The Markets in Financial Instruments Directive (MiFID) became law in the UK in November 2007. It was designed to encourage competition between Europe’s trading venues for financial instruments. It also aimed to ensure appropriate levels of protection for investors and consumers of investment services across the European Union (EU). The financial crisis of 2008 created a need for further regulations and the rapid response of EU regulators, namely MiFID II, is now almost upon us, just some 9 years later!!!
This is the first of several articles that we will be publishing to assist firms understand how the new regulations will affect them. The focus of this article is MiFID II authorisations and notifications. Subsequent articles will cover other aspects, such as conflicts of interest and recording telephone calls.
MiFID II applies from 3 January 2018, and will deliver some important changes to the scope of regulation in the UK. It introduces new processes for authorising investment firms and will require investment firms and others to make a range of notifications. As a result, it will have a significant impact for a range of authorised persons, including some currently unauthorised businesses. IMD firms or firms with IMD only passports do not need to be MiFID II authorised.
While 3 January 2018 seems reasonably far in the future, the deadline for firms that need to take action is potentially quite short. Given that literally thousands of pages of consultation, guidance and policy statements relating to MiFID II have been published to date, with more to come in the next few months, one of the biggest challenges for firms is to identify how MiFID II will affect them and whether and what action is needed now, in order to continue in business without interruption beyond 3 January 2018.
What firms need to consider
Firms need first to consider whether they will be a MiFID II firm or apply for/continue exemption (see below*).
Much of MiFID II is aimed at financial institutions and most UK based adviser firms are likely to be MiFID exempt currently and wish to remain exempt under MiFID II. Firms that want to do MiFID II regulated business in another EEA country (known as passporting) will need to apply for a passport and be MiFID II authorised.
Having decided on their desired status, firms need to identify which applications and notifications they will need to make to the FCA and by when, by considering the following …
- The changes to the scope of regulation – MiFID II changes the scope of activities, services and financial instruments in a range of different ways;
- Changes to forms – there are new forms for most authorisations and Variation of Permissions (VoPs) involving investment services and activities. Passporting forms are also changed – in particular, investment firms need to submit one service passport notification for each country in which they intend to provide cross-border services.
- Early applications – the good news is that firms can (and should) make any necessary applications now to ensure they have the necessary permissions and passports on 3 January 2018. Passport notifications can be made from 31 July 2017. The bad news is that firms have so far been slow to respond, possibly because they are not sufficiently aware of the impact and requirements of MiFID II or because firms are finding the sheer volume and complexity of the FCA papers difficult. Whatever the reason, it is not advisable for firms to leave action until the last minute and risk being in authorisation limbo on 3 January 2018. Firms that need to apply for permissions or passports must do so by the relevant deadline, as indicated below.
The key authorisation and passporting deadlines are:
- complete applications for authorisation of relevant firms and for VoPs must be submitted by 3 July 2017 to ensure that the FCA will assess them by 3 January 2018;
- notifications of establishment passports for branches must be submitted to the FCA as early as possible after the passporting gateway opens on 31 July 2017.
- notifications of cross-border service passports must be submitted by 2 December 2017;
MiFID II – Application and notification user guide
Full guidance on all the above can be found in the MiFID II – Application and notification user guide that the FCA published in January 2017.
We have tried to bring out the key points below.
The guide is aimed at a very wide audience including, of particular relevance to many of our readers, adviser firms that are exempt from authorisation as MiFID investment firms under the optional exemption in Article 3 of MiFID II. You can read more about exempt firms below*.
The primary aim of the guide is to help firms understand whether they need to apply for MiFID II authorisation and/or a VoP.
There are different application packs for each of the following circumstances …
- Initial authorisation – an unauthorised business, or a business authorised under legislation other than FSMA, applying for a first Part 4A permission under FSMA to be authorised as a MiFID investment firm.
- VoP to become a MiFID investment firm – a firm with a Part 4A permission under FSMA but which is not currently a MiFID investment firm, applying for a VoP to become a MiFID investment firm. This is also classified under MiFID as an initial authorisation.
- VoP for a MiFID investment firm – a firm with a Part 4A permission under FSMA which is already a MiFID investment firm, applying for a VoP to extend the range of activities it performs.
- Change of legal status (COLS) – a firm making an application to change its legal status that would also be classified under MiFID as an application for initial authorisation.
There are four types of exemption that might apply.
Article 3 MiFID exempt firm
Under Article 3 of MiFID, Member States have the option to exempt some firms from authorisation as MiFID investment firms. The UK exercised the optional exemption in Article 3 which means that Article 3 MiFID exempt firms do not need to comply with the full extent of MiFID rules. However, MiFID does require Article 3 MiFID exempt firms to be subject to national regulation.
Firms that might otherwise qualify for the exemption, but want to do MiFID business outside the UK, can choose to opt out of the exemption and therefore become a MiFID investment firm.
MiFID II includes the same exemption but Article 3 firms must now be subject to ‘at least analogous’ requirements. These include a wide range of authorisations, conduct of business and organisational requirements, but not the whole range of those that will apply to MiFID investment firms.
- Article 3 MiFID exempt firms wishing to remain as such under MiFID II do not need to take any action as they will be grandfathered through by 3 January 2018.
Article 2 MiFID exempt firm
There are several situations in which a firm can be exempt under Article 2. The most likely for our purposes is where a firm provides investment services purely as a complement to its main professional activity; for example, firms such as solicitors or accountants that belong to a designated professional body; or an Authorised Professional Firm that provides investment services in an incidental manner in the course of their professional activity.
- Article 2 MiFID exempt firms wishing to remain as such under MiFID II will need to wait until September for the FCA to confirm what the process will be.
Article 8 MiFID exempt firm
Generally, this applies where a firm has had MiFID authorisation removed for some reason, e.g. as a result of not having done any MiFID business for over twelve months.
- Article 8 MiFID exempt firms wishing to remain as such under MiFID II should confirm with the FCA what is required.
Exempt CAD firm
These firms are considered to be MiFID firms, i.e. not exempt from MiFID but, as suggested by the label, exempt from elements of the Capital Adequacy Directive. No action is needed from firms already authorised as MiFID investment firms that do not want to make any changes in their scope of permissions. However, firms need to check carefully whether the changes to services and activities under MiFIID II changes the scope of their activities, in which case a VoP or new application may be required.
- Exempt CAD firms are MiFID firms and so will need to check whether the scope of their activities changes under MiFIID II, in which case an application may be required by the relevant deadlines.
What action is required, and by when?
- Authorisations and VoPs
New firms that want to be authorised as Article 3 MiFID exempt firms should submit the relevant information required for new MiFID authorisation applications described in paragraphs 3.9 to 3.20 of the applications and notifications guide.
An existing Article 3 MiFID exempt firm wishing to opt into MiFID will have to follow the process for existing authorised persons submitting a VoP application to become a MiFID investment firm. This process and the relevant application which must be provided to the FCA are described in paragraphs 3.21 to 3.29 of the guide.
If an existing Article 3 MiFID exempt firm wishes to apply for a VoP but remain a MiFID exempt firm, it will have to follow the process described under paragraphs 3.31 to 3.35 of the guide.
Investment firms are already required to provide notice to the FCA of events and information which are required for the FCA to discharge its obligations under the FSMA. MiFID II brings changes to the notifications that firms authorised as investment firms need to make in the following areas …
- changes to the membership of the management body;
- algorithmic trading;
- direct electronic access provision;
- intention to act as a general clearing member.
- Structured Deposits
Firms wishing to advise on Structured Deposits must notify the FCA by 2 January 2018 using the appropriate notification form.