(i) Pan-European Regime for the Financial Services Industry
Council Directive 2004/39/EC, the Markets in Financial Instruments Directive ("MiFID") marked the introduction by the European Union of a new and broad ranging, pan-European regime for the financial services industry.
Replacing Council Directive 93/22/EEC, the Investment Services Directive (the "ISD"), MiFID represents one of the key elements of the EU's Financial Services Action Plan, a set of EU legislation which was introduced with the objective of producing an effective single financial services market in the EU. MiFID develops and extends the scope of financial services regulation outlined in the ISD and introduces new and more extensive requirements to which firms have to adapt, in particular in relation to their conduct of business and internal organisation.
In general terms, MiFID builds upon the principles already set out in the ISD and most firms that were covered under ISD will continue to be covered under MiFID but in many cases the requirements placed upon them under MiFID are far more comprehensive than before. Investment firms which provide investment services to third party clients or conduct, on a professional basis, investment activities in relation to certain financial instruments may be within the scope of MiFID.
Broadly speaking, the types of firm likely to fall within MiFID's scope include:
retail banks investment banks portfolio managers (excluding firms acting as managers of collective investment schemes) stockbrokers and broker-dealers many futures and options firms corporate finance firms wholesale market brokers operators of Regulated Markets and Multi-lateral Trading Facilities providers of custody services, and commodities and venture capital firms. (ii) Regulation of Investment Firms
MiFID requires that member states of the EEA1 ("Member States") must license and regulate investment firms carrying out investment services in their jurisdiction.
It also establishes high-level organisational and conduct of business standards that apply to all investment firms. These standards include managing conflicts of interest, best execution, customer classification and suitability requirements for customers. It also includes pre-and post-trade transparency requirements for equity markets etc and extends the common regulatory system to "systematic internalisers" (i.e. a firm which acts as a mini-exchange by crossing orders it has on its books internally).
MiFID also requires that Member States recognise investment firms licensed in other Member States and permit such investment firms to operate within their jurisdiction without imposing any further requirements on them.
Differing from the ISD which placed emphasis on mutual recognition between Member States, MiFID introduced the concept of maximum harmonisation which means that Member States cannot gold-plate the EU requirements by, for example, imposing harsher penalties for non-compliance. In addition, the MiFID Directive improved the operation of the 'passport' for investment firms by more clearly delineating the allocation of responsibilities between Home State and Host State for passported branches and generally clarifying some of the jurisdictional uncertainties that arose under the ISD.
APPLICATION OF MIFID IN IRELAND
(i) Irish MiFID Regulations
MIFID has been transposed into Irish law by the European Communities (Markets in Financial Instruments) Regulations, 2007 as amended by the European Communities (Markets in Financial Instruments) (Amendment) Regulations, 2007 and by Section 5 of the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 (the 'MIFID Regulations') with effect from 1 November, 2007.
(ii) Financial Regulator Authorisations
Regulation 4 of the MiFID Regulations provides that the Central Bank and Financial Services Authority of Ireland (the "Financial Regulator") is the competent authority in Ireland for the purposes of MiFID.
The Financial Regulator is therefore responsible authorisation of entities under the MiFID Regulations. Such authorisation may be unconditional or subject to such conditions or requirements as the Financial Regulator sees fit.
(iii) Withdrawal/Suspension/Revocation of Authorisation
The Financial Regulator also has the power to withdraw or suspend an authorisation in certain circumstances or apply to the High Court for an order revoking the authorisation of an investment firm.
(iv) Register of Authorised Investment Firms
The Financial Regulator is required to maintain a publicly accessible register of authorised investment firms and investment firms authorised in other Member States passporting into Ireland. This register appears on the Financial Regulator's website.
(v) Who is Affected?
Investment firms offering financial services to clients or customers located within the EEA are potentially affected by the MiFID Directive, either directly or indirectly.
(vi) Acting as an Investment Firm in Ireland
Regulation 7(1) of the MiFID Regulations provides that any party that proposes to act as an investment firm (or claim to be an investment firm or represent itself to be an investment firm) in Ireland must be either:
authorised by the Financial Regulator in Ireland to do so, or authorised to do so under the MiFID Directive by the competent authority in another Member State. DOES YOUR BUSINESS COME WITHIN THE SCOPE OF THE MIFID REGIME?
(i) Are you acting or proposing to act as an "Investment Firm"?
If your regular occupation or business is the provision of one or more investment services to third parties on a professional basis, or the activity of dealing on own account on a professional basis, relating to financial instruments then you will be considered an investment firm for the purposes of the MiFID Regulations.
The definition of investment firm is set out in Regulation 3(1) of the MiFID Regulations. The key elements of this definition are examined in more detail below.
(ii) Are you providing or do you propose to provide "Investment Services"?
The investment services covered by the MiFID Regulations are as follows:
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 (iii) What "Financial Instruments" are covered?
For MiFID to apply, the investment services provided have to relate to one or more of the following financial instruments:
transferable securities money-market instruments units in collective investment undertakings derivative contracts that relate to securities, currencies, interest rates, yields, other derivative instruments, financial indices which may be settled physically or in cash derivative contracts relating to commodities that may be settled in cash other than on default or other termination event derivative contracts relating to commodities that can be physically settled if traded on a regulated market and/or multilateral trading facility (MTF) derivative contracts relating to commodities, physically settled, but not for commercial purposes which have characteristics of other derivative financial instruments having regard to whether they are cleared and settled through recognised clearing houses or are subject to margin calls derivative instruments for the transfer of credit risk financial contracts for differences derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash as well as derivative contracts relating to assets, rights, obligations, indices etc. (iv) Are the services to be provided "on a professional basis"?