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Review of the Markets in Financial Instruments Directive

EU raise MiFID hurdles to non-EU investment firms

 

April 2011 

Background

The Markets in Financial Instruments Directive (“MiFID”) is a core pillar in EU financial market integration.  MiFID’s main objectives were (and are) to improve the competitiveness of the EU financial markets by creating a genuine single market for services and activities and to ensure a harmonised, high degree of protection for investors in financial instruments.  It allows European investment firms the freedom to provide investment services across Europe under a so called “MiFID passport” if they comply with various investor protection requirements.

MiFID took effect in November 2007 and the European Commission believes that market developments and also experience during the financial crisis means it now needs updating.  In December last year the European Commission published a public consultation as part of its review of MiFID.  That public consultation has now closed.  However there are a number of points which non-European investment firms may wish to monitor closely to see if they are included in the European Commission’s formal proposal which is currently scheduled for publication in spring this year.

Access of third country firms to EU markets

Currently the access of non-European investment firms to EU markets is not harmonised under MiFID but is left to the discretion of individual Member States (provided that national provisions do not result in treatment more favourable than that given to European firms). 

One of the questions the Commission raised in the consultation (question 138) is “is it necessary to introduce a third country regime in MiFID based on the principle of exemptive relief for equivalent jurisdictions?”

In the associated commentary to the question the consultation explains:

“.. it is suggested to introduce a mechanism by which access to the EU could be granted to investment firms and markets authorised and established in other jurisdictions subject to a strict equivalence regime.  To this effect, the framework Directive could be modified to introduce the principle of exemptive relief for investment firms and market operators based in jurisdictions with equivalent regulatory regimes applicable to markets in financial instruments, as regards areas covered for instance in the EU by MiFID, MAD, the Prospectus Directive and Transparency Directive.”

It is a little unclear as to what the Commission is actually contemplating.  The concern is that it is proposing that:

  • any EU-wide mechanism for exemptive relief for firms authorised and established in non-European jurisdictions would be based only on a “strict equivalence regime”; and
  • non-European firms and markets which do not qualify for exemptive relief could in effect be barred from access to European markets.

Various UK bodies, including the British Bankers’ Association, have responded to the consultation expressing their concerns in relation to this proposal.  It has been pointed out that the EU would be open to accusations of protectionism, that European professional investors may be restricted in their ability to pursue investment opportunities in other markets and European corporates may be restricted in accessing a variety of overseas markets for their equity and debt finance.

However strong concerns about accusations of protectionism were raised in the context of earlier drafts of the Alternative Investment Fund Managers (“AIFM”) Directive which was finally approved by the European Parliament in December last year.  While a compromise was eventually reached in respect of the AIFM Directive this was only achieved after many months of stand-off and negotiation and significant comment and lobbying from, among others, the US Treasury.  Therefore the fact that the proposal may be labelled by some as protectionist and may risk retaliatory measures does not mean that it is one which the relevant European bodies will not pursue further.

Direct sales by investment firms and credit institutions

In this light, one of the other issues which the consultation raises and which may be of more general interest is Question 86: “ What is your opinion about applying MiFID rules to credit institutions and investment firms when , in the issuance phase, they sell financial instruments they issue, even when advice is not provided?”

Here the associated commentary to the question explains:

“Some national regulators have raised concerns with respect to the applicability of MiFID when investment firms or credit institutions issue and sell their own securities.  While the application of MiFID is clear when investment advice is provided as part of the sale, greater clarity is needed in the case of non-advised services, where the investment firm or bank could be considered not to be providing a MiFID service………….the Commission Services consider that it would be necessary to specify that MiFID also applies to investment firms and credit institutions selling their own securities when not providing any advice.  To this end, the definition of the service of execution of orders on behalf of clients could be modified in order to also include the direct sale of their own securities by banks and investment firms.”

Again this proposal has been questioned in certain responses to the consultation which have made the point that the crucial issue should be whether or not the credit institution is providing an investment service to investors as opposed to acting purely as issuer of the securities in question.  When credit institutions offer securities to the public it is usually on the basis of a prospectus for which the issuer (ie the credit institution) is liable for any misrepresentation.  This is regardless of whether investment advice is given.  If an investor receives no investment advice from the credit institution in such cases then there appears to be no basis for imposing additional potential liabilities as no investment advice has been given or relied on.  It is not reasonable to treat a bank raising capital for its business in a completely different way from a commercial company or even a government.

More worryingly for non-European entities, if both this proposal and the proposal above relating to access for third country firms were ultimately adopted then a non-European credit institution or investment firm which is not authorised or established in a jurisdiction which is considered to impose “equivalent” rules and protections may not only be barred from providing investor services in Europe but potentially also from raising equity and debt capital in Europe.

Outcome

Whether the European Commission will still produce proposed legislation in the next couple of months for review and adoption by the European Council and European Parliament remains to be seen.  Various of the responses to the consultation emphasised that the Commission should take the time to adequately consider the full implications of the proposals rather than rushing the consultation.  Some also asked for the Commission to provide an opportunity for further consultation on the terms of any draft legislative text.  In any event, following some of the proposals flagged by the consultation paper, whatever is published next by the Commission should be monitored carefully.

 

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