The Department of Finance has published its Feedback Statement on its 2016 MiFID II Consultation. This Briefing summarises the approach that the Minister for Finance will take in respect of the various MiFID II Member State discretions.
We have set out below some of the key points arising out of the Feedback Statement.
The transposition date for MiFID II was 3 July 2017. However, the Irish transposing regulations have not yet been published.
In its Feedback Statement, the Department confirmed that it is continuing to work on those regulations, and that work is expected to be completed "in the coming weeks". Given this language, transposing regulations are not expected imminently.
In addition to those transposing regulations, as set out below the Central Bank's Consumer Protection Code will be the subject of certain MiFID II- related amendments, primary legislation will be needed to amend the Investment Intermediaries Act 1995 and the existing sanctions regime, and further regulations are expected at the end of this year to deal with amendments to the Irish Client Asset Regulations.
THIRD COUNTRY FIRMS AND BRANCHES
As expected, the Minister will exercise the discretion under Article 39 of MiFID II to impose a requirement on a third country firm to establish a branch where the firm intends to provide investment services to retail clients and elected-up professional clients in Ireland.
Crucially, whilst implementing Article 39, the Minister has decided to broadly maintain the existing safe harbour under the Irish MiFID I Regulations for non- EEA firms providing investment services into Ireland on a cross-border basis, but has confirmed that the safe harbour will no longer apply in the following circumstances:
- if the firm provides investment services to retail or elected-up professional clients in Ireland (per Article 39);
- if the firm is registered by ESMA in accordance with Article 47 (Equivalence decision) of MiFIR, on the basis that the MiFIR third country regime supersedes any national third country regime when the firm is registered by ESMA following an equivalence decision by the Commission in respect of its home country - as such, the Department has highlighted that the safe harbour will still exist for these firms, but under the MiFIR framework (and thereby across the EU) rather than under national law;
- in respect of third country firms whose home country is on the list of non-cooperative jurisdictions maintained by the Financial Action Task Force and who are not subject to authorisation and supervision in respect of the investment services they provide to wholesale clients in Ireland; and
- in respect of third country firms whose home country is not a signatory to the IOSCO Multilateral Memorandum of Understanding concerning consultation and cooperation and the exchange of information.
Many firms rely on the safe harbour, so how the safe harbour and the carve-outs from its application will be reflected in the Irish transposing regulations will need to be reviewed carefully when those regulations are published. Firms currently relying on the safe harbour will have to consider whether they will fall within its amended scope from January 2018 onwards.
RTO/ADVICE OPTIONAL EXEMPTION
The Minister will exercise the discretion in Article 3(1) of MiFID II to exempt, from the scope of MiFID II, persons who meet the conditions in Article 3(1)(a), (b) and (c).
Under MiFID II, those exempt persons must be subject to requirements which are "at least analogous" to certain requirements of MiFID II. The Department confirmed that it identified certain gaps between the MiFID II package and national legislation. As a result, the Central Bank's Consumer Protection Code will be amended to include specific obligations on persons who will benefit from the above exemption in respect of the following:
- obtaining specified information from product producers and understanding the characteristics and identified target market of each product they are selling;
- ensuring that telephone conversations leading to or intending to lead to a transaction are recorded or, alternatively, following up such telephone conversations with a written communication;
- disclosing conflicts of interest to clients;
- providing periodic suitability assessments;
- aggregating costs and charges in disclosures to clients;
- making reasonable estimates of costs (where actual costs are not available) in disclosures to clients;
- disclosing the effect of commissions, fees or other charges when presenting performance information to clients;
- refraining from using the term "independent financial advice" (or similar) when accepting and retaining commissions from third parties;
- disclosing certain information to clients when providing independent financial advice;
- where the firm is a natural person, refraining from providing both independent and non-independent advice; and
- ensuring that staff performance is not remunerated or assessed in a way that conflicts with the duty of staff to act in the best interests of the relevant firm's clients.
Amendments will also be made to the Investment Intermediaries Act 1995 regarding the provision by firms of information on their management bodies and resources when seeking authorisation, and the establishment by the Central Bank of a public register of tied agents.
The implementation of Article 3(1)(a) as described above will lead to fairly significant changes for some firms currently authorised under the Investment Intermediaries Act 1995.
The Minister for Finance is not exercising the discretion to exempt persons that meet the conditions in Article 3(1)(d) or (e) (i.e. firms that provide hedging for clients operating in the energy markets, or firms that provide hedging for clients that are operators within the EU Emissions Trading System Directive).
IRISH CLIENT ASSET REGULATIONS
The existing Central Bank Client Asset Regulations will be retained (those Regulations are super-equivalent to MiFID II and this has been approved by the European Commission), subject to certain amendments to take account of MiFID II. These amendments will be made by way of separate regulations (i.e. not by way of the Irish transposing regulations). The Department has signalled that the Central Bank will consult on those changes before amending the existing Client Asset Regulations, and the revised Client Asset Regulations are expected to be in place by 3 January 2018 when MiFID II comes into force.
INVESTOR COMPENSATION SCHEME
All investment firms (including those exempt under Article 3(1)(a), (b) and (c)) must still be covered by the Investor Compensation Scheme.
INVESTOR PROTECTION AND CONFLICTS OF INTEREST
Under Article 24(12) of MiFID II, Member States have a discretion to impose additional requirements on investment firms in respect of various investor protection matters, including the provision of information' and remuneration arrangements relating to investment advice and portfolio management.
Feedback had been sought as to whether a level playing field should exist between the requirements of MiFID II and the requirements of the Insurance Distribution Directive. The Minister has decided not to exercise this discretion for the time being pending the outcome of a planned consultation by the Central Bank, later this year, on the payment of commission to intermediaries.
CLIENT ORDER HANDLING
As expected, the Minister has followed the approach taken under MiFID I, and will exercise the discretion to allow investment firms to fulfil their obligation regarding the earliest possible execution of client limit orders in respect of shares admitted to trading on a regulated market or traded on a trading venue which are not immediately executed under prevailing market conditions, by transmitting the client limit order to a trading venue.
The Minister will exercise the discretion to allow regulated markets to impose higher fees:
- in respect of orders placed that are subsequently cancelled; and
- on participants that place a high ratio of cancelled orders to executed orders.
As expected, the Minister will designate the Central Bank of Ireland as the single national competent authority for the purposes of MiFID II.
- Criminal sanctions: The Minister will provide for criminal sanctions in respect of breaches of MiFID II, and these are expected to be aligned with the current maximum penalties applicable in Ireland under the MiFID I regime. Primary legislation will be needed to give effect to this, and that will be published after the Irish transposing regulations are published.
- Fines: The maximum administrative fine for an individual will be €5,000,000, and the maximum fine for legal persons will be €10,000,000.
- Non-regulated persons: Parts of MiFID II and MiFIR apply or might apply to non-regulated persons such as non-financial counterparties under EMIR. For those persons, the applicable enforcement regime will be the regime applicable to non-regulated persons i.e. not the Central Bank's Administrative Sanctions Regime or similar.
The Department has noted that a harmonised concept of "fx forward" will come into force on 3 January 2018, following previous divergences in the manner in which different Member States interpreted that term under MiFID I. That harmonised concept of "fx forward" is set out in Article 10 of Commission Delegated Regulation (EU)2017/565.
The position taken by the Department in relation to national discretions is largely as expected. It is hoped that transposing regulations will be published soon to allow firms to complete their implementation projects.
We will publish further updates as the Irish transposition process progresses.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.