The MiFID 2 package takes effect (with a few exceptions) from 3 January 2017. We still await key technical measures. Following ESMA's discussion, consultation and advice papers last year, it has now started to publish final drafts of key Implementing and Regulatory Technical Standards (ITS and RTS) for the Commission to approve. In this factsheet we look at MiFID 2's requirements and ESMA's Final Report on third-country firms, published on 29 June 2015.
The Level 1 text
Currently, MiFID gives Member States discretion about whether, and if so under what conditions, firms from outside the EEA (third-country firms) can operate in their territories. Its only requirement is that national legislation cannot treat third- country firms more favourably than firms from within the EEA.
MiFID 2 brings fundamental change.
The key relevant provisions are:
Services to retail and elective professional clients
- MiFID 2 Article 39: This allows (but does not require) Member States to require third-country firms wishing to provide investment services or perform investment activities with or without ancillary activities to retail or elective professional clients to set up a branch in the relevant Member State. Where this is the case, the branch can be authorised in that Member State only if it meets certain conditions:
- the firm requires, and has, authorisation to provide the services in the country of its establishment, and it is supervised in its performance of them, and the relevant regulator pays regard to FATF recommendations on the prevention of money laundering and terrorist financing;
- there are appropriate co-operation agreements between the home country regulator and the relevant Member State;
- the branch has sufficient freely available initial capital;
- the branch appoints one or more persons to manage it, and each relevant person complies with the provisions of CRD4 on governance and the management body in the same way that all firms covered by MiFID 2 must;
- the third-country "home" country has in place an agreement with the relevant EEA Member State that fully complies with the OECD Model Tax Convention on Income and Capital; and
- the firm belongs to a compensation scheme authorised or regulated in accordance with the Investor Compensation Directive.
- MiFID 2 Article 40: The applicant firm must also provide the relevant Member State regulator with information about itself, its supervisor, its domestic management and compliance arrangement and details of its initial free capital.
- MiFID 2 Article 41: Once authorised, the firm must comply with the requirements of MiFID 2 on organisation, trading, conflicts of interest, investor protection (including the rules on disclosure, suitability and appropriateness, best execution, client order handling and dealing with ECPs). It must also comply with relevant rules on trading venues, and MiFIR's requirements on transparency and transaction reporting.
- MiFID 2 Article 42: Where a client initiates services, however, there is no requirement for the third-country firm to set up a branch specifically to perform those services. However, if the firm is required to have a branch, it cannot market new categories of product or service to the client other than through the branch.
Services to per se professional clients and ECPs
- MiFIR Article 46: A different regime applies under MiFIR to a third-country firm wishing to provide investment services or carry out investment activities with or without ancillary activities to or with per se professional clients and eligible counterparties within the EU with or without setting up a branch. These firms may do so based on registration with ESMA. ESMA will do this based on an application where:
- there is an equivalence decision in place (see Article 47);
- the firm is authorised in the jurisdiction where its head office is established to provide the services and activities it wishes to provide in the EU, and is subject to effective supervision and enforcement; and
- ESMA has established cooperation agreements with the third-country regulator in line with Article 47.
- Member States may, however, allow these services and activities on the basis of national regimes where there is no equivalence decision in place.
- A registration with ESMA will cover the entire EU. No Member State can impose any requirements on the third-country firm additional to those set out in MiFID 2 and MiFIR, or treat these firms more favourably than other firms. However, they may at their discretion allow third-country firms to provide services and activities to ECPs and per se professionals if there is no equivalence decision in effect.
- Registered third-country firms must tell customers before providing any investment service that they are not allowed to provide services to anyone other than an ECP or per se professional and that they are not supervised in the EU, and must disclose the name of their home country supervisor.
- As with MiFID 2, third-country firms may provide services without registration to clients who have approached the firm on their own initiative, but may not market any new products or investment services to those clients.
- These third-country firms must offer to submit any disputes to dispute resolution mechanisms in a Member State before they provide any service.
- MiFIR Article 47: The Commission's equivalence decision about the firm's home regulator will be made only if (i) the firm's activities require authorisation and are subject to ongoing supervision and enforcement; (ii) there are sufficient and appropriate capital requirements and requirements on shareholders and members of the management body; (iii) there are adequate organisational requirements around internal controls; (iv) there are appropriate conduct of business rules; and (v) there are rules preventing market abuse.
- ESMA will also have to have in place co-operation agreements with the relevant authorities.
- If a third-country firm is already authorised under Article 39 of MiFID 2, it can provide services to ECPs and per se professional clients without setting up any more branches, but must comply with the information requirements in Article 34 of MiFID 2 that apply to EU firms wishing to passport on a services basis and will be subject to the supervision of the EU Home State of the branch.
- MiFIR Article 48: ESMA will keep a publicly available register of registered third-country firms, setting out which services the firms can provide and who is responsible for their supervision.
In ESMA's consultation of December 2014 it set out what information it thought third-country firms should provide when applying for registration under MiFIR. It also said it should be provided with a written declaration from the third-country firm's regulator to the effect that the firm is subject to its effective supervision and enforcement and setting out the scope of its licence.
It also considered that the information MiFIR requires third-country firms to provide before providing services should:
- be in English or an official language of the Member State where the services will be provided;
- be laid out in a way which is easy to read, using characters of readable size; and
- not use colours that might diminish the comprehensibility of the information.
The controversial points
There were not many controversial points on the consultation or the draft RTS that accompanied it. But following consultation, ESMA amended the requirements on third-country firms so their supervisors now merely need to confirm that the firm is authorised, and for which services. ESMA has clarified that third-country firms will not have to confirm that the firm is subject to effective supervision and enforcement. It also agreed that, while firms should tell it within 30 days of a change to most of the information they need to submit, they did not need to do so in respect of changes to the name and address of their home regulator, or the link to that regulator's register.
- RTS 5: Article 46(7) of MiFIR: These set out the information a third-country firm applying for authorisation must submit to ESMA. The standards also say how these firms must notify clients of the limitations on their activities that MiFIR mandates.
- The information ESMA requires is:
- full name of the firm, including its legal and relevant trading names;
- head office address;
- contact details of the firm – address, phone number and email addresses;
- contact details of the person in charge of the application;
- if available, details of the firm's website, national identification number, legal entity identifier and BIC code;
- name and address of home country competent authority (with details of areas of competence if more than one) and links to appropriate registers if available;
- information on which investment services, activities and ancillary services it is authorised to provide in its home jurisdiction, which must take the form of a written declaration by the home country regulator; and
- the investment services and activities to be provided or performed in the EU, and any ancillary services.
- The firm must apply in the form specified by ESMA, and inform ESMA within 30 days of a change to the information (except the information about the home state regulator). Applications must be in English, and any accompanying documents not in English must have a certified English translation.
- The information third-country firms must provide to client must:
- be in a durable medium;
- be in English or an official language of the relevant Member State;
- be easy to read, using characters of reasonable size; and
- not use colours that may diminish the comprehensibility of the information.
We now wait for the Commission to approve the standards – which it needs to do within three months – and for further guidelines on management bodies from ESMA and EBA. Then Member States will need to review and amend their current rules and forms to bring them into compliance with MiFID 2, so firms are using them by 3 January 2017.
Additionally, each Member State must decide whether to introduce the MiFID 2 Article 39 branch registration requirement. From a UK perspective, Treasury's March 2015 consultation suggested the UK is minded not to do this, but instead keep the current national regime so far as possible. So, to provide investment services into the UK on a cross-border basis third-country firms not wishing to have a UK presence which currently rely on the "overseas persons" exclusion should in principle be able to continue to do so. However, Treasury has not announced its final decision. Whatever the UK decides, firms wanting to provide services across Europe will almost certainly need an ESMA registration.
What should third-country firms do?
Third-country firms do not need to wait for the Commission's approval of the RTS to plan how they wish to conduct business in the EU once MiFID 2 is implemented. The key decision must be which services a third-country firm wishes to provide, to which types of customer, in which jurisdictions within the EU. From this flows the fundamental decision on:
- whether it will be necessary to set up a branch in one or more EU Member States and apply for authorisation there – noting that MiFID 2 does not allow any form of passport for branches authorised in one Member State to provide services into another or set up a branch in any other – assuming of course the home country regulation and regulator meet the required conditions if the relevant Member State imposes them. This will also involve an assessment of the financial requirements and the organisational and conduct of business rules with which the firm will have to comply (and prove its readiness to do so in its application);
- whether the firm will wish to provide services only to per se professionals and ECPs, in which case it will wish to consider the benefits of applying for ESMA registration – again, assuming the home country regimes are adequate to allow this;
- whether it may wish to combine the two regimes as MiFIR allows; or
- whether none of these options will work, and the firm will be faced with the need to assess whether it should establish an EU-based subsidiary for its EU business – and whether that subsidiary would meet the authorisation conditions.
So, the position for third-country firms is still not completely harmonised, especially where they may wish to provide services to retail clients, or services that are not regulated in their home countries. MiFID 2 may present opportunities, but it also presents challenges. Third-country firms with an interest in acting for EU clients should consider the impact of both.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.