The Current Position
All EU states regulate the provision of “investment services” that take place within their territory. Clearly, a service takes place within a territory if both the client and the firm are located in that country, although the position is more complex where the firm is located outside the EU, but the client is EU-based.
First, we need to be clear about what amounts to an “investment service.” MiFID contains a list of services and activities that all member states must make subject to regulation, although states may regulate other services as well (which, for example, the UK does). This list includes the following main activities:
- Reception and transmission of orders in relation to one or more financial instruments
- Execution of orders on behalf of clients
- Dealing on own account
- Portfolio management
- Investment advice
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
- Placing of financial instruments without a firm commitment basis
This means that non-EU entities that execute client orders (for example, broker dealers), that place securities (for example, underwriters or placement agents) or that provide investment advice (for example, corporate finance advisers) when dealing with EU-based clients or investors will be carrying on MiFID investment services.
Location of the Service
The only question then is, when the service is cross-border, whether it is deemed to take place in the EU or in the country of the service provider. Although an effort was made some years ago by the European Commission to standardise the approach within the EU on the circumstances in which a service would be deemed to take place within the EU, it eventually stalled because a number of states did not agree with the Commission’s approach. We are left with this current position:
Reverse Solicitation. As a result of the AIFMD discussions, reverse solicitation is now a much more familiar concept than it was two or three years ago. Many significant countries in the EU, including France and Germany, agree with the Commission’s initial view that the test should simply be whether the service is provided as a result of an approach by the client to the firm (in which case it is deemed to take place outside the EU) or whether it came about as a result of commercial canvassing by the non-EU firm (in which case it is deemed to take place within the EU). For this reason, non-EU broker/dealers, placement agents and corporate finance advisers may not solicit clients (even institutional clients) in France and Germany, save where the potential client demonstrably approached the institution first.
Characteristic Performance. Other countries (the main example is the UK) take the view that the test is one of characteristic performance. In other words, who approached whom is not really relevant; rather it is the nature of the service that is relevant. In very broad terms, in such countries, provided that the non-EU firm complies with general advertising rules, it may approach professional investors to carry out services with them without needing to be authorised in the EU.
The Markets in Financial Instruments Directive II
MiFID II will create a more harmonised framework within the EU for the first time; although it will liberalise the position in countries such as France and Germany, it will make the position in countries such as the UK more difficult. The new position will be:
- Non-EU firms may establish a branch in the EU and use it to market services to EU persons through a passport (although it appears as though this passport will not permit the offering of service to most individuals). Non-EU firms have always been able, in theory, to establish a branch in the EU, but they could not use the passport to access clients in other member states.
- Non-EU firms will be permitted to provide services to eligible counterparties and per se professional clients (in effect, EU authorised institutions and large undertakingsi, but not local authorities and their pension funds) in the EU without needing to establish the above authorised branch in the EU. They must, however, register with the European Securities and Markets Authority (ESMA). It is currently uncertain as to what this registration will require, but it is probably no more than the provision of information (although ESMA does have 180 business days to grant or refuse the application). Such firms must be authorised and supervised in the home country; the home country regime must be broadly equivalent to the EU regime (as decided by the Commission) and the firm must also offer EU clients the option of having disputes referred to a court or arbitration in the EU.
- Firms that obtain clients in the EU as a result of the client’s exclusive initiative are not within the above restrictions. However “where a third country firm solicits clients or potential clients in the Union or promotes or advertises [investment services] in the Union, it should not be deemed as a service provided at the exclusive initiative of the client” [text taken from the legislation]. Firms may not market new products or services to such clients.
The new regime will be implemented partly through the MiFID directive (which, like the AIFMD, will need to implemented in each country though changes to local law) and through Markets in Financial Instruments Regulation (MiFIR). Since MiFIR is a Regulation rather than a Directive, it has direct effect in member states’ law without any requirement for that state to implement it.
It is expected that the new rules will come into effect during early 2017, although there will be a transitional period whilst the Commission makes the equivalence assessments referred to in the second bullet point above.
____________________________________________i A large undertaking is an undertaking that fulfils at least two of the following criteria: balance sheet total EUR20 million; net turnover EUR40 million; own funds EUR2 million.