MiFID II – The Markets in Financial Instruments Directive II
What is MiFID II?
MiFID II and the accompany regulation (MiFIR – the Markets in Financial Instruments Regulations) were approved by the European Parliament in 2014 as an updated version of the original MiFID, which was approved in 2004.
MiFID II relates to the provision of investment services both within and into the European Union and seeks to achieve maximum harmonisation amongst member states. MiFID II also contains an article (39) dealing with the services of third country (non-EU) firms seeking to provide services within the EU. MiFID II (as a Directive) requires the articles to be adopted into national law, however this allows a degree of variation or gold-plating. MiFIR (as a Regulation) applies directly in each member state. MiFID II deals with retail and elective professional clients whilst MiFIR deals with institutions and per se professional clients.
The original timeline for implementation of MiFID II/MiFIR was January 2017, however in early 2018 this was extended by one year.
MiFID already exists, why MiFID II?
There were a number of reasons why a new directive was needed:
- Regulators felt a few gaps needed to be filled
- MiFID was becoming outdated by increasing use of new technology in investment services; in particular algorithms were seen as capable of contributing to disorderly markets and potential abuse
- Calls for a more level playing field in some areas, which have resulted in the introduction of organised trading facilities as a new type of trading venue, the more equal treatment of regulated markets & multilateral trading facilities and the extension of the transparency & systematic internaliser regimes to all asset classes
- Concerns about the generosity of exemptions available for firms trading in commodity derivatives and the integrity of the emission allowance market – tightened up including with the introduction of position limits
- Perception that firms had not taken some of the conduct requirements sufficiently seriously – enhanced from MiFID standards, often by articulating more clearly what regulators expect
- Important new requirements around product governance, intervention and recording of telephone conversation and electronic communications
MiFID II specifically states that fund business operated under the Alternative Investment Fund Managers Directive (AIFMD) or the Undertakings for Collective Investments in Transferable Securities (UCITS) are excluded from MiFID II. That being said their fund management companies will have to comply with certain provisions, particularly regarding suitability of product and reporting.
MiFID II and Third Country Firms
Article 39 of MiFID II provides that a Member State “may require that a third country firm intending to provide investment services or perform investment activities with or without any ancillary services to retail clients or to professional clients within the meaning of Section II of Annex 2 in its territory establish a branch in that Member State”. This means that Member States have the option of requiring a local branch, regulated by that Member State’s regulator. The original MiFID had no third country provisions and so any services provided by Third Country Firms were dealt with at the discretion of the relevant Member State.
Whilst the UK has chosen to retain its current regime, insofar as permitted by MiFID II/MiFIR, other countries are choosing different routes:
- France – requirement for a branch when dealing with retail and elective professional clients
- Germany – there may be exemptions available from the requirement for a branch
- Italy – Italian branch required
- Netherlands – requirement for a branch (except firms from USA, Australia & Switzerland)
MiFID II and Guernsey
Following the adoption of MiFID II & MiFIR by the European Parliament, Guernsey formed a working party (industry, government, regulator) as it did for the AIFMD previously. This working party has not met in recent time as information regarding third country equivalence requirements has been minimal and sporadic.
Ideally an opt-in/opt-out regime, similar to that the island has implemented for AIFMD, would be ideal as whilst clearly a degree of equivalence will be required for dealing with the EU there is still a strong desire to remain competitive internationally. Given that implementation of the directive is getting steadily closer the island will soon have to decide what changes to implement into local regulation. Given the flexibility in the primary legislation at least most changes should not require amendment to the law.
Whilst there is still no agreement on how Guernsey should progress one thing is certain, those providing investment services to clients (particularly retail and elective professional clients) in the EU/EEA should begin to think about the services they are offering, which countries those clients are in, and how they maintain those services going forwards.
Midshore are able to help provide advice, project management, or procedures for your organisation to successfully implement necessary policies and practices to ensure your compliance with MiFID II and MiFIR. We can help you look at routes for providing services in various EU member states and can also provide MiFID II Awareness training for your staff.
Please contact us to discuss your needs.