The FSA has consulted on a temporary rule which would require all incoming EEA firms from late-implementing EEA states to comply with certain MiFID standards after 1 November 2007. This includes firms with top-up permissions but excludes cross-border business done under exclusions from the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, for example, the overseas persons exemption.

The purpose of the rule is to ensure that an incoming firm from a member state which has not fully transposed MiFID is subject to appropriate MiFID standards comparable to those applying to UK firms and other EEA passported firms. The rule will also enable the FSA to use its supervisory and enforcement powers under FSMA to take action against passporting firms for breaches of MiFID requirements. This means that the FSA will be able to meet its regulatory objective of protecting UK consumers and ensuring proper functioning of the markets.

The focus is primarily on MiFID conduct of business provisions, associated organisational requirements in relation to conflicts of interest and record-keeping, transparency requirements and requirements that apply specifically to multilateral trading facitilies ("MTFs"). The proposed rule would last for 12 months, from 1 November 2007 to 31 October 2008.

The consultation on the rule (the "precautionary measure rule") was published in September in the "MiFID Permissions and Notifications Guide – an Update" and the consultation period has now ended. The FSA confirmed in PS 07/18 that the rule will be made as drafted. The new rule will be set out in SUP 13 A.9.

The number of inward passporting firms affected by late implementation will vary depending on how many member states are late and how late they are. Based on answers to a transposition questionnaire submitted to the Commission in September 2007, it would appear almost certain that Poland and Spain will not meet the 1 November deadline. Although many member states have missed the transposition deadline of 31 January (and even now many have not fully transposed the Level 1 or Level 2 Directives), from the responses given to the questionnaire, most appear confident that they will be able to meet the implementation deadline of 1 November.

Existing ISD authorisations and passport notifications from EEA firms will be regarded as valid by the FSA after 1 November, even if the firm's home state has not (fully) implemented MiFID. The FSA plans to convert firms' existing ISD passports to MiFID passports from 1 November and this will be reflected on the FSA register.

Incoming EEA firms that operate an MTF will be subject to the precautionary measure rule. In addition, they will be expected to meet the MiFID requirements which apply specifically to MTFs and the capital requirements which will apply to MTF operators for the first time on 1 November