The European Union (Markets in Financial Instruments) Regulations 2017 (S.I. No. 375 of 2017) (MiFID II Regulations) were signed into law by the Minister for Finance on 10 August 2017 and published by the Department of Finance on 15 August 2017.
The MiFID II Regulations transpose MiFID II into Irish law and they will enter into effect on 3 January 2018.
Below are some of the key impacts of the MiFID II Regulations.
The "Safe Harbour" Exemption
Of particular note is the decision to broadly maintain the "Safe Harbour" for third country investment firms who do not provide investment services to the retail market (Third country investment firms will be required to establish a branch where they provide investment services to retail clients and "elect-up professional investors" in Ireland).
Under the MiFID II Regulations third country firms will not be allowed rely on the "Safe Harbour" exemption unless the following requirements are met:
- the firm is subject to authorisation and supervision in the country in which it is established and the competent authority of the third country does not appear on the FATF list of non-cooperative jurisdictions; and
- co-operation agreements are in place between the Central Bank and the national competent authority of the third country including provisions regulating the exchange of information.
Third country firms may also provide investment services to professional clients and eligible counterparties where the firm appears on the register of third country firms kept by ESMA, pursuant to Article 48 of MiFIR, once a decision of equivalence has been adopted. However, where a third country firm's registration is withdrawn by ESMA the Central Bank may issue a direction to the firm stating that it shall not provide investment services, or perform investment activities, in the State irrespective of the firm's compliance with the provisions of the "Safe Harbour" exemption.
The recent Feedback Statement published by the Department of Finance, following their consultation on MiFID II, outlined how national discretions will be dealt with. The MiFID II Regulations confirm the positions taken by the Department of Finance, including on the optional exemption from authorisation available pursuant to Article 3(1)(a)-(c) of MiFID II.
Optional Exemption pursuant to Article 3(1) of MiFID II
This optional exemption has been included in Regulation 4(3) of the MiFID II Regulations. In order to avail of the exemption the entities must qualify under paragraphs (a)-(c) of Regulation 4(3) which set out that the entity:
(a) is not allowed to hold client funds or securities,
(b) has limited powers to provide investment services; and
(c) shall only transmit its orders through one of the entities listed in the paragraph.
When exercising this discretion, Article 3(2) of MiFID II requires certain analogous requirements to those which are required under MiFID II to be imposed on firms availing of the exemption. The Department of Finance set out a 'gap list' in the Feedback Statement detailing what changes will be required to national rulebooks in order to comply with this obligation. In particular, changes that will be required to the Consumer Protection Code 2012 (as amended) and the Investment Intermediaries Act 1995 were highlighted.
Once the Consumer Protection Code 2012 (as amended) is updated the key additional obligations which will be imposed on firms qualifying for the exemption under Regulation 4(3) of the MiFID II Regulations include:
- ensuring that telephone conversations leading to, or intending to lead to a transaction, are recorded or that a written record of the details of the conversation is kept but also allowing the client to make amendments to, or withdraw, the order;
- providing clients with disclosures on conflicts of interest;
- advising clients as to whether periodic assessments of the suitability of investment products recommended will be provided and whether they are providing enhanced 'after-sale' services;
- ensuring that disclosure of the effect of commissions, fees or other charges to clients when providing performance information; and
- ensuring that remuneration, or staff performance assessments, occurs in a way that conflicts with the best interests of clients.
Amendments to the Investment Intermediaries Act 1995 were made by the MiFID II Regulations and they include:
- requiring firms seeking authorisation (pursuant to Section 10), who meet the conditions set out in Regulation 4(3), to provide additional information regarding the management of the body and the resources of the firm prior to the grant of authorisation; and
- establishing a public register of tied agents who meet the conditions of Regulation 4(3) by the Central Bank which will prohibit firms from appointing tied agents that do not appear on the register.
"Single Investment Firms Rulebook Approach"
The Department of Finance noted in the Feedback Statement that they will be exercising their discretion under Article 16(11) of MiFID II to go beyond the client asset rules set out in MiFID II. It was noted that they had received approval from the European Commission to maintain the current Client Asset Regulations but that they would be amended to reflect the enhanced level detail in the delegated legislation accompanying MiFID II.
To this end, the Central Bank has launched a consultation proposing to amend the Central Bank Investment Firm Regulations (S.I. No 60 of 2017) (Investment Firms Regulations) and the Client Asset Regulations as necessitated by MiFID II. The consultation also proposes integrating the Client Asset Regulations and the Investor Money Regulations into the Investment Firms Regulations in order to create a "single investment firms rulebook approach".
The proposed structure of the amended Investment Firms Regulations will be:
i. Parts 1 – 5: the current Investment Firms Regulations with limited amendments as highlighted by the consultation;
ii. Part 6: the amended Client Asset Regulations;
iii. Part 7: the Investor Money Regulations; and
iv. Part 8: the Central Bank's policy position on capital requirements to market operators.
The consultation will run until 27 September 2017.