On 14 July 2017, the Irish Department of Finance issued a feedback statement on its 2016 public consultation on Ireland's approach to the transposition of MiFID II1 (the "Feedback Paper").
While the final publication of the Irish transposing regulations is expected in the coming weeks, the Feedback Paper contains important statements regarding third country firm access to the Irish financial market and welcome clarity on the scope of the MiFID II licensing requirements for such firms in Ireland from 3 January 2018.
The Feedback Paper states that the Irish Minister for Finance has decided to "substantially maintain" the Current Irish Safe Harbour (as defined below) in respect of "wholesale" clients, subject to the amendments and detail noted below. These amendments will not affect the historic position relied upon by the vast majority of third country firms when structuring and servicing Irish international finance and investment fund structures. If implemented, the proposed updated regime will continue to provide third country firms with the now familiar legal comfort, certainty of access and ease of conduct of business in this sector.
We welcome the contents of the Feedback Paper given the importance of the Current Safe Harbour to Ireland's financial services industry. In particular, it provides important clarity to industry participants in advance of the publication of the Irish regulations transposing MiFID II and in the context of current Brexit-scenario planning by the international financial services industry.
The Current Irish Position
Ireland's MiFID I Regulations2 prohibit any person from acting or claiming to be an investment firm in Ireland without due authorisation (by the Central Bank of Ireland (the "CBI") or under the MiFID I passport regime). While it has always been possible to advise investment firms whether an Irish licence is required on an examination of their actual activities (e.g. a first principles analysis on where services are actually carried out), this is not the ideal foundation from which to conduct business. In particular, this is the case for third country firms who are not able to rely on the passport in MiFID I which allows EU investment firms to provide services on an establishment or freedom of services basis within the EU.
To provide clarity to third country firms on the scope of the Irish MiFID licensing requirement, the Irish MiFID I Regulations3 provide that an investment firm shall not be regarded as operating in Ireland (and therefore outside the Irish licensing requirement), where:
(a) its head or registered office is in a non-EU country;
(b) it has not established a branch in Ireland; and
(c) it is not providing investment services to Irish individuals (the "Current Safe Harbour").
As such, when acting within the Current Safe Harbour third country firms (e.g. arrangers and managers to Irish securitisation SPVs or non-EU investment advisors to regulated funds) can provide services without incurring significant costs in determining on a case by case basis that they are otherwise outside the Irish licensing requirement.
While the Current Safe Harbour does not impose any equivalency hurdle for the third country firm, in respect of third country managers appointed to Irish regulated investment funds the CBI does prrove this appointment as part of the fund's authorisation and supervision (the "CBI Fund Manager Approval").
The Proposed Irish Position under MiFID II
The Feedback Paper states that it is the Irish government's intention to amend the Current Safe Harbour to recognise the MiFID II dual regime approch. MiFID II introduces for the first time both a third country firm EU passport for the provision of services to eligible counterparties and per se professional clients (the "third country passport")4 and a Member State discretion to impose a local branch requirement on third country firms providing services to retail and elective professional clients (the "retail branch requirement")5.
Retail and Elective Professional Clients
The Feedback Paper states that Ireland has decided to exercise the retail branch requirement both in respect of retail and elective professional clients.
While the Irish regulations transposing MiFID II are yet to be published, third country firms providing investment services to such clients in Ireland should take advice immediately on whether they will need to establish an authorised branch in Ireland from 3 January 2018. The Feedback Paper is silent on transitional arrangements in this regard.
The Feedback Paper also states that the Irish government understands that the imposition of the retail branch requirement is the approach most Member States intend to adopt.
The reverse-solicitation safe harbour 6 will also be available for the provision of services to such clients. While reverse-solicitation will not be widely applied and will be interpreted narrowly, it may provide useful comfort to some third country firms.
Eligible Counterparties and Per Se Professional Clients
The Feedback Paper states that an amended form of the Current Safe Harbour will be maintained for eligible counterparties and per se professional clients, subject to the following:
(a) the revised safe harbour will not apply to the provision of services to retail or elective professional clients (as per the imposition of the retail branch requirement);
(b) where the third country passport is available to a third country firm (i.e. upon an EU equivalence grant by the European Commission to a third country pursuant to MiFIR), that regime shall prevail. Additionally, where ESMA withdraws a third country firm's passport under MiFIR, the CBI will be empowered to align with ESMA's withdrawal decision; and
(c) the safe harbour will not be available to third country firms who are not subject to authorisation and supervision in their third country in respect of the investment services being provided to wholesale clients in Ireland, whose home country is on the FATF list of non-cooperative jurisdictions8 and whose home country is not a signatory to the IOSCO Multilateral Memorandum of Understanding concerning consultation, cooperation and the exchange of information.
In respect of condition (c), we expect the language of the Irish transposing regulations to track closely the corresponding retail branch requirement authorisation conditions found in Article 39(2)(a) and (b) of MiFID II.
We expect that the CBI will continue to operate the CBI Fund Manager Approval in respect of regulated investment funds.
For most third country firms who are relying on the Current Safe Harbour in the context of Ireland's international finance and funds sectors, the policy guidance contained in the Feedback Paper will provide welcome comfort.
The revised safe harbour proposed will retain Ireland's attractiveness as the location of choice for a range of established products including regulated investment funds, securitisations, debt securities offerings and other structured products.
The published Irish position also respects the increased harmonisation and enhanced retail protection objectives of MiFID II. However, in respect of the provision of investment services to elective professional clients, the Irish adoption of the retail branch requirement will likely increase the cost of the provision of such services to this sector of the market. This may ultimately act to reduce Irish client access to such services from third country providers.
Whether an Irish client is a per se professional client or merely an elective professional client will be an important issue to establish for market participants. Annex II of MiFID II details these classifications and is included in Appendix I of this update.