UK Clients and US ETFs
In 2018, as part of MiFID II, an EU regulation, transposed into UK law, called PRIIPs (Packaged Retail and Insurance-based Investment Product Regulations (PRIIP Regulations) became effective in UK law on 1 January 2020. This regulation was introduced to ensure that UK retail clients have adequate disclosures, transparency and Key Investor Information Documents (KIIDs) when purchasing certain financial products. Improving the transparency of PRIIPs offered to UK 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 UK “retail clients”. In relation to Stake’s product offering, this is applicable to 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, UK “retail clients” are unable to purchase a product covered by PRIIPs. However, “professional clients” under MiFID II (defined by Stake as “Stake Accredited Investors”) can trade US ETFs on Stake.
How Stake re-categorises certain UK retail clients as Stake Accredited Investors is outlined below.
MiFID Client Categorisation
In accordance with the Financial Conduct Authority rules, we initially classify everyone as a UK retail client to provide the highest level of protection under MiFID II.
To trade US ETFs, a UK retail client must be re-categorised as a Stake Accredited Investor (a professional client under MiFID and MiFID II) and will not receive the same level of protection as UK retail clients, but as a consequence are not subject to the KIIDs requirements described above.
Regulated entities, large clients and individuals who have the requisite knowledge, experience and financial capability, may be eligible to be re-classified as a Stake Accredited Investor.
Re-categorisation under MiFID II
The approach for re-categorisation by a regulated firm, Hellostake Limited, is outlined below in accordance with UK law.
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 a UK retail client must:
- Inform UK retail clients of the risks resulting from the agreement are likely to be different from the risks associated with the components when taken separately; and
- provide UK retail clients with an adequate description of the different components of the agreement and the way in which its interaction modifies the risks.
- Client Communication
Stake will ensure that all communication with clients is 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 UK retail clients. Stake’s obligations of details, method and timing of the provision of information differs for UK retail and 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 a UK 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 UK retail clients than in respect of any Stake Accredited Investor.
Stake Accredited Investor
Stake’s approach to categorising customers who wish to be Stake Accredited Investors is outlined below.
A UK retail client may request to be re-categorised as a Stake Accredited Investor, by completing the in-app process covering the client’s investment history, financial experience and financial holdings.
To obtain such re-categorisation through Stake’s platform, UK Retail clients must provide evidence that they satisfy at least two of the following criteria. Only once Stake have reviewed and approved these documents will the client be able to trade ETFs
- 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.
Once this process has been completed, the client will have an obligation to provide back-up documentation confirming the responses provided in the app. Stake may request additional information.
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 email@example.com.
The documentary evidence that Stake may request include:
- 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.
- 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)
- 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.
UK retail clients requesting to be re-categorised as Stake Accredited Investors must read, confirm and sign that they understand all warnings, guidance provided by Stake regarding 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.