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Protection

EUROPEAN UNION - THE THIRD LIFE DIRECTIVE

Legislation was introduced within the European Union in the early 1990's known as the Third Life Directive in order to provide a basis and code of law for the cross-border marketing of Financial Services.

All EU Member States have adopted the Third Life Directive. Financial Services products may ONLY be marketed by an EU member State outside of the product provider's country of domicile subject to specific product authorisation regarding distribution by the country in which the product is to be distributed.

This legislation has seen a massive growth in the number of investment houses using the Republic of Ireland and Luxembourg (as well as the United Kingdom ) as a domicile for the products that these investment houses wish to distribute throughout EU member states.

Subject to the authorisation of a specific product in each of the EU member states, the product may be sold (including marketing and advertising) on terms equivalent to those applying to domestic products.

Therefore, ONLY such funds as are authorised for distribution may be marketed, advertised and overtly sold to members of the public under normal domestic rules.

The above represents, in broad generally terms the distribution principle employed throughout the European Union in order to provide an open market for the provision of Financial Services between EU member states.

However, the Third Life Directive also specifically prohibits the distribution of certain products where the domicile of the product is outside of the EU.

In particular, this legislation prohibits the overt marketing, advertising and selling of any product where the domicile of that product is in a tax favoured jurisdiction outside of the EU e.g. Jersey , Guernsey or the Isle of Man.

Products which are domiciled and issued from the UK dependent territories may not be sold within the EU.

Any investor who wishes to invest in any investment product or arrangement which has its domicile in the Isle of Man, Jersey or Guernsey may only do so by the use of what is known as the “own initiative principle”.

Under this restriction, the non-EU product providers may not advertise nor market their services or products within the EU unless they receive specific authorisation to do so.

No such product has been authorised within the EU to date.

In addition, Financial Adviser's may not “sell” such products to their client's or prospective client's. The only means by which an investor may access these products, is by the use of their own “initiative” in selecting such a product. In effect the client can buy the product but must not be sold it. In my experience, this situation very rarely happens in practice as most clients are sold the products recommended by the adviser and do not, as it were, place a specific investment order with the adviser.

In practice therefore, where an investor who is a resident of the EU wishes to purchase a product, which is domiciled in the UK dependant territories (or any other tax favoured jurisdiction), he or she may request an investment adviser to research such products for the client to consider. Such products may not be overtly sold to any client. The adviser must have a specific request from the client's to carry out the necessary research and present this information to client's, but they are prevented under the terms of Third Life Directive from recommending or “selling” such an investment.

In essence, the client may place an order to buy such an investment, but if an adviser recommends or “sells” such an investment to an investor, he is in breach of the European Union's Third Life Directive.

In my opinion, many of the offshore territories have ignored this legislation and have permitted, in some cases, unregulated businesses, to overtly sell their contracts outside of the provisions of the Third Life Directive.

I believe that such contracts may be capable of being voided ‘ab initio', provided evidence can be shown that the investment was overtly sold to an investor, as opposed to the investor requesting such information in order to make a reasoned judgement on the purchase of the investment based upon his own initiative.

Many of the companies operating in the UK dependent territories, are owned by UK based businesses, many of which also own interests in Financial Services companies or banks in Spain , France and Portugal . None of these companies would wish to be found in breach of the Third Life Directive. Any individual who believes that he may have been mis-sold an investment which is in breach of this Directive should advise the product provider if the investor believes that the product has been mis-sold or was inappropriate to the client's needs or that the product was sold to the investor in breach of the Directive.

Any complaint in this regard should be addressed to the Compliance Officer of the product provider concerned who will be required to enter any complaint on their formal Complaints Log which is normally open for inspection to their regulator.

I also believe that any product provider based in the UK dependent territories who has permitted the advertising, marketing or overt selling of products, should react positively if they are advised (and have evidence) of the breaches that may have occurred in respect of The Third Life Directive and are advised that such breaches are to be submitted to the domestic regulator (in the case of Spain, the CNMV).

This clarifies, in general terms, the EU Third Life Directive and what it does and does not permit.

David Klein

© COSTA DEL SOL ACTION GROUP
Against Unlicenced Financial Advisers & Product Providers that support them.