EU Clients and US ETFs
In 2018, as part of part of MiFID II, an EU regulation called PRIIPs (Packaged Retail and Insurance-based Investment Product, detailed here PRIIPs Regulations) is effective 1 January 2020. This regulation was introduced to ensure that European Union Retail Clients (EU Retail clients) have adequate disclosures, transparency and Key Investor Information Documents (KIIDs) when purchasing certain financial products. Improving the transparency of PRIIPs offered to EU Retail clients is an important investor protection measure.
The regulation covers any investment where the amount repayable to the client fluctuates because of exposure to the performance of assets not directly purchased by such EU Retail clients. In relation to Stake’s product offering, this is applicable to the US Exchange Traded Funds (ETFs), as the respective US ETF issuers have not produced KIIDs.
Stake has taken the position that after 1 January 2020, customers deemed to be “EU Retail clients” under MiFID II are unable to purchase a product covered by PRIIPs. However clients classified as “Professional clients” under MiFID (defined by Stake as a “Stake Accredited Investor”) are afforded less protection and can trade US ETFs on Stake.
The purpose of this document is to outline how Stake re-categorises EU Retail clients as Stake Accredited Investors.
Non-EU clients are not impacted by this regulation and will be able to purchase and trade US ETFs without the need to be classified or accredited before they can purchase such instruments.
MiFID Client Categorisation
The European Union legislation MiFID and MiFID II, requires Stake (HELLOSTAKE LIMITED) to classify each Client based on their knowledge and experience, and classify them into; either Retail or Professional clients in accordance with the legislation. In accordance with the Financial Conduct Authority rules, we classify everyone as an EU Retail client to provide the highest level of protection under MiFID II.
To trade US ETFs EU Retail clients must be re-categorised as a Stake Accredited Investors (a Professional client under MiFID and MiFID II) and do not receive the same level of protection as EU Retail clients but as a consequence are not subject to the KIIDs requirements described in this document.
Stake Accredited Investors, considered Professional clients under MiFID II rules, including regulated entities, large clients and individuals who have asked to be re-categorised as “elective professional clients” and meet the MiFID II requirements based on their knowledge, experience and financial capability.
Stake provides a process that enables EU Retail clients to request to be classified as Stake Accredited Investors and therefore can purchase US ETFs on Stake after 1 January 2020.
Re-categorisation under MiFID II
The approach for re-categorisation by a regulated firm, Hellostake Limited, are outlined below and reflect the language outlined in MiFID II.
The risks of packaged investments
A firm (Stake), that offers an investment service with another service or product or as a condition of the same agreement with an EU Retail client must:
- inform EU Retail clients if the risks resulting from the agreement are likely to be different from the risks associated with the components when taken separately; and
- provide EU Retail clients with an adequate description of the different components of the agreement and the way in which its interaction modifies the risks.
The above requirements do not apply in respect of Professional clients.
Stake will always ensure that its’ communications with all clients are fair, clear and not misleading. However, the way in which a firm may communicate with Professional clients (about itself, its services and products and its remuneration) may be different from the way in which the firm communicates with EU Retail clients. Stake’s obligations of details, method and timing of the provision of information differ for EU Retail or Professional clients. Most relevant is that Key Information Documents (“KID”) for PRIIPs”, which include US ETFs are not applicable to Professional clients.
All Stake’s clients are non-advised and assessing appropriateness for non-advised services is important. Stake is usually required to determine whether a client has the experience and knowledge in order to understand the risks involved in relation to a certain financial product. Where an appropriateness assessment is required for a client, Stake will assume that a Stake Accredited Investor has the necessary experience and knowledge to understand the risks involved in relation to those particular investments or products. Stake will not make such an assumption for an EU Retail client.
Stake provides non-advised investment services and is not required to give warnings to the Professional client if it cannot determine appropriateness with respect to US ETFs.
Exclusion of liability
Stakes’ ability to exclude or restrict any duty or liability owed to clients is narrower under the FCA rules in the case of EU Retail clients than in respect of any Stake Accredited Investor.
The Financial Services Ombudsman
The Financial Ombudsman Service in the UK may not be available to Stake Accredited Investors; it is up to such client to ascertain applicability.
Stake Accredited Investor
Stake’s approach below is not a definitive interpretation of the regulation, but a guideline to our approach in categorising customers who wish to be Stake Accredited Investors.
An EU Retail client may request to be re-categorised as a Stake Accredited Investor, by either:
- online, by undertaking a questionnaire and a self-declaration process through Stake’s investment platform;; or
- offline, by emailing Stake with documents necessary for Stake to re-classify the customer as a Stake Accredited Investor.
Should a client succeed in being categorised they will be notified by Stake at the appropriate time.
An EU Retail client may request to be reclassified as Stake Accredited Investor as is set out in our product (web, app or otherwise). Stake may request additional documentation to undertaking its assessment.
To obtain such re-categorisation through Stake’s platform, EU Retail clients must have at least $30K USD of assets in their Stake account and provide evidence that they satisfy at least two of the following criteria:
- Number of Trades: During the last 12 months, there were at least forty (40) trades (including at least 1 per quarter) in stocks or ETFs or similar products, in a Stake account or another brokerage or share dealing account;
- Portfolio Value: The Client holds a portfolio of financial instruments (including cash) that exceeds EUR 500,000 (or equivalent);
- Employment History: The Client works or has worked in the financial sector for at least one year in a professional position which requires knowledge of products it trades in.
Upon notification by the client that it wishes to be a Stake Accredited Investor, Stake will request that the customer provide details that confirms that the client meet 2 of the above 3 criteria.
If Stake is of the belief that the client does not meet the criteria to be a Stake Accredited Investor, Stake will not allow the client to be re-categorised on the Stake investment platform for a least a 30 day period, but a client can request that Stake review its decision due to various reasons, including a change in the status of the client. A client can also request that Stake re-categorise them via direct email to firstname.lastname@example.org.
In such instance, Stake may request documentary evidence which gives it comfort as to classifying a client as a Stake Accredited Investor, including:
- In relation to item 1 above (Number of Trades): If not evidenced within their Stake account, proof from another brokerage (or brokerages) showing at least 40 trades in the last 12 months.
- In relation to Item 2 (Portfolio Value): If not evidenced by their Stake account, confirmation from an accountant or proof of assets showing greater than EUR 500,000 (i.e.copies of brokerage statements, tax, bank or other certificate of proof or combination of such)
- In relation to Item 3 (Employment History): Proof of employment history, which may include a digital copy of a signed letter from an employer or manager, showing such employment including a statement of tenure and position that will evidence such.
Upon review and verification of the information and supporting evidence provided, Stake may re-categorise EU Retail clients if the necessary conditions are met. EU Retail clients requesting to be re-categorised as Stake Accredited Investors must read and understand all warnings and guidance provided by Stake and confirm that they have been read.
Stake will require such clients who are reclassified as Stake Accredited Investors to sign and confirm their understanding of such reclassification.
Stake will undertake regular checks on the activity of Stake Accredited Investors in relation to their status. Stake reserves the right to reclassify customers and remove their status as a Stake Accredited Investor at Stake’s absolute discretion.