The MiFID “safe-harbour” exemption allows non-EU entities to provide investment services in Ireland to corporates, without being authorised under the markets in financial instruments directive (“MiFID”).
There has been much speculation surrounding the future of this exemption under the revised markets in financial instruments framework (“MiFID II”), which will start to apply from 3 January 2018. It was anticipated that this issue would be resolved at the beginning of July with the transposition of the MiFID II Directive into Irish law.
However, this transposition deadline has come and gone without the transposing regulations being made. Pending the transposing regulations, the Department of Finance has published a Feedback Statement to its earlier MiFID II consultation, setting out its approach regarding a number of issues under MiFID II, including the safe-harbour exemption.
According to the Department, the safe-harbour exemption will continue to be available under MiFID II but will be narrower in scope. In addition, its availability will be subject to the fulfilment of a number of new conditions. Any entity currently relying on the safe-harbour exemption to provide services into Ireland will need to review its existing arrangements to ensure that all such services can continue to benefit from this exemption once MiFID II takes effect. If it can no longer rely on the exemption, it will need to identify alternative ways of providing investment services to clients in Ireland.
The safe-harbour exemption
Generally, a firm must be an authorised investment firm in order to provide investment services in Ireland, under the European Communities (Markets in Financial instruments) Regulations 2007. However, this is subject to an exemption for non-EU firms, usually referred to as “Third Country Firms”, that have no Irish branch and that provide investment services to Irish clients other than individuals that do not themselves provide services on a professional basis. This is known as the "safe-harbour exemption".
Third country firms and MiFID II
MiFID II provides a bespoke regime governing the circumstances in which a Third Country Firm may offer investment services in Ireland (and other EU member states), which is set out in the MiFID II Directive 2014/65 and in the Markets in Financial Instruments Regulation 600/2014 ("MiFIR"). These circumstances differ depending on the type of client involved. Specifically, MiFID II distinguishes between two different categories of clients, namely:
- a retail client and a client that has opted to be treated as a professional client (an “opted-up client”); and
- a professional client or eligible counterparty.
Professional clients and eligible counterparties broadly cover the same entities, including: investment firms, credit institutions, other regulated financial institutions, insurance companies, collective investment schemes and their managers, and pension funds and their managers.
A "large undertaking" will be a professional client, if it fulfils any two of the following size requirements on a company basis:
- balance sheet total: EUR 20,000,000
- net turnover: EUR 40,000,000
- own funds: EUR 2,000,000
Other institutional investors whose main activity is to invest in financial instruments will also be professional investors. This includes entities dedicated to the securitisation of assets or other financing transactions.
Under the MiFID II Directive, member states have the option of requiring a Third Country Firm to establish a branch in order to offer investment services to retail and opted-up professional clients. Any member state that requires the establishment of such a branch can only authorise a branch that meets the conditions specified in the MiFID II Directive.
For its part, MiFIR envisages a registration regime, which will allow a Third Country Firm to provide investment services in the EU to professional clients and eligible counterparties once it is registered with the European Securities and Markets Authority (ESMA) and the European Commission has made an applicable equivalence decision. Pending the roll-out of the registration mechanism, a member state may apply its national rules to the provision of investment services by such Third Country Firms.
The feedback statement
In summer 2016, the Department of Finance held a public consultation on the national discretions contained in MiFID II which dealt with, among other things, the safe-harbour exemption. The Feedback Statement follows on from that consultation. Its purpose is to indicate how the Department intends to address those national discretions in the regulations transposing the MiFID II Directive into Irish law. While the Department expects to complete its work on those regulations in the coming weeks, the Feedback Statement seeks to help those affected by the decisions on the national discretions, by indicating how these will be dealt with in the transposing regulations.
According to the Feedback Statement, the safe-harbour exemption will continue to apply to MiFID II professional clients and eligible counterparties, pending the application of the registration process set out in MiFIR. However, in order to be able to rely on the exemption, the Third Country Firm’s home country must satisfy certain conditions. In particular, the safe-harbour exemption will no longer be available to a Third Country Firm whose home country:
- is on the Financial Action Task Force (FATF) list of non-cooperative jurisdictions and which Third Country Firm is not subject to authorisation and supervision in respect of the investment services provided to wholesale clients in the State;
- is not a signatory of the IOSCO Multilateral Memorandum of Understanding concerning consultation and cooperation and the exchange of information.
The safe-harbour exemption will cease to encompass Third Country Firms providing investment services to retail and opted-up professional clients in Ireland, and such firms will therefore need to consider alternative ways of providing investment services to these clients.
Third Country Firms providing investment services in Ireland under the safe-harbour exemption, will need to carry out a review of those services to ensure that they can continue to rely on that exemption under MiFID II. In particular, such firms will need to ensure that their clients are categorised as professional clients or eligible counterparties for MiFID II purposes and that their home country meets the requirements identified above.
Any Third Country Firm that intends to provide investment services to a retail or opted-up professional client after 3 January 2018 will need to consider how best to do so in the absence of the safe-harbour exemption. In certain cases, a Third Country Firm may be able to provide an investment service/activity to a client in Ireland on the basis of reverse solicitation eg where the retail/opted-up professional client initiates at it own exclusive initiative the provision of that service/activity. However, any firm regularly providing services into Ireland to retail/opted-up clients will need to consider establishing a branch in Ireland in order to continue to provide investment services to such clients, subject to meeting the relevant authorisation requirements. Any firm that provides services to retail/opted-up clients in multiple EU member states may also wish to consider setting up an authorised subsidiary under MiFID II as this will allow it to benefit from MiFID II passporting rights throughout the EU.