INTRODUCTION

The Markets in Financial Instruments Directive (“MiFID”) is a European Union law that aims to harmonise the regulation of investment services across the member states of the European Economic Area and came into effect from 1 November 2007. Following the 2008 financial crisis, amendments to MiFID became the focus of tighter regulatory controls.

On 2 July 2014, a revised MiFID entered into force and consisted of a recast Directive (MiFID 2) and a new Regulation (MiFIR). Over the next two years, EU member states will transpose the new rules which will be applicable from 3 January 2017. Both these level 1 texts will be supplemented by delegated and implementing acts and technical standards which will set out the detailed rules for certain areas.

MiFID 1: NO CURRENT PASSPORT REGIME

Guernsey, Jersey, BVI and Cayman Island firms are treated as non-EU “third country” firms by the EU. Access to EU markets is currently not harmonised under MiFID. Each member state decides its own regulations regarding access subject to certain EU Treaty principles and provided that a third country firm should not receive more favourable treatment than an EU firm. There is no “passport” by which a third country firm can establish an authorised branch in one EU member state and then provide those services in another EU member state. Each member state may require a new authorisation.

MiFID 2/MiFIR: PASSPORT AVAILABLE TO ACCESS ELIGIBLE COUNTERPARTIES AND CERTAIN PROFESSIONAL INVESTORS 

For the first time, MiFIR allows third country firms to provide investment services or perform activities directly to “eligible counterparties” and “per se professional clients” (as defined in MiFID 2) throughout the EU. Under MiFIR, these firms may do so without necessarily having to establish a branch in an EU member state provided that:

  • the European Commission has determined that the firm’s country has a relevant legal and supervisory regime broadly equivalent to the EU’s
  • the firm applies to and is registered by the European Securities and Markets Authority (ESMA) as a permitted third country firm. 

 ESMA registration requires that:

  • the firm is authorised to provide the relevant investment services or activities in the jurisdiction of its head office
  • co-operation arrangements exist with the relevant third country.

PASSPORT USING AN EU BRANCH

Where a third country firm has established an authorised branch in an EU member state and that firm is established in a country with an EU Commission recognised MiFID equivalent regime, then the firm can provide its investment services to eligible counterparties and professional clients (within Section 1 of Annex 2) throughout the EU without having to establish further branches. There would also be no requirement for the branch to register with ESMA provided the branch complied with MiFID’s cross-border information requirements.

BRANCH NEEDED FOR RETAIL AND ELECTIVE PROFESSIONAL INVESTORS

Under MiFID 2, an EU member state may require a third country firm, that wishes to access that state’s retail investors (or retail clients who elect to be considered professionals under Section 2, Annex 2, MiFID 2) to:

  • establish a branch in that state
  • be authorised by that member state’s competent authority in accordance MiFID 2 rules implemented by that member state.

Furthermore the relevant member state’s authority may need to be satisfied that:

  • the third country firm is appropriately authorised in its home country (eg. Guernsey)
  • co-operation arrangements are in place between the EU member state and the firm’s country
  • the firm has adequate regulatory capital
  • the firm’s senior management systems and controls are sufficient
  • the firm belongs to an EU authorised or recognised investor compensation scheme. 

As each EU member state may decide whether or not to have this branch requirement, there is therefore no MiFID 2 passport available to a third country firm with an authorised branch in one EU member state wishing to provide services to retail and elective professional investors in another member state. MiFID 2 does not clarify the access requirements for third country firms seeking access to retail clients in a member state which has no branch requirement.

OWN EXCLUSIVE INITIATIVE

The MiFID and MiFIR restrictions do not apply where a third country firm provides its services at the ‘own exclusive initiative’ of the prospective client.