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 ESMA's Final Report on authorisation, passporting and registration of third-country firms published on 29 June 2015.
The Level 1 Text
The key relevant provisions are:
- MiFID 2 Article 7: authorities will not authorise firms until fully satisfied the firm complies with all MiFID 2 requirements. The firm should provide all information including its operational and organisational structure. Authorities must decide on applications within six months of receipt of a complete application.
- MiFID 2 Articles 34 and 35: Member States must allow investment firms and credit institutions authorised in another Member State to passport services and activities covered by their Home State authorisation without imposing extra rules. Firms wishing to passport must notify their Home State regulator of where and how they wish to operate, including use of tied agents. Home States must pass on this information within one month, and then the firm may start to act on a services basis. For branches, Home States have three months to communicate branch applications, then Host States have two months to communicate any local requirements MiFID 2 allows them to impose.
- MiFIR Article 46: a third-country firm wishing to provide investment services to professional clients and eligible counterparties in the EU without setting up a branch may do so where ESMA has registered it. ESMA will do this on the basis of an application and an equivalence decision in respect of the applicant's home country regulator.
ESMA's consultation addressed:
- procedures for granting and refusing requests for authorisation of investment firms;
- freedom to provide investment services and activities/establishment of a branch; and
- provision of services and performance of activities by third-country firms following an equivalence decision.
ESMA favoured basing the requirements on existing standards, many of which it felt needed no change. Its views attracted little comment. When it published the draft standards it asked 36 specific questions.
The Controversial Points
There were not many controversial points. But following consultation, ESMA:
- confirmed the requirements would apply only to new applicants, but firms should meet them at all times;
- clarified authorities should acknowledge applications within 10 days of receipt;
- clarified which parts of the passporting standards apply to credit institutions and made changes to ensure the standards align to the Level 1 text as some respondents thought they went beyond it;
- rejected requests that use of electronic forms for passporting applications, completed in English, should always be acceptable. Applications should be in an official language of the Home State, and ESMA will not impose on all authorities the requirement to allow electronic forms; and
- 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 clarify that the firm is subject to effective supervision and enforcement.
- RTS 1: Article 7(4): These set out general information firms must provide, as well as information on capital, shareholders, the management body, financial information and organisation of the applicant. They also set out more detail than the consultation version on what regulators will look for when confirming nothing about shareholders and controllers (or potential controllers), nor the group structure of the applicant, will inhibit effective supervision.
- ITS 2: Article 7(5): These set out the formalities for applications, and annex a basic application form, which references the requirements of the RTS and includes forms on which firms notify the members of the management body and changes to membership.
Passporting and tied agents
- RTS 3: Articles 34(8) and 35(11): These set out what investment firms, and credit firms providing investment services and activities, must do when notifying the intention to provide services in another Member State, change existing passports, or apply for passports relating to access to multilateral or organised trading facilities. They also cover information required in branch or tied agent passport applications or notifications of change.
- ITS 4: Articles 34(9) and 35(12): These set out the format and process for submission of the notifications in RTS 3. They require submission of a separate form for each Member State to which the firm wishes to passport, and each tied agent. The forms include questions seeking information on branch operations. There are also forms that authorities must use for communicating with each other.
- 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.
We now wait for the Commission to approve the standards – which it needs to do within 3 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.
UK regulators and UK firms will see little significant change, but nevertheless there will be some, and firms should especially note changes in the procedure to notify changes to domestic or passported business. MiFIR is of course a major change for third country firms providing cross border business.