On 10 August 2017, the Minister for Finance, Paschal Donohoe TD (the “Minister”) signed the European Union (Markets in Financial Instruments) Regulation 2017 (the “MiFID II Regulations”) which have been publicly available from 14 August 2017 and may be accessed here.
The MiFID II Regulations give effect to the Markets in Financial Instruments Directive 2014/65/EU, Commission Delegated Directive (EU) 2017/593 and full effect to Regulation (EU) No. 600/2014 (“MiFIR”), (collectively “MIFID II”) and will enter into force on 3 January 2018.
The MiFID II Regulations do not introduce any gold plating requirements. However, the Minister has exercised certain national discretions, meaning that the Irish implementation may differ from other member states who do not exercise such national discretions. This note considers the national discretions exercised by the Minister and the consequential impact on Irish domestic legislation. It will be of relevance to Irish MiFID firms, credit institutions and non-MiFID investment intermediary firms.
Regulation 4(3) of the MiFID II Regulations provides an exemption from MiFID II for firms that meet certain criteria (an “Exempt Firm”), exercising the national discretion provided for in Article 3(1) (a), (b) and (c) of MiFID II. An Exempt Firm will be subject to regulation under the Investment Intermediaries Act 1995 (the “IIA”) and its activities will be limited.
The MiFID II investor protections will not apply to Exempt Firms, and these firms will only be subject to investor protection requirements under the Central Bank of Ireland (the “Central Bank”)’s Consumer Protection Code (the “CPC”). There is a significant discrepancy between the requirements of MiFID II and the current domestic provisions under the IIA and the CPC.
Addendum to the Consumer Protection Code
To address the potential for any regulatory arbitrage, the Central Bank has amended the CPC by way of Addendum so that Exempt Firms will be subject to certain enhanced CPC investor protections similar to the MiFID II protections. The key amendment is the new Chapter 14, “Additional Requirements Arising from the Transposition of Directive 2014/65/EU into Irish law”, which only applies to Exempt Firms. This chapter introduces enhanced investor protections in the following areas:
- product governance;
- remuneration requirements;
- recording telephone calls;
- conflicts of interest disclosures;
- periodic suitability assessments;
- costs and charges requirements;
- commission, fees and charges disclosure independent financial advice disclosure requirements; and
- remuneration requirements.
This will ensure the end client will be afforded sufficient protection regardless of the applicable regulatory regime.
Client Order Handling Rules
Regulation 36(4) of the MiFID II Regulations exercises the discretion contained in Article 28(2) of MiFID II. This enables investment firms to fulfil their obligation in regard to the earliest possible execution of client orders, by transmitting the client limit order to a trading venue. If this discretion was not exercised, investment firms would be required to make the client orders public, if they are not immediately executed under prevailing market conditions in a regulated market or in a trading venue, by making it easily accessible to other market participants.
Third Country Regimes
The Minister has elected to exercise the discretions under the MiFID II Third Country Regime, in addition to maintaining the Irish Safe Harbour Regime. Together these regimes, subject to certain limitations, give third country firms a number of options to provide services in Ireland without having to be authorised as an investment firm.
(a) MiFID II Third Country Regime
Relying on the discretion under the MiFID II third country regime, the MiFID II Regulations will allow a third country firm to provide investment services to retail and elect-up professional clients in Ireland by establishing a branch. This requirement provides greater protection for retail clients and ensures a level playing field in respect of investment firm rules providing retail investment firms in Ireland.
This regime will apply in addition to the wholesale third country regime under MiFIR. Under the wholesale third country regime, a third country firm may provide investment services to eligible counterparties and professional clients in the European Union (“EU”) without establishing a branch, where the firm is on the register of third country firms maintained by European Securities and Markets Authority (“ESMA”), following an equivalence decision by the Commission, and other conditions under MiFIR. The result of the above is that Ireland will apply the two third country regimes under MiFID II.
(b) Irish Safe Harbour Regime
The current national “safe harbour” regime for third countries carrying out wholesale investment services has been retained under Regulation 5 of the MiFID II Regulations. However, the application of safe harbour is limited under the MiFID II Regulations to the provision of investment services to eligible counterparties and all professionals and will not apply where:
- a firm provides investment services to retail clients in Ireland (and potentially elect up professionals);
- a firm is a third country firms whose home country is on the Financial Action Task Force list of non-cooperative jurisdictions and which is not subject to authorisation and supervision for providing investment services to wholesale clients in Ireland; or
- a firm is a third country firms whose home country who is not a signatory to the International Organization of Securities Commission Multilateral Memorandum of Understanding concerning consultation and cooperation and the exchange of information.
Importantly, the safe harbour regime will not apply if a firm is registered by the European Securities and Markets Authority (“ESMA”), following an equivalence decision by the Commission under MiFIR. In that circumstance, the MiFIR third country regime will apply, superseding the Irish “safe harbour” regime. The practical implication of this is that such a firm will be able to provide wholesale investment services in Ireland, irrespective of which regime it falls under. The Irish “safe harbour” regime will continue to be a helpful exemption as the MiFIR third country regime is dependent on an equivalence decision by the Commission, which strays into the area of politics and, given the current Brexit environment, may be difficult to rely upon at present.
The Central Bank has discretion to make rules requiring those who avail of the “safe harbour” exemption to notify it as it deems necessary, to ensure that the conditions of the exemption are being met. This is a new requirement under the MiFID II Regulations. In addition, the Central Bank may issue a direction to a third country firm whose registration with ESMA has been withdrawn that it may not provide investment services, irrespective of the fact that it might otherwise fall within the “safe harbour” regime.
The narrowing of this exemption means that some third country firms may no longer be able to provide investment services in Ireland without being authorised by the Central Bank. This will need to be considered prior to the coming into force of the MiFID II Regulations in January 2018.
Higher fees applying to cancelled orders
Regulation 72(15) of the MiFID II Regulations allows regulated markets to impose higher fees for cancelled orders and on participants placing a high ratio of cancelled orders to executed orders implements the discretion, as provided for in Article 48(9) of MiFID II. This is intended to mitigate against risk to the maintenance of an orderly market.
Investor Compensation Schemes
All investment firms (including Exempt Firms) must still be covered by the Investor Compensation Scheme.
The MiFID I Regulations
Certain provisions from SI 60/2007 (the “MiFID I Regulations”) did not directly reflect obligations under MiFID I and do not reflect any obligation under MiFID II. However, these provisions have been carried across (with some necessary modifications) to the MiFID II Regulations. Some examples of these include:
- Regulation 4 of the MiFID II Regulations maintains the exemptions in respect of members of professional bodies, personal representatives, trustees and certified Investment Intermediaries;
- Regulation 5 of the MiFID II Regulations includes a transitional provisions deeming firms authorised under the MiFID I Regulations to be authorised under the MiFID II Regulations;
- Regulation 119(12) of the MiFID II Regulations provides that the Central Bank may continue enforcement actions under the MiFID I Regulations;
- Regulation 14 of the MiFID II Regulations maintains the powers of the Central Bank to seek revocation of authorisation through the courts; and
- Regulation 147 of the MiFID II Regulations the powers of a liquidator, receiver, etc will be retained, including the restrictions to those powers.
Prohibitions on persons knowingly or misleadingly making false or misleading applications for authorisations under MiFID II has been retained under Regulation 125 of the MiFID II Regulations.
Client Asset Rules
The Minister has received the approval of the European Commission under Article 16(11) of MiFID II to go beyond the client asset rules set out in MiFID II, though they have stated that this reflects the Minister’s intention to “maintain” the current domestic Client Asset Regulations (the “CAR”). In light of this, the Minister has indicated that some amendments will be made to the CAR to reflect the overlap with the MiFID II rules. The Central Bank has launched a consultation regarding the proposal to amend the Central Bank Investment Firm Regulations 2017 and the CAR which may be accessed here.
The Investment Intermediaries Act 1995
Regulation 142 of the MiFID Regulations sets out amendments to the IIA which will be relevant, in particular, for Exempt Firms. The amendments include the requirement that an Exempt Firm must provide additional information prior to authorisation, the establishment of a public register of tied agents (the “Register”) who meet certain conditions and a prohibition on the appointment of tied agents who do not appear on the Register.
The publication of the MiFID II Regulations, albeit delayed, is good news for firms impacted by MiFID II.
The Central Bank has stated that, for the moment, it will not be introducing guidance on MiFID II and firms should rely upon the vast volume of guidance that ESMA has published, and continues to publish. Whilst ESMA’s guidance is helpful, it does not address certain Irish specific issues, particularly the divergence in investor protections that apply to Exempt Firms under the CPC and MiFID investment firms under the MiFID II Regulations. This is an area of regulatory development and we would hope that the Central Bank will issue guidance on these points.
The Central Bank expects firms to manage regulatory amendments proactively as by preparing for and understanding the changes that are about to occur, firms put themselves in the best position possible to take advantage of opportunities that arise. Firms that do not prepare may find themselves unable to adapt to the new regulatory environment and face significant challenges in respect of continuing ordinary trading.
However, even full engagement with the MiFID II regime has its challenges. The Central Bank has noted that even firms with “significant MiFID II budgets” are facing time pressures to ensure that they are fully compliant by the implementation deadline.
With the implementation date looming, firms directly and indirectly impacted should:
- Be fully resourced to meet their regulatory obligations;
- Be advanced in terms of implementing their project plans, with key decisions made at this point; and
- Have fully considered the implications of MiFID II on their businesses and have made the changes to their systems, policies and procedures.