On 22 May 2007 the FSA published the MiFID Permissions and Notifications Guide (Guide). The Guide explained the nature and extent of the changes that will need to be made to firms’ permissions and passports in light of the UK’s implementation of MiFID on 1 November 2007. MiFID also introduces some new notification requirements and, in certain cases, the position of firms’ tied agents, approved persons and waivers from FSA rules will need to be reviewed. Many of the changes will also be relevant to non MiFID firms.
Structure of the Guide
The Guide has 11 specific chapters that cover: (1) Client categorisation. (2) Article 3 MiFID exemptions. (3) Passporting. (4) Tied agents. (5) Systematic internalisers. (6) Multilateral trading facilities. (7) Commodity derivatives and credit derivatives. (8) Client money. (9) Outsourcing retail portfolio management to non-EEA service providers. (10) Waivers. (11) Approved persons.
In addition the Guide has 5 annexes that cover: (1) Assessment of firms which fall within Article 3 MiFID exemption. (2) ISD to MiFID maps. (3) MiFID to BCD maps. (4) New standard requirement for exempt CAD firms. (5) Standard client money requirements. (6) Links to relevant FSA documents and forms. (7) Actions checklist.
The Guide does not contain any policy proposals from the FSA nor does it amend or qualify any rules and guidance in the FSA Handbook. It is intended solely as a guide to help firms determine what MiFID-related notifications and applications they should make.
The Guide does not cover transaction reporting. The FSA is to publish a Transaction Reporting User Pack (TRUP) later this summer.
Generally speaking in the Guide the FSA asks firms to submit their applications and notifications by 1 August 2007. This is so that the FSA may process them in good time before 1 November 2007. The FSA warns firms that if their paperwork is not submitted by the dates mentioned in the Guide then it may not be able to process the applications or notifications in time to make the firm MiFID compliant on 1 November 2007.
To smooth the transition in the most cost-effective way, the Guide reports that the FSA is working with HM Treasury on proposals that would allow it to automatically map existing customer types to the new MiFID-based client categories (see table below). These proposals are to be published shortly.
**See full article for table**
Firms whose permissions currently enable them to do investment business with all existing customer types will be automatically mapped by the FSA to the new MiFID-based client categories of retail, professional and eligible counterparty as at 1 November 2007. The Guide states that these firms need take no further action. Whilst the FSA will not be confirming to firms their new MiFID-based client categories, these details will be available on the FSA Register from 1 November 2007.
Should a firm not consider that the automatic mapping will fit its MiFID business model after 1 November 2007, then the Guide advises that the firm should apply for a variation of permission (VOP) before 1 August 2007 for a different limitation. Where a firm is applying for permission to deal with clients requiring higher levels of protection, it will need to demonstrate to the FSA that it has the necessary systems and controls in place to do so.
In relation to non-MiFID business the FSA will be providing a transitional regime between 1 November 2007 and 1 July 2008 for the new client categories. Under this transitional regime firms will be able to continue using the existing tests for classifying customers (e.g. the criteria relating to ‘private customers’ and ‘intermediate customers’) for non-MiFID business until 1 July 2008.
Firms wanting to do non-MFID business on a different basis to that set out in the automatic mapping provisions after 1 July 2008, will need to apply for a VOP no later than 1 January 2008.
Article 3 MiFID exemption
Firms that qualify for the Article 3 MiFID exemption will be exempt from MiFID. However, such exempt firms will be unable to use the MiFID passport. To give effect to the article 3 MiFID exemption HM Treasury has made secondary legislation in the form of The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Amendment) Regulations 2007 (Regulations). The Regulations only apply to UK authorised firms or applicant firms. The key components of the Regulations include:
- firms meeting the qualifying conditions for the Article 3 MiFID exemption on 1 November 2007 will be deemed to be exempt firms and will be ‘automatically opted out’ of MiFID’s scope unless they advise the FSA otherwise; and
- firms applying for authorisation after 1 November 2007 should indicate their wish to opt out of the exemption when filling in the application pack.
As from 1 November 2007 all firms qualifying for the Article 3 MiFID exemption will have a requirement on their permission that explains their status.
In the Guide the FSA makes it clear that it will not be advising firms on the Article 3 MiFID exemption. Given this firms will need to assess whether their existing or proposed investment services and activities meet the qualifying conditions in the Regulations and qualify for exemption under Article 3 MIFID.
Turning specifically to venture capital firms and corporate finance firms the Guide states that the FSA has written to them as part of its CRD prudential categorisation exercise, indicating the relevant requirements not to hold client money that must be contained in the permission of those who wish to take advantage of the exemption.
If a firm does not have a requirement not to hold client money on its permission, and it wishes to rely on the Article 3 MiFID exemption, it should apply for the appropriate standard client money requirement (using a VOP application) by 1 August 2007. The firm must also ensure that it satisfies the other qualifying conditions for exemption.
For authorised firms that want to opt out of the Article 3 MiFID exemption they should submit a VOP application to the FSA by 1 August 2007, requesting the addition of the new standard requirement for exempt CAD firms. However, if the firm wants to exercise a cross-border services passport as of 1 November 2007, it should submit its VOP application by 1 July 2007 to allow sufficient time for both the VOP application and passport notification to be processed by 1 November 2007. In those cases where a firm wants to establish a branch in another Member State on or as soon as possible after 1 November 2007, it should send the FSA its VOP application immediately.
MiFID gives firms ‘the right’ to carry on business in other EEA Member States either through the establishment of a physical presence (branch passport) or through the provision of cross-border services (services passport).
The existing passporting process will generally remain the same. However, whereas under the ISD investment firms are currently required to notify both their Home and Host State competent authorities of any changes in the particulars previously notified under a passport, under MiFID an investment firm will no longer be required to notify the Host State competent authority of any changes to their existing passported activities.
So UK investment firms will only need to notify any such changes to the FSA as the Home State competent authority. The FSA will pass any notifications of changes it receives on to the relevant Host State competent authority on the firms’ behalf. There is no such change in the process for notifications for credit institutions under the BCD. UK credit institutions should continue to notify both the FSA and the relevant Host State competent authority of proposed changes to their branch passport.
For investment firms the ISD passport will need to be replaced by a MiFID passport. There are some changes to how existing activities and services will be represented under a MiFID passport, most notably advice, that may require firms to review their passport.
The Guide provides that a UK firm wishing to change the scope of its existing ISD or BCD services or branch passport to include new MiFID investment services and activities, ancillary services or financial instruments, to take effect from 1 November 2007 should deliver a passport notice to the FSA by no later than 30 September 2007.
A UK firm wishing to establish a branch in another Member State (for which it does not already hold an ISD or BCD passport) to carry out MiFID investment services and activities, ancillary services or financial instruments to take effect from 1 November 2007 should deliver a passport notice to the FSA by 31 May 2007 (or as soon as possible thereafter).
A UK firm without an ISD or BCD passport wishing to provide new MiFID investment services and activities, ancillary services or financial instruments on a cross-border services basis, to take effect from 1 November 2007 should deliver a passport notice to the FSA by no later than 30 September 2007.
If a firm is satisfied that the mapping of existing ISD passports across to MiFID passports or the BCD maps as appropriate, will allow it to carry on business as usual post 1 November 2007, then it need take no further action. This ISD to MiFID maps and the MiFID to BCD maps are set out in Annexes 2 and 3 of the Guide.
UK investment firms with investment advice under an existing ISD passport who do not want ancillary service B5 included in the automatic mapping across to a MiFID passport should notify the FSA by 1 August 2007.
Details regarding MiFID passports of UK firms will be available on the FSA Register from 1 November 2007.
The UK will operate the MiFID tied agent regime alongside the existing, and broadly similar, appointed representatives regime. An appointed representative carrying out MiFID business in the UK will also be a tied agent. As is the case with appointed representatives now, a tied agent based in the UK will not be able to hold client money in connection with their MiFID business; and a firm that wishes to appoint a tied agent in the UK will be required to notify the FSA.
For UK firms using tied agents the Guide states:
- A firm need take no action if it is using appointed representatives who all conduct ISD investment business in the UK and are all tied agents for MiFID business in the UK.
- If a firm is appointing a UK tied agent to act on its behalf from 1 November 2007 onwards it will need to notify the FSA on the appointed representative and tied agents notification form. Firms are asked to submit this from 1 October 2007.
- If a firm is appointing a UK tied agent who is not included on the FSA Register, it will need to submit an appointed representative notification to the FSA prior to the tied agent taking up its functions.
For UK firms using tied agents established in other EEA Member States where they do not currently have a branch the Guide states:
- If a firm wants its tied agents to be able to carry on business immediately as of 1 November 2007, it will also need to ensure that a branch notification is with the FSA by no later than 31 May 2007.
- If a firm wants its tied agent to be able to carry on business immediately as of 1 November 2007, it will also need to ensure that the tied agent is registered as of 1 November 2007 either in its Home Member State, if that Member State permits the appointment of tied agents, or if it does not, on the FSA’s Register.
- In addition, for UK firms using EEA tied agents from Member States where they currently have a branch, the Guide states that if a firm wants its tied agent to be able to carry on business immediately as of 1 November 2007, it needs to ensure that it has made the relevant change in branch details notification to the FSA by no later than 30 September 2007.
Systematic internalisers (SIs) are defined by MiFID as those investment firms which, on an organised, frequent and systematic basis, deal on account by executing client orders outside a regulated market (RM) or a multilateral trading facility (MTF). Trading outside a RM or MTF is commonly known in the UK as over-the-counter (OTC) trading. To be able to act as a SI, firms will need a permission enabling them to ‘deal on own account’.
The Guide provides that if a firm intends to act as a SI, it needs to ensure that it has the appropriate permission to do so and, if not, make a VOP application by 1 August 2007.
If a firm is acting as a SI in respect of shares admitted to trading on a RM, it should notify the FSA that it is acting in that capacity by 1 December 2007.
Multilateral trading facilities
MiFID introduces the new activity of operating a multilateral trading facility (MTF). The Regulations made by HM Treasury allow the FSA to grant automatically to all firms authorised to operate an alternative trading system (ATS) before 1 November 2007 the permission to carry on the new regulated activity of operating a MTF. This has removed the need for firms to apply for a VOP to carry on the new activity.
The Guide states that:
- If a firm is currently authorised to operate an ATS and plans to operate a MTF as from 1 November 2007 it need take no action.
- If a firm is currently operating an ATS but does not plan to operate a MTF from 1 November 2007 it should submit a VOP application as soon as possible which requests the removal of the firm’s existing ATS requirements and indicating the change in business model. The application should be submitted by no later than 1 October 2007.
- If an authorised firm which does not currently act as an ATS operator wants to operate a MTF as from 1 November 2007 it needs to submit a VOP application by 1 August 2007.
Commodity derivatives and credit derivatives
The Guide states that MiFID firms’ permissions comprising activities relating to the investment categories in the left-hand column of the table below will be widened automatically to include the corresponding MiFID financial instruments in the right-hand column. The increases in scope will not affect the permission of a UK firm which is outside the scope of MiFID. The increases in scope are only relevant to the permissions of firms that come within the scope of MiFID.
**See full article for table**
One of the most significant impacts of MiFID implementation on the FSA’s existing client money regime is that MiFID firms will lose the ‘professional opt-out’ exclusion for MiFID business. The Guide states that if a firm relies on the opt-out and intends to hold client money in relation to MiFID business after 1 November 2007, it will need to apply for a VOP to remove any existing client money requirements on its permission that prevents it from doing so. The VOP application should be submitted by 1 August 2007.
Outsourcing retail portfolio management to non-EEA service providers
The Guide explains that if a firm has an existing outsourcing agreement with a non-EEA service provider it will need to ensure that the conditions in SYSC 8.2.1 will be satisfied as at 1 November 2007. If any of the conditions will not be satisfied the firm should notify the FSA in writing of its proposal to outsource a retail portfolio management service to a non-EEA provider. SYSC 8.2 and 8.3 set out the content of the required prior notification and guidance.
From 1 November 2007, a firm may only outsource this service if it has submitted a prior notification to the FSA and it has not received a notice of objection from the FSA within one month of the FSA receiving the notification.
The Guide states that a firm should consider the changes in this area and assess whether it needs to submit a prior notification to the FSA, either for any existing arrangements or any proposed arrangements after 1 November 2007.
A firm can submit notifications for existing arrangements from 1 July 2007 using a notification form.
Significant changes to the FSA Handbook are being made to implement MiFID and to reflect the FSA’s move towards more principles-based regulation. Many rules are either being replaced by ‘intelligent copy-out’ of the MiFID requirements, or removed in favour of reliance on higher-level requirements, or recast in a slightly different form. These changes will come into effect on 1 November 2007.
The Guide explains that firms should review the waivers that they currently have against the changes to the FSA Handbook and consider the impact on their business that the loss of those waivers may have. Firms can assume that, all existing waivers of COB rules will expire at 1 November 2007 and likewise any waivers in respect of rules in CASS, SYSC and MAR which will be replaced by new rules on the same date as part of MiFID implementation. If a firm concludes that it will need a waiver of the new Handbook provisions that come into effect at 1 November 2007, it will need to make a fresh waiver application. If a firm is a MiFID firm, however, it should bear in mind that an application for waiver of a rule that implements a MiFID requirement is unlikely to be successful.
As to timing the Guide states that a firm should apply for any waiver of a new COBS rule as early as possible, and no later than 1 September 2007, to give the FSA sufficient time to consider the application. A firm should apply for a waiver of the new rules in other sourcebooks by 1 September 2007.
For UK firms carrying on MiFID business there will be some changes to the CF8 Apportionment and Oversight controlled function. The FSA advises that it shall be consulting on this in the summer. Also firms will need to consider the more detailed responsibilities in SYSC 6 and 7 for controlled functions CF10 (Compliance oversight), CF14 (risk assessment) and CF15 (internal audit).
For EEA incoming firms doing only MiFID business there will no longer be a need to apply for approval for those individuals performing an activity in relation to controlled functions CF9 (EEA business oversight) and CF10 (Compliance oversight) as from 1 November 2007.
EEA investment firms that do non-MiFID business may need to continue to apply for controlled functions CF9 (EEA business oversight) and CF10 (Compliance oversight) for individuals undertaking these roles and such firms will need to confirm to the FSA the competence of any individual applying for approved person status.
The FSA will be writing to all existing EEA incoming firms, regardless of their current passport, in the third quarter of 2007 to confirm what they need to do before 1 November 2007.
View MiFID Permissions and Notifications Guide, (PDF 311KB