MiFID1 is the EU framework for the regulation of investment firms carrying out investment services.
Ireland is a key European jurisdiction for the provision of investment services – both domestically and as a European hub for EU cross-border services.
This client update looks at the application process to set up an investment firm authorised under the MiFID regime in Ireland.
Subject to qualifying for any applicable exemptions, an investment firm will require authorisation under Regulation 11 of the MiFID Regulations2 to (a) provide one or more investment services in Ireland; and (b) in respect of one or more financial instruments3.
The authorisation process involves an application to the Central Bank of Ireland (the "Central Bank"). The key steps in the process are as follows:
- An initial submission to the Central Bank of a Key Facts Document ("KFD");
- A preliminary meeting with the Central Bank to discuss the applicant's business objectives and how these fit within the MiFID regime;
- Submission of a complete application form including (i) a detailed business plan; (ii) draft policies and procedures covering compliance; risk management; internal audit; conflicts of interest; business continuity; (iii) individual questionnaires for each PCF; (iv) a draft Internal Capital Adequacy Assessment Process ("ICAAP"); and (v) ownership details, a group structure chart and accounts of all entities in the group; and
- Review of the application by the Central Bank and final decision.
Once authorised in one EU member state, an investment firm can very easily "passport" its services (by way of establishing a branch or through the freedom of services) into other EU member states.
Outsourcing considerations and key roles
To establish a MiFID entity the "head office" / "principal place of business" or "the mind and management" of the applicant must be located in Ireland.
Therefore an applicant will require senior management presence in Ireland to ensure that full authority and effective control of the applicant's core functions (such as financial control, legal and compliance and risk management) rests there.
An Irish authorised MiFID firm may delegate some of its activities to entities in other jurisdictions, subject to the MiFID Regulations.
Regulation 105 of the MiFID Regulations states that the Central Bank will publish a statement of policy in relation to the outsourcing by an investment firm of portfolio management functions setting out examples of cases where the Central Bank would not object to such outsourcing and explaining why the Central Bank considers that in such cases outsourcing would not impair the ability of an investment firm to fulfil its obligations under the MiFID Regulations. However, the Central Bank has indicated to Maples and Calder that it has not published such policy. The process is therefore more subjective, based on the specific circumstances of each applicant.
In a recent statement a representative of the Central Bank stated that "the Central Bank does not have any per se difficulty with outsourcing up to an appropriate point".4
The Central Bank expects that a firm must be able to demonstrate that it has necessary expertise to supervise the outsourced functions effectively.
Conditions for authorisation
These are as follows:
- Capacity to provide investment services. The applicant's constitutional documents must give it sufficient capacity to conduct investment services;
- Minimum capital. The applicant must have sufficient capital in line with the Capital Requirements Directive. Each firm must prepare an Internal Capital Adequacy Assessment Process ("ICAAP");
- Directors/managers. The Central Bank must be satisfied as to the probity and competence of the directors and senior managers of the applicant. Detailed questionnaires must be completed;
- Qualifying shareholders. Full details of the suitability of each qualifying shareholder needs to be provided, including group structure charts, details of all regulated entities in group, accounts for all entities in ownership chain and evidence showing ownership of each entity in that chain;
- Structure, skill, staffing. The Central Bank must be satisfied as to the organisational structure and management skills of the applicant and that adequate levels of staff and expertise will be employed to carry out its proposed activities; and
- Ongoing organisational requirements and conduct of business requirements. The MiFID Regulations apply high-level organisational and conduct of business standards to all investment firms.
The Central Bank has six months from the date it receives a complete application to provide its decision (which can be extended by another six months). The Central Bank will determine if an application is complete or not within ten working days of receipt. The entire process usually takes six to nine months.
MiFID 2 in context
The next iteration of the MiFID regime (MiFID 2) comes into effect on 3 January 2018. This represents a substantive revamp of the EU regulatory regime for investment firms. Among the areas of direct impact, investment firms will need to address a range of new or enhanced requirements on (i) pre- and post-trade transparency; (ii) transaction reporting; (iii) inducements; and (iv) product governance and distribution.
The Central Bank is already engaged with industry in preparation for the introduction of the new regime. New MiFID 2 forms and guidance have been published on their website and the Central Bank will accept applications for authorisation under the new regime from 3 July 2017.
At this point, any new applications should take MiFID 2 into account and ideally factor as much of the new and enhanced requirements into their business from the outset.
The Financial Services Regulatory team at Maples and Calder provides legal advice, regulatory guidance and practical support to investment firms regulated under the MIFID regime.
We can provide full support on MiFID authorisation projects for new investment firms setting up in Ireland (including associated support from other practice areas including corporate, tax and employment).
We can carry out policies and procedures reviews and upgrades to meet MIFID organisational requirements and conduct of business rules.
We regularly liaise with the Central Bank on cross-border passport applications and EU branch establishments. We also provide support on areas such as anti-money laundering, business continuity planning and automated compliance monitoring.
1. The Markets in Financial Instruments Directive (2004/39/EC)
2. The European Communities (Markets in Financial Instruments) Regulations 2007 and Commission Regulation (EC) No. 1287/2006
3. See list of investment services and financial instruments as set out in the MiFID Regulations in Appendix 1.
4. Copy of article available here.
(As contained in Schedule 1, Part 1 of the MiFID Regulations)
- The reception and transmission of orders in relation to one or more financial instruments.
- Execution of orders on behalf of clients.
- Dealing on own account, meaning the activity of trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments.
- Portfolio management.
- Investment advice.
- Underwriting of financial instruments or placing of financial instruments on a firm commitment basis.
- Placing of financial instruments without a firm commitment basis.
- Operation of multilateral trading facilities.
Note – Schedule 1, Part 2 sets out Ancillary Services.
(As contained in Schedule 1, Part 3 of the MiFID Regulations)
- Transferable securities.
- Money market instruments.
- Units or shares in undertakings for collective investments in transferable securities within the meaning of the European Communities (Undertakings for Collective Investments in Transferable Securities) Regulations, 2003 (S.I. No. 211 of 2003) [Since updated and replaced with the European Communities (Undertakings for Collective Investments in Transferable Securities) Regulations, 2011 (S.I. No. 352 of 2011) as amended].
- Units in a unit trust.
- Shares in an investment company.
- Capital contributions to an investment limited partnership.
- Units in a common contractual fund.
- Options, futures, swaps, forward rate
agreements and any other derivative contracts relating to any of
(a) securities, currencies, interest rates or yields, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash;
(b) commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default of other termination event);
(c) commodities that can be physically settled, provided that they are traded on a regulated market or on an MTF;
(d) commodities, other than as described in subparagraph (c), and not being for commercial purposes, if the commodities can be physically settled and have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognized clearing houses or are subject to regular margin calls;
(e) climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics if the options, futures, swaps forward rate agreements or other derivative contracts, as the case may be, must be settled in cash or may be settled in cash at the option of one of the parties (otherwise that by reason of a default or other termination event).
- Derivative instruments for the transfer of credit risk.
- Financial contracts for differences.
- Other derivative instruments relating
to assets, rights, obligations, indices and measures not otherwise
mentioned in this definition if the derivative instruments have the
characteristics of other derivative financial instruments, having
regard to whether inter alia, they are –
(a) traded on a regulated market or an MTF,
(b) cleared and settled through recognised clearing houses, or
(c) subject to regular margin calls.
- For the avoidance of doubt, a forward
foreign exchange contract is not a financial instrument
(a) its terms are determined principally by reference to standard or regularly published economic terms, such as price, lot and delivery date;
(b) it is traded, or is expressly stated to be equivalent to a contract that is traded, on a regulated market, an MTF or a third country trading facility that performs a similar function, and
(c) it is cleared or settled through a recognised clearing house or is subject to regular margin calls.
However, the provision of services in relation to forward foreign exchange contracts that are not financial instruments may be an ancillary service where these are connected to the provision of investment services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.