The UK became a third country from January 31, 2020. Although the practical impact of this change does not crystallize until the end of this year, it is timely to review the European Union’s (EU) third country regime under the Markets in Financial Instruments Directive (MiFID) / Regulation (MiFIR), which has recently been the subject of a consultation by the European Securities and Markets Authority (ESMA). ESMA has announced that all open consultations with a closing date on or after 16th March have been extended by four weeks as a result of COVID-19, so these consultations will be affected by this extension.
Provision of Services Through a Branch in the EU (MiFID)
EU Member States may require a third country firm intending to provide investment services or perform investment activities to retail or elective professional clients in the EU to establish a branch. Where this is the case, the relevant branch must be authorized by the Member State with certain conditions, for instance, there must be sufficient initial capital at the free disposal of the branch and the firm must belong to a recognized investor compensation scheme.
The regime for third country entities in relation to the provision of services or performance of activities through a branch is set out in Articles 39 to 42 of MiFID, as amended by the Investment Firms Directive 2019/2034.
A branch of a third-country firm must comply with certain MiFID requirements such as those in respect of organizational requirements for investment firms, conflicts of interest, assessment of suitability and appropriateness and best execution. EU Member States cannot impose any additional requirements on the organization and operation of the branch, over and above the MiFID requirements. Furthermore, Member States cannot treat any branch of third country firms more favorably than EU firms.
Provision of Services With or Without a Branch in the Eu Following an Equivalence Decision (MiFIR)
Articles 46 to 49 of MiFIR, as amended by the Investment Firms Regulation 2019/2033, set out the rules in relation to the provision of services by third country firms to professional clients and eligible counterparties with or without a branch, following an equivalence decision by the European Commission. It is very uncertain at the moment whether financial services equivalence decisions will be granted to the UK at the end of the transition period this year. If an equivalence decision were to be granted, UK firms will need to apply to ESMA to be registered as a third country firm permitted to provide investment services in the EU. ESMA is empowered to keep a register of the third country firms permitted to provide investment services in the EU on this basis.
The Investment Firms Regulation and Directive, which were finalized by the European Union last year, introduced changes to the MiFID II and MiFIR regimes in respect of the provision of the investment services by third country firms. These changes were for example in relation to;
- reporting requirements from third country firms to ESMA,
- authorization requirements for a branch of a third country firm under MiFID,
- the information needed to be provided to ESMA to be registered as a third country firm providing services in the EU.
ESMA published a consultation on the MiFID II and MiFIR regimes for third country firms in January of this year on the necessary technical standards to implement these changes.
ESMA has proposed that the information to be provided by a branch of a third country firm under MiFID should be similar to the information provided for third country firms providing services in the EU with or without a branch under MiFIR.
Information to be reported annually under the MiFID and MiFIR regimes include, for example:
- turnover and asset under management information of third country portfolio management firms,
- information on complaints received in the EU by the Firm,
- information on the activities of the control functions of third country firms, with a focus on operations of the firm in the EU.
Firms registered under MiFIR must also report any changes to the information necessary for their registration.