application form in the post), then the advisor must be regulated by the CNMV.
From 1st October 2007, this will all change. Advisers will have to be regulated. To do so, they will have to prove that they are fit and proper persons and so if they already have a blemished record, it is unlikely that they will continue to be in business after 1st October 2007. Some advisers are already advertising that they have implemented these changes, but this is a meaningless statement and may be deceptive to the lay reader of the ad. Until they have been investigated and approved, they remain unregulated and remain outside of any disciplinary process and their clients will not have any secure compensation arrangements for negligent advice nor access to independent arbitration procedures.
The CNMV have a system of posting warnings about advisers who they suspect may be offering services without appropriate authorisation. However they do not necessarily investigate their suspicion: they simply post a warning that an adviser is trading without appropriate authorisation, and as a result the warning system has limited value or credibility
The DGS regulates insurance companies and advisors to insurance contracts, which include investments within them. In many cases the issuance of insurance bonds involves millions of pounds of underlying investments but because they are within an insurance “wrapper” (often because of the tax benefits of holding assets in this way) they are not regulated by the CNMV, but by the DGS.
In the UK, there is a single regulator (the Financial Services Authority “FSA”); whilst in Spain all insurance products are regulated by the DGS, and direct or traded investments and collective investments by the CNMV, as above.
It is possible that where an insurance company is regulated in Spain, it may appoint “agents” who will be regulated under the authority of the insurance company’s own regulated status. If for example a particular insurance company offers exceptional products, service or value it may be wholly appropriate for an agent to offer only that company’s insurance products and, of course, any such agreement may be varied in the future if the circumstance were to alter. In the same way that an adviser may select a single trust company to hold assets, it is no different when selecting an insurance company if the purpose is to provide the best product for, say, tax planning.
The EU and the fast changing face of regulation
The objective of the EU is to allow freedom of services and freedom of establishment, which means that if a company is regulated in one country, it can offer its services freely, without restriction, in any other EU country.
The goal is that this can happen without any further regulation, but as a temporary measure the concept of “passporting” has been introduced.
This means that if a company is regulated in one country (e.g. the UK by the FSA) then it can freely passport its services into any other EU country, such as Spain `provided they register with the Spanish Financial Services. The process is relatively simple, it means that the Spanish regulators regulate a company which has been passported into its territory. The the home regulator (in this example, the UK’s FSA) continues to regulate that company only in the UK.
Regulation throughout the EU is inconsistent. Each regulator has its own rules, and they can easily conflict with another country’s regulation. The ruling in Spain is simple, all companies must be registered with the Fiancial Services.
The UK home rules are much more extensive than those in Spain, and in order to allow UK firms to compete on an equal footing in Spain, various rules which would apply in the UK, do not apply in Spain. The Financial Services Compensation Scheme in the UK does not apply where the advice has been rendered in Spain, even though it may have been given by a UK FSA regulated company. However it is applicable in Spain if the company is registered. There is no access to the UK Ombudsman service if you are non-resident of the UK.
There is assistance provided by the Spanish regulators in the event of you receiving inappropriate advice.
Unfortunately there have been (and still are!) many unregulated advisors in Spain. They are characterised by using consultants who are unqualified, not carrying any professional indemnity insurance and giving inappropriate or negligent advice. They have been particularly prevalent in the expatriate market. A number of these unregulated advisors have been identified on this website.
Is it Sufficient to deal with a Regulated Advisor?
It is very important that any prospective investor deals with a regulated advisor, but in itself the fact of regulation is insufficient. Using a regulated adviser does not guarantee quality. You should deal with advisers who have expertise and experience in dealing with all manner of financial services including tax planning, succession planning, investment planning etc. in both Spain and your home country in case you or your widow(er) should ever decide to return there.
Ask all the right questions at outset. Check out the credibility of the adviser with third parties, do not rely on the shiny front office… anyone can make an office look smart. Ask about the regulated status of the adviser, ask if they carry Professional Indemnity Insurance and make sure that they provide a full report before you proceed with any advice. The report must contain full product particulars and give adequate reasons why any particular product or service is being recommended. The charges must be clear and the report must contain any relevant risk warning appropriate to the recommendations.
Never, we repeat NEVER, pass your money to the intermediary unless you are entirely satisfied that they are properly regulated to handle client money. Only ever send the funds for investment direct to the institution being recommended to you.
Finally, ask what happens if you do have a complaint so that you are aware from the outset what action is available to you if you are the victim of bad advice. Most of these issues should be covered in the standard Terms of Business which any decent Firm will provide before you part with your money. Study this carefully as your rights in the future will be determined, at least in part, by what this document says.
Remember it took a long time to make your money… it’s up to you to make sure you are not the victim of unregulated, inappropriate advice. It is still, and always will be, a case of Caveat Emptor. Avoiding the cowboys and getting it right from the start is the key to long term trouble free financial advice.