Financial Regulation in Spain
There’s been much written recently about the regulation of financial advisers in Spain, and this information is intended to clarify the regulatory position. It is understandable for those who are familiar with UK financial services regulation to expect similar protection to be available in Spain. However, like many things in Spain (house purchase, death duties etc) the laws, regulations and practices are different in some key areas.
Spain’s Financial Services Regulator
The main regulator of financial services in Spain is the Comision Nacional del Mercado de Valores (CNMV).
Unlike the UK, the simple provision of financial advice to an individual is not a regulated activity in Spain. This is the fundamental difference with the regulatory position in the UK where the provision of advice is regulated. However if the provider of the advice then “intermediates” or transacts business with an investment house or stockbroker on behalf of his client, then this is regulated and the intermediary is required to be regulated. Simply giving advice alone is outside of the regulatory legislation. The following is a quote received from the CNMV recently:
“Concerning advising, it is a free activity In Spain. Thus, those persons or entities providing only independent advising services are not under the supervision of the CNMV and they do not need to be registered within the CNMV to provide these services”.
The CNMV regulate dealings in financial “instruments” which are freely traded on the open market, such as shares traded on the Spanish stockmarket, but also including collective investment fund managers (offshore funds and unit trusts), stockbrokers, discretionary portfolio management services where trading activity takes place, futures and options underwriting and so on. The main legislation governing what is regulated (and who is required to be regulated) is contained in Act 24/1988, July 28, of the Securities Markets. Whilst the adviser may purely give advice without being regulated, the moment he takes any action to put the advice in place by “intermediation” then he must be regulated. Therefore any adviser who makes an investment recommendation of an investment traded on the open market and takes positive action of any description to put such an investment in place must be regulated by the CNMV.
The definition of “instruments” under the Spanish Act excludes investment made via an insurance contract. Investment in single premium insurance bonds, including single premium with profits policies are therefore not regulated by the CNMV.
This is because “instruments” are defined in a list under Article 63 of the Act as an investment that can be “freely negotiated in a secondary market”. Single premium insurance bonds including single premium with profit policies do not have a secondary market. Single premium insurance bonds issued by insurance companies are not traded in any secondary market, they are simply encashed if the investor wants his investment returned. So insurance bonds are not capable of being regulated by the CNMV. Whilst this point is not always clear, a specialist legal financial services lawyer, who is a Law Professor and a Partner in one of the largest specialist firms in Madrid, is of the unequivocal opinion that insurance bonds are excluded as there is no secondary market. Directly dealing in collective investments, such as an OEIC (Open Ended Investment Company), shares, unit trusts and offshore funds are specifically covered by the Act and are required to be regulated by the CNMV, as are those intermediaries who instruct such investments on behalf of their clients.
UK Regulation in Spain
Some advisers in Spain, who are regulated in the UK, claim that the UK Financial Services Act protects advice given in Spain, and that therefore the client is well protected. This is misleading. The UK’s Financial Security Authority (FSA) do not provide the same degree of regulatory services nor apply many of the UK rules where the investment advice is provided from a base outside of the UK (under the operation of FIMBRA adapted rule F27.2.1 (3).) Thus a FSA regulated firm providing advice from a base in Spain, does NOT have to provide independent advice, nor even provide full information about the investment recommended. He’s also not obliged to issue Terms of Business, nor to ensure there’s no conflict of interest, nor obtain a fact find. The UK’s Investor Compensation Scheme does not apply either, although even if it did, it is limited to £48,000.
So, the CNMV doesn’t cover investment advice, and the UK FSA offers only limited protection where a UK adviser provides advice from Spain. There is an additional agency for the regulation of insurance brokers (found in the Spanish law 9/1992 of 30 April) with the Direccion General de Seguros (“DGS”) being the body charged with the registration of such brokers and to ensure that they meet the required legal standards. This authority tends to be directed towards ordinary insurance products (life and domestic) rather than the sophisticated UK style investment based products linked to a life insurance contract such as single premium investment bonds where an insurance policy structure is used to hold a personal choice of investments.
If, for example, an individual is advised to set up a trust (a unregulated activity in Spain) for tax and personal financial planning reasons in a non-Spanish location and the trustees then make any investment on behalf of the trust, then such activity is entirely outside of the Spanish regulatory regime. It is essential, however, to ensure that the adviser you are dealing with is reputable and meets a high compliance standard in their place of business and additionally that the adviser holds Professional Indemnity insurance to protect you against an act of negligence.
Investment or Insurance Product Regulation
The law attempts to limit the marketing of investments or insurance that are not authorised by the CNMV or the DGS. The 3rd Life Directive of the EU enables investments that are regulated in other EU countries (such as the UK, Luxembourg and Ireland) to be marketed in Spain, subject to the particular product being authorised for distribution by the Spanish authorities. Many investment products that are marketed in Spain are not so authorised and it is in this area that many of the problems can arise. If mis-selling occurs, the product provider will normally claim that it was the agent (or broker) that was responsible and that the agent or broker acted as the agent of the client and not of the investment house. If the agent or broker is not registered are regulated in Spain or elsewhere, then there is little or no recourse to an independent regulatory body to deal with any complaint.
The law doesn’t allow investments or insurance policies outside of the EU to be marketed in Spain to individuals without specific authorisation, although they may be marketed to entities outside of Spain, such as Offshore Trustees, even though the beneficiaries (and settlor) may include Spanish residents. The regulation of marketing, however, doesn’t really offer satisfactory protection to the individual investor, in my view, as it doesn’t address the financial loss that can arise from an adviser providing inappropriate advice to his client.
If an investor believes he or she has lost out from bad advice it is possible that the overseas insurance company will pay some compensation if it can be shown that they allowed their investment to be marketed in Spain without authorisation, or if a broker appointed by them marketed it inappropriately. However, the unhappy investor is dependent on the goodwill of the insurance company, though the overseas regulator (in the Isle of Man or Channel Islands, for example) may bring informal pressure on the company, especially where the adviser has proven to be deficient.
The Regulatory regime in Spain concerning financial services is unsatisfactory from an expatriate investors point of view and it is therefore much more necessary for the individual investor to carry out careful research of the Firm providing advice.
Essential Compliance Procedures - Check that these procedures are in place
Selecting an adviser is made much more difficult in Spain because of the lack of adequate regulation. The large established international firms of advisers apply procedures which are designed to protect the investor and to preserve their reputation and which in many cases go beyond what would be required by a Regulator.
These procedures should include the following:
1 All advice must be given in writing and an independent Compliance Department must check the letter or report before it is released to a client. The contents are checked to ensure that the advice provided is appropriate to the client’s needs and objectives, both from an investment and taxation perspective.
2 Any new advisers should have formal professional qualifications (usually UK based) and provide first class references.
3 Clear objectives and circumstances of each client should be obtained, and advice given must match those objectives and agreed risk profile to ensure the advice is suitable.
4 Full written details (including full risk warnings) of any proposed investment must be provided when the advice is given. Some companies only use the Compliance Department on a sample basis, and after the report has been sent out. It is my much more effective if all reports are checked and approved by the Compliance Department before they are released.
5 Only investments that have been approved by the Compliance Department should be recommended. Only investments that are subject to regulation in the country from which they are issued should be recommended, and unregulated investments are to be avoided.
6 Investments recommended must be described clearly and not in any misleading manner.
7 Regular valuations must be provided and prepared independently of the adviser. Clients must receive a regular review of their investments. Clients should have direct access to their administration team via dedicated telephone facilities.
8 All of the chosen Firm’s advisers should receive structured training throughout the year and be subject to continuous assessment, as well as being provided with information to keep up to date about relevant financial products, tax changes and markets.
9 Full terms of business must be given to each client at the outset and on any subsequent occasion when new business is transacted.
10 There must be a dedicated Compliance Officer within the Company advising you who is responsible for the Compliance Department and independent of the adviser, and who investigates all complaints promptly. In the event the complaint is not resolved to the satisfaction of the client, an independent arbitration and/or mediation should be offered (subject to agreement of the company’s professional indemnity insurers).
11 Professional indemnity insurance is essential for the benefit of clients. This must cover both investment advisory and trustee services.
12 The Compliance Department, prior to publication, must approve all advertisements including circular letters.
13 Disciplinary procedures may be applied where necessary to ensure compliance.
It is difficult for the smaller firms to operate in this way. It is highly unsatisfactory when the person setting the procedures, giving the advice, structuring and selecting investments, keeping abreast of financial and legal changes, and investigating complaints, turns out to be the same person.
The procedures applied by the larger groups are far more extensive than the Spanish regulation would currently require, even if advice were to become a regulated activity in Spain. The investor is today left with ensuring that he or she deals with the larger more reputable companies, rather than the smaller company that struggles to provide a compliant and independent service.