The Current Position in Europe
Any non-European firm carrying on any investment service with European clients or counterparties currently operates under a patchwork of different national regulatory regimes, ranging from the liberal (e.g., the UK where all cross border business is permitted except with retail investors) through to the restricted (e.g., Germany where all solicitation and marketing is technically prohibited but an unofficial tolerated practice appears to have developed that allows institutional business to carry on in a gray zone).
The European Commission’s Proposals
The European Commission in October 2011, therefore, set out proposals (amongst many other things) to harmonize the European regulatory regime for non-European firms dealing with Europeans. These proposals, if they are enacted in this form, will prohibit a non-European person from carrying on any regulated financial services business with a European person except:
(1) where a firm itself has established an authorized branch in the European Union (subsidiaries or branches of other group firms will not be sufficient);
(2) neither the specific business nor the relevant client relationship has been solicited by the non-European firm (the so-called “reverse solicitation test”); or
(3) the business is undertaken only with “eligible counterparties” – in effect banks, brokers, investment managers, insurance companies, etc. To use this exemption, the firm would have to be included on a list maintained by the European Securities and Markets Authority – a quasi-European supra-regulatory authority.
This has, rightly, been referred to as “Fortress Europe,” and we are monitoring its possible consequences for US firms carefully as the proposals pass through the various stages.
The Official Response
The Presidency of the Council of the European Union (the representative of Member States’ governments) has recently published a progress report on the MiFID II legislative proposals. The aim of the progress report is to provide an update on the status of the various discussions and issues that have arisen from MiFID II. Although the report states that there is, “in principle,” agreement on a number of the proposals, it is also clear that a number of issues are still to be resolved, some even potentially requiring discussion at a political level.
The report notes that “several Member States have expressed serious concerns and have strong reservations” about the Commission’s proposal on third countries. The Member States’ view is that the proposal is “unnecessary and disproportionate.” The report, though, appears to indicate that the substance of the proposals should in due course be amenable to agreement by the relevant countries.
The United Kingdom’s House of Lords European Committee scrutinizing the draft text is more critical, however, calling the proposal “deeply flawed” and urging the UK government to ensure that the final version of the text does not close the European financial market to non-European firms: http://www.publications.parliament.uk/pa/ld201213/ldselect/ldeucom/28/28.pdf.
So where does this leave us? There is clearly considerable opposition to the proposal to close European markets to third country firms. The only question, though, is how effective this opposition will be given that the same argument was lost in the final position of the Alternative Investment Fund Managers Directive. Under this directive, from 2018, non-European managers will be prohibited from promoting funds to European investors unless that manager is also authorized in the European Union.
It is expected that agreement on these issues should reached by the end of the year, with the Directive not coming into force before 2015.