Following on from our previous briefing in May with regard to our initial assessment of the likely impact of Brexit on continuing access throughout the EU for UK MiFID investment firms, we provide a more detailed assessment of consequences for UK MiFID investment firms that deal with retail customers and those that deal with professional clients.

Post Brexit Relationship with the EU

There has been much debate on the likely final arrangement, whether the Norwegian, Swiss or some unique arrangement will be negotiated.

The Irish view is that the least likely and worst outcome for the island of Ireland would be if the UK were to adopt a Norwegian model of membership of the EEA.

Under the terms of the Norwegian model, freedom of movement would apply to investment services but would not apply to agriculture and fisheries and the loss of these benefits would have a significant adverse impact on the economy of Northern Ireland. Given the various positions of Northern Ireland and Scotland, it is likely that a bespoke arrangement will be negotiated between the UK and the EU.

Planning for continued MiFID services throughout the EU

For planning purposes, the worst case scenario for UK MiFID firms would be that the UK would leave the EEA and relies on the third country equivalence provisions in MiFID II and MiFIR to maintain access to EU jurisdictions.

The two main questions for MiFID investment firms will be:

  • Can a third country investment firm continue to maintain access to retail customers throughout the EU and how?
  • Can a third country investment firm continue to maintain access to professional customers throughout the EU and how?

Retail Clients

MiFID I - Cross-border

MiFID I does not provide a harmonised framework for third country access to EU markets with the result that access to EU markets under MiFID I by third country firms operates on the basis of national discretions, provided that a Member State may not apply more favourable treatment than for EU investment firms.

MiFID II - Cross-border

Third country firms that provide investment services to retail clients on a cross-border basis will continue to be subject to national discretions, with the effect that a UK firm outside the EEA would lose its passport to deliver investment services on a cross border basis to retail customers throughout the EU.

The likely impact for UK MiFID firms that currently provide investment services to retail customers throughout the EU is that they will have to establish either a subsidiary in the EU or establish multiple branches throughout the EU.

As noted in our initial Brexit assessment earlier in May, the creation of a subsidiary is likely to be subject to national restrictions in dealing with retail customers throughout the EEA, such that the subsidiary will likely have to operate as principal, rather than as agent/arranger on behalf of the UK parent.

MiFID II -Branch

MiFID II also provides for harmonised access to retail clients through a domestic branches set up in the Member States where the retail clients are resident, subject to an overall equivalence assessment having been made by the National Competent Authority (NCA).

Equivalence Assessment of Branch by the Irish Central Bank as NCA

Branch authorisation may only be granted by the Irish Central Bank where:

  • The third country firm is authorised and supervised in relation to the services supplied through the branch;
  • The third country jurisdiction pays due regard to FATF recommendations on anti-money laundering and counter-terrorism financing;
  • The host jurisdiction and the third country jurisdiction provide for exchange of information;
  • The branch has sufficient initial capital at its disposal;
  • Branch management complies with the governance requirements of MiFID II and CRD IV;
  • A tax information sharing agreement has been entered into between the third country and the host jurisdiction; and
  • The third country has an investor compensation scheme that is approved under the Investor Compensation Scheme Directive.

Access to Retail Customers throughout the EU

The overall outcome for UK MiFID investment firms that deal with retail customers on a cross-border basis will be that they will have to consider re-locating within an EU Member State to continue to maintain access to retail customers and they will be faced with the choice of setting up a subsidiary MiFID investment firm or setting up multiple branches.

Subsidiary in Ireland

A key question is whether a subsidiary set up in a Member State could act as agent/arranger for a third country parent as riskless principal.

As noted in our May briefing, there are reasonable grounds for concern that several of the larger Eurozone jurisdictions would not recognise the provision of cross-border services of an EU subsidiary that acts as agent or riskless principal on behalf of a third country parent.

Assuming that equivalence is recognised between the Financial Conduct Authority in the UK and Central Bank of Ireland at the national level and between the UK and EU Commission at the EU level, as is generally expected, then the restructuring options between the existing UK operations and the potential Irish operations are likely to be more accommodating so as to maintain significant operations within the UK.

Professional Clients

The position is altogether more favourable for UK MiFID firms that deal with professional clients.

MiFIR and MiFID II

Under MiFIR, it is open to a third country firm to provide investment services to professional clients throughout the EU from its home jurisdiction, subject to an equivalence assessment having been made by ESMA.

In addition, under MiFID II a third country firm that sets up a branch in an EU jurisdiction will be able to provide services within that Member State jurisdiction to retail customers. Critically, however, such a branch would also be permitted to provide investment services on a cross-border basis to professional customers and eligible counterparties throughout the EU on a cross border basis.

Registration with ESMA under MiFIR

There is a registration regime under MiFIR operated by ESMA that is similar to the equivalence regime that is required to be undertaken by the NCA of an EU branch. However the equivalence regime that operates in relation to provision of investment services by a third country firm to professional clients throughout the EU subject to registration with ESMA under MiFIR is as follows:

  • The EU Commission has adopted a decision that the prudential and business conduct rules are equivalent;
  • The third country has an equivalent passport regime to MiFID II and MiFIR;
  • The third country firm is authorised and supervised in relation to the services to be delivered on a cross-border basis throughout the EU;
  • An exchange of information arrangement exists between the home state competent authority and ESMA; and
  • A similar equivalence assessment of the authorisation and supervision regime is carried out satisfactorily by ESMA.

Impact of Brexit on UK and MiFID Firms

Professional Clients

UK MiFID investment firms that provide services on cross-border basis to professional clients throughout the EU can rely to a large degree on the registration regime operated by ESMA on equivalence measures introduced in MiFIR.

Retail Clients

UK MiFID investment firms provide investment services on a cross-border basis to retail clients throughout the EU will need to consider re-locating a subsidiary to operate on a cross-border basis throughout the EU.

The EU subsidiary will need to be consider being capitalised to operate as principal rather than agent/arranger on behalf of a third country parent.

Given the likelihood of equivalence at a national level between Ireland and the UK and between the UK and the EU, the restructuring options between existing UK operations and potential Irish operations are likely to be accommodating towards maintaining significant operations within the UK.