UK investor in US stocks

DavidPrice1

Hi all,

I have a question which I hope you can help with. I am interested in an US ETF to invest in. Now, my current brokers Freetrade, Hargreaves do not offer US ETFs due to being identified as PRIIPS thus needing a KID. Fair enough, but I made an account with IG and I found many US ETF's that I can invest in (after filling in an online W-8BEN form). So my question is, if IG is offering these ETFs without a KID, would there be a problem in me investing in the ETF? Also, how does IG offer them, when many other brokers cannot. Is there a caveat somewhere I am not seeing? 

I hope all that made sense. 

Regards,
David.

Voyager2002

I think that if you attempt an actual purchase, you will find that at the last moment a screen comes up saying that you are not allowed to proceed. IG would actually be breaking the law if they allowed an ordinary investor resident in the UK to purchase the securities in question.

These purchases are still possible for professional investors who can provide evidence of specific financial qualifications and/or experience gained in relevant employment, which is probably why some platforms continue to offer these securities, even though most of us cannot buy them.

DavidPrice1

Voyager2002 said:

I think that if you attempt an actual purchase, you will find that at the last moment a screen comes up saying that you are not allowed to proceed. IG would actually be breaking the law if they allowed an ordinary investor resident in the UK to purchase the securities in question.

These purchases are still possible for professional investors who can provide evidence of specific financial qualifications and/or experience gained in relevant employment, which is probably why some platforms continue to offer these securities, even though most of us cannot buy them.

Thank you for clearing that up. 

ImranQ

I don't believe there are any restrictions on foreign retail investors or traders to deal in US shares (ETFs are treated as shares) so long as you pay the tax on capital gains. I have traded in US shares on Interactive Brokers who allow public to deal with pretty much any market around the world. W-8BEN is an intergovernmental form designed for you to inform them that you pay your tax outside the US. 

I suspect the reason why the brokers the OP is registered with are not able to buy/sell US shares is that perhaps:
1) these brokers may not be registered with the regulatory frameworks and bodies.
2) may not have the necessary qualifications/registrations to deal in the US market
3) concentrate on UK/EU market
4) some other cumbersome protocol (for them).

masonic

ImranQ said:

I don't believe there are any restrictions on foreign retail investors or traders to deal in US shares (ETFs are treated as shares) so long as you pay the tax on capital gains. I have traded in US shares on Interactive Brokers who allow public to deal with pretty much any market around the world. W-8BEN is an intergovernmental form designed for you to inform them that you pay your tax outside the US.

See https://www.fca.org.uk/firms/priips-disclosure-key-information-documents

Note that only UK (and EU) brokers need to comply with this legislation. The brokers affected by this legislation can sell US company shares, just not collective investment funds such as ETFs.

Brokers that are not subject to UK/EU law can still sell you US domiciled ETFs, but they are not permitted to sell financial services in the UK, so you'd need to find one that would accept you as a customer as a non-resident of the country in which they are based. You would also be investing under a different regulatory regime, so wouldn't have the same rights, access to the Financial Ombudsman Service, etc. although if you were using a US based broker, the compensation scheme has a much higher limit.

ImranQ

masonic said:

ImranQ said:

I don't believe there are any restrictions on foreign retail investors or traders to deal in US shares (ETFs are treated as shares) so long as you pay the tax on capital gains. I have traded in US shares on Interactive Brokers who allow public to deal with pretty much any market around the world. W-8BEN is an intergovernmental form designed for you to inform them that you pay your tax outside the US.

See https://www.fca.org.uk/firms/priips-disclosure-key-information-documents

Note that only UK (and EU) brokers need to comply with this legislation. The brokers affected by this legislation can sell US company shares, just not collective investment funds such as ETFs.

Brokers that are not subject to UK/EU law can still sell you US domiciled ETFs, but they are not permitted to sell financial services in the UK, so you'd need to find one that would accept you as a customer as a non-resident of the country in which they are based. You would also be investing under a different regulatory regime, so wouldn't have the same rights, access to the Financial Ombudsman Service, etc. although if you were using a US based broker, the compensation scheme has a much higher limit.

Thanks. That is useful information to know.
I have only dealt with US based brokers in the past, which allow full services.

masonic

ImranQ said:

I have only dealt with US based brokers in the past, which allow full services.

If, by 'in the past', you are referring to before 2018, then these regulations were not in force. It's worth adding that the regulations apply only to retail clients, so if you are or were a professional investor they would not apply.

Interactive Brokers, and perhaps other platforms, will allow clients to trade US ETFs if they register as professional. See the following pages for at IB:

IB will reject retail client orders for PRIIPs: https://ibkr.info/article/3203

IB process for updating your MiFID client category: https://www.interactivebrokers.com/lib/cstools/faq/#/content/35798873

So at IB, you can apply to be reclassified as Professional if you can demonstrate you have placed trades of >EUR 200k on average 10 times per quarter over the last year AND have assets in excess of EUR 500k (or can demonstrate one of these and work in the financial sector). You would also need to pass an assessment of your experience and knowledge.

ImranQ

masonic said:

ImranQ said:

I have only dealt with US based brokers in the past, which allow full services.

If, by 'in the past', you are referring to before 2018, then these regulations were not in force. It's worth adding that the regulations apply only to retail clients, so if you are or were a professional investor they would not apply.

Interactive Brokers, and perhaps other platforms, will allow clients to trade US ETFs if they register as professional. See the following pages for at IB:

IB will reject retail client orders for PRIIPs: https://ibkr.info/article/3203

IB process for updating your MiFID client category: https://www.interactivebrokers.com/lib/cstools/faq/#/content/35798873

So at IB, you can apply to be reclassified as Professional if you can demonstrate you have placed trades of >EUR 200k on average 10 times per quarter over the last year AND have assets in excess of EUR 500k (or can demonstrate one of these and work in the financial sector). You would also need to pass an assessment of your experience and knowledge.

Interesting! Admitedly I hadn't come across these regulations as I haven't traded ETFs for some time and last time was before 2018. I think IB is a bit of a different animal from other US brokers as IB have an arm in the UK and therefore have to conform to FCA regulations. I saw that there are numerous other brokers outside of UK & EU law which do allow you to open accounts with them. 
From what I can see however, KIDS seem to be available on instruments such as S&P Options and Futures which is good news.

masonic

ImranQ said:

I saw that there are numerous other brokers outside of UK & EU law which do allow you to open accounts with them.

In theory this should be the case, but I've read elsewhere that the US-based ones are unwilling to open accounts for those with no connection to the US (either residency or citizenship). If you have any known examples of offshore brokers who offer services to UK residents, then it could be quite useful to others to share these. It is technically illegal (but not enforceable if the company is not subject to UK law), as it amounts to carrying on a regulated activity in the UK without authorisation. One could draw parallels to the FCAs restrictions on cryptocurrencies, where the exchanges couldn't really be stopped from offering people services, so the FCA had to demand UK banks to block transactions to them. If you have an offshore bank account with which to deposit and withdraw from an offshore broker, I really can't see what could be done to stop you using them.

ImranQ said:

From what I can see however, KIDS seem to be available on instruments such as S&P Options and Futures which is good news.

My understanding is that options, futures (and CFDs) fall outside of the regulations, so this is another way of getting exposure to a security indirectly as a UK retail investor.