Guernsey and the EU’s MIFID II with FAQs
The Commission has reissued its document to provide a brief update to regulated firms, the States of Guernsey and other stakeholders on recent developments relating to the EU’s Markets in Financial Instruments Directive that could have a significant impact of firms located in the Bailiwick who are, or may be in the future, undertaking relevant investment services business with individuals or entities located in the European Union.
The MiFID II Overview may be found here.
The original Markets in Financial Instruments Directive (MiFID) was implemented in November 2007. It introduced competition to the EU trading landscape and provided a ‘passport’ for trading venues and investment firms to operate throughout Europe on the basis of authorisation in their home Member State. It also introduced various investor protection measures. MiFID governs those firms that provided defined investment services and products in the European Union (EU) as well as in Iceland, Lichtenstein and Norway (as members of the European Economic Area (EEA)). It also sets out the framework for regulating securities and investment markets and market infrastructure in the EU.
As a result of the global financial crisis the European Commission adopted a legislative proposal for the revision of MiFID. The proposals take the form of a revised Directive (MiFID ii) and a new Regulation (MiFIR), which together are commonly referred to as ‘MiFID ii’. MiFID ii expands MiFID’s scope particularly with respect to commodity derivatives, adds further investor protections and increased the requirements related to the trading of financial instruments. The European Commission, Parliament and Council reached agreement on the texts for MiFID ii and MiFIR in early 2014 and the two documents were published in the EU Official Journal on 12 June 2014. Member states must transpose into national law by 3 July 2017, prior to the effective date of 3 January 2018.
MiFID II / MIFIR will apply to: Investment firms; Credit institutions when providing investment services and/or performing investment activities; Market operators including any trading venues they operate; All financial counterparties as defined in Article 2(8) of the European Infrastructure Regulation (EMIR) and to all non-financial counterparties falling under Article 10(1)(b) of EMIR; Central Counter Parties (CCPs) and persons with proprietary rights to benchmarks; and Third country firms providing investment services or activities within the European Union.
MiFID II has introduced a regime for Third Country Firms that wish to provide cross-border services to clients established in an EU Member State. The impact of the Third Country regime for Third Country Firms will not be immediate; however Bailiwick firms will need to take account of the detailed provisions of both MiFID II and MiFIR.
MiFID II will give Member States the power to allow a Third Country Firm to provide investment services to specific types of professional clients as defined in Section II of Annex II to MiFID II (Elective Professional Clients) and Retail Clients, i.e. those clients which are neither Eligible Counterparties nor per se Professional Clients. The Third Country Firm will need to establish an authorised branch in the relevant Member State (Host State) and comply with the Host State rules which implement MiFID II. Once authorised, the branch will not be able to provide services to Retail Clients and Elective Professional Clients in any other member state. The authorised branch will be permitted to provide services to Per se Professional Clients and Eligible Counterparties across the European Union.
MiFIR will permit Third Country Firms to provide investment services to Eligible Counterparties, as defined in MiFID, and the entities identified in Section I of Annex II to MiFID II (per se Professional Clients) throughout the EU. A Third Country Firm will be able to do so without having to establish a branch in the EU but will have to become registered with the European Securities and Markets Authority (ESMA) and comply with MiFIR.
No. Under MiFIR, Third Country Firms will be able to provide investment services to Eligible Counterparties and per se Professional Clients under the individual Member State rules. A Third Country Firm will be able to do so for a period of three years after a decision by the European Commission on whether the regulatory arrangements in the country where that Third Country Firm has its registered office (Home Country) satisfy certain requirements in MiFIR (an Equivalence Decision). The MiFID ii provisions on establishing a branch to serve Retail Clients and Elective Professional Clients will come into force as soon as MiFID ii comes into force.
There is nothing in MiFIR or MiFID II to stop an individual Member State from making rules that require Third Country Firms to establish a branch to provide investment services to Eligible Counterparties and per se Professional Clients as well as to Elective Professional Clients and Retail Clients.
A Third Country Firm will have to apply to ESMA to become registered in ESMA’s register of Third Country Firms (the ESMA Register). In order to register the Third Country Firm, ESMA will need to satisfy itself that: (a) the European Commission has made an Equivalence Decision with respect to the Third Country Firm’s Home Country, (b) the Third Country Firm is authorised to provide the relevant investment services in its Home Country and subject to effective supervision and enforcement and (c) appropriate cooperation arrangements are in place between ESMA and that Home Country. The Third Country Firm will also have to make certain disclosures to those per se Professional Clients or Eligible Counterparties to whom it markets its investment services and agree to submit to the jurisdiction of court or tribunal in a Member State. Once registered with ESMA the Third Country Firm will benefit, in effect, from a MiFIR Third Country Passport.
If ESMA refuses to admit a Third Country Firm to the ESMA Register, MiFIR still permits an individual Member State to allow Third Country Firms to provide investment services to Eligible Counterparties and per se Professional Clients under rules made in that Member State. These Third Country Firms will, however, not have the benefit of the MiFIR Third Country Firm Passport resulting from entry on the ESMA Register.
The European Commission rather than ESMA will have the final decision on whether the Bailiwick regulatory regime and supervisory framework achieves the same objectives as MiFID ii. For a transitional period of three years and pending equivalence decisions by the European Commission, national third country regimes will continue to apply.
In order for a Host State competent authority to authorise a branch of a Third Country Firm, the authority would need to satisfy itself that: (a) the Third Country Firm is appropriately authorised in its Home Country; (b) there are appropriate co-operation arrangements between the Host State and the Third Country Firm’s Home Country, dealing with the exchange of information, including an effective exchange of information on tax matters; (c) the Third Country Firm has adequate regulatory capital; (d) the Third Country Firm’s senior management systems and controls are sufficient; and (e) the Third Country Firm belongs to an authorised or recognised investor compensation scheme. The Third Country Firm will have to comply with the Host State rules giving effect to many of the provisions in MiFID II governing conduct of business. The branch can only provide services to Elective Professional and Retail Clients within the Host State the branch is established in.
Both MiFIR and MiFID II provide that where a Third Country Firm provides services at the “own exclusive initiative” of an EU investor, the requirement to become registered or authorised, as the case may be, should not arise. MiFID II and MiFIR limit this expressly by stating that an own initiative approach by an EU investor will not entitle the Third Country Firm to market new categories of investment products or investment services to that individual.
If a Third Country promotes or advertises investment services in the EU that service should not be deemed as a service provided at the own exclusive initiative of the client. It could be argued that promotions or advertisements which cause an investor to approach a Third Country Firm should not attract an authorisation or registration requirement. However, the Third Country Firm will not be able to provide the service without being authorised or registered.
ESMA has the responsibility to develop numerous draft regulatory technical standards and drafting implementing technical standards. ESMA has delivered three sets of technical standards during 2015, which have been published on its website www.esma.europe.eu/policy-rules/mifid-ii-and-mifir The rules contained in the draft technical standards, once implemented will bring the majority of non-equity products into a robust regulatory regime and move a significant part of OTC trading onto regulated platforms.
AIFMD governs the marketing and managing of AIFs, all Bailiwick regulated funds which are marketed in the EEA fall within the definition of an AIF. The broadening of the scope of MiFID II has resulted in the services of portfolio management and investment advice being captured under the investment services in Annex I of MiFID and will also be captured by MiFID II.
Bailiwick firms need to keep up to date with MiFID II progress and assess the possible impact of the new Directive and Regulation on their own business model. All entities which provide investment services and activities from within the Bailiwick to clients within the EU will be impacted.