Ireland is home to a significant number of investment firms regulated under the legislative framework set out in the revised Markets in Financial Instruments Directive1(“MiFID II”) and the Markets in Financial Instruments Regulation2(“MiFIR”). There are a number of advantages to being authorised in Ireland under this framework, including:
- the ability to passport throughout the European Economic Area (“EEA”), either on a branch or a cross-border services basis;
- a favourable tax regime, due to a combination of a 12.5% corporate tax rate and an exceptionally extensive and comprehensive set of double tax agreements; and
- access to a sophisticated financial services ecosystem with a deep pool of staff, managers, professional advisers, regulators and service providers including not only native English speakers but a sizeable international population (roughly 17%).
MiFID firms are regulated under the European Union (Markets in Financial Instruments) Regulations 2017 (the “MiFID Regulations”), which transpose the MiFID II Directive into Irish law, and MiFIR.
One of the main advantages of the MiFID legislative framework is that it enables an investment firm to carry on business covered by its Irish authorisation throughout the EEA without seeking further authorisation in another member state.
Safe Harbour and Third Country Firms
An investment firm authorised in a third country (“Third Country Firm”) cannot passport under MiFID. However, it may benefit from a “safe harbour” which means that it does not need to become authorised in Ireland to offer MiFID investment services to per-se professional clients and eligible counterparties.
Specifically, the MiFID Regulations permit a Third Country Firm to provide MiFID services/activities to a per-se professional client and/or to an eligible counterparty without establishing a branch, once it satisfies certain requirements, namely:
- the Third Country Firm’s head or registered office must be in a non-EEA member state and it must not have a branch in Ireland;
- the Third Country Firm must be subject to authorisation and supervision in the third country in which it is established and the relevant competent authority must pay due regard to any recommendations of the Financial Action Task Force (FATF) in the context of anti-money laundering and countering the financing of terrorism; and
- co-operation arrangements must be in place between the Central Bank of Ireland (“CBI”) and the competent authorities of the third country that include provisions regulating the exchange of information for the purpose of preserving the integrity of the market and protecting investors.
MiFIR also provides an EU wide right for a Third Country Firm to provide investment services or perform investment activities to professional clients and eligible counterparties without establishing a branch, once it is registered in the register of Third Country Firms kept by ESMA. In order to be included on the register, a firm must meet a number of requirements. In particular, the European Commission must have adopted an equivalence decision in relation to the legal and supervisory arrangements in place in the third country.
Third Country Firms will be able to continue to provide services and activities in Ireland under the MiFID Regulations until three years after the adoption of such an equivalence decision.
Retail and opted-up professional clients
Under the MiFID Regulations, a Third Country Firm will generally need to establish a branch in Ireland and obtain prior authorisation from the CBI before providing investment services/activities to retail clients and opted-up professional clients.
However, the Third Country Firm will be able to provide such services/activities without establishing a branch when the client initiates, at its own exclusive initiative, the provision of the relevant service or performance of the relevant activity. This does not entitle the Third Country Firm to market new categories of investment products or investment services to that client otherwise than through a branch.
The Authorisation Process
An entity wishing to become authorised as a MiFID Firm must submit an application for authorisation to the CBI, using the form “MiFID Application Form – Investment Firms” (here). An entity, including a Third Country Firm, which intends to acquire an existing Irish investment firm will have to notify the CBI by completing an Acquiring Transaction Notification Form.
An entity that wishes to obtain a MiFID authorisation under Irish law must fulfil a number of requirements. For existing groups with substantial operations outside Ireland, an important requirement will be the CBI’s emphasis on ensuring that the applicant’s “heart and mind” will be located in Ireland. This essentially means that the CBI will need to be satisfied that the applicant will be properly run in Ireland and that the CBI will be able to supervise it effectively. Among other things, the CBI will expect to see present in Ireland:
- a senior management team with strength and depth overseen and directed by a strong board; and
- organisation structure and reporting lines which ensure there is appropriate separation and oversight of all activities.
There is no requirement for any specific individual to be resident in Ireland. However, ideally, the personnel who are to fulfill the applicant’s core functions should operate out of Ireland.
An Irish authorised branch may outsource/delegate some of its activities to entities in other jurisdictions, subject to compliance with the MiFID Regulations. However, the investment firm will need to be able to satisfy the CBI that there are objective reasons for the outsourcing arrangements and that they do not lead to the creation of letter-box entities or allow the circumvention of the MiFID framework and the responsibilities of the investment firms.
On 13 July 2017, ESMA published an Opinion to support supervisory convergence in the area of investment firms in the context of the United Kingdom withdrawing from the European Union (the “Opinion”) as well as two other sector specific Opinions dealing with investment management and secondary markets, respectively. These three Opinions followed a general ESMA Opinion, published at the end of May.
Among other things, the Opinion requires all national competent authorities to be satisfied that there is an objective justification for a firm’s decision to relocate to a particular EU member state and that this is not motivated by regulatory arbitrage. The Opinion also warns that certain types of outsourcing, including outsourcing to non-EU entities, could make oversight and supervision of the outsourced functions more difficult. In this respect, the Opinion states that national competent authorities,
“should therefore give special consideration to such outsourcing arrangements and the additional risks arising from them and in particular whether to require (relocating) firms to submit a detailed plan of the phasing out of any such relocations.”
According to the CBI, prospective applicants should be mindful of ESMA’s Opinions when seeking to engage with the CBI and, at a minimum be able to address queries regarding the rationale for the structure, location and characteristics of the proposed firm.
For its part, the CBI has published Brexit FAQs which provide general information to financial services firms considering relocating their operations from the UK to Ireland. According to the CBI, it will update these FAQs regularly as the Brexit negotiations progress and as new issues emerge and are resolved.