PERG 13.1 Introduction

PERG 13.1

Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation covering ‘The application of the definitions in Sections C6 and C7 of Annex I of Directive 2004/39/EC (MiFID)’. See https://www.esma.europa.eu/system/files/2015-05-06_final_guidelines_c6_and_7.pdf.

1The purpose of this chapter is to help UK firms consider:

  • • whether they fall within the scope of the Markets in Financial Instruments Directive 2004/39/EC (‘MiFID’) and therefore are subject to its requirements;
  • • how their existing permissions correspond to related MiFID concepts;
  • • whether the CRD and the EU CRR apply to them, and for certain firms, whether the recast CAD continue to apply to them;33 and
  • • if so, which category of investment firm they are for the purposes of the transposition of the recast CAD or CRD and the EU CRR3.

Background

MiFID replaces the Investment Services Directive (ISD). It expands the kinds of business which must be regulated in the UK to include, in particular, activities relating to a wider range of commodity and other non-financial derivatives. As a result of MiFID, the categories of firm which can exercise passporting rights and the categories of business for which the passport is available are wider than under the ISD. In particular, whereas investment advice was a non-core service under ISD, it is an investment service in its own right under MiFID and so can be provided on a cross-border basis as a standalone business.

MiFID is supplemented by "Level 2 measures", Commission Regulation (EC) No 1287/2006 (MiFID Regulation) and Commission Directive 2006/73/EC (MiFID Implementing Directive). These implementing measures amplify and supplement certain of the concepts and requirements specified in MiFID.

MiFID scope

The scope aspects of MiFID are primarily addressed through the Regulated Activities Order (‘RAO’) and PERG 2 focuses on the scope of regulated activities under the RAO and includes materials on the effect that MiFID has on the RAO. This chapter focuses more on the underlying MiFID investment services and activities, as well as the exemptions.

Where a firm’s regular occupation or business is providing one or more investment services to third parties or performing investment activities in relation to MiFID financial instruments on a professional basis, it is a firm to which MiFID applies unless it is exempt.

Broadly, the exemptions from MiFID are likely to be relevant to insurers, group treasurers, professional firms to which Part XX of the Act applies, many authorised professional firms, professional investors who invest only for themselves, pension schemes, depositaries and operators of collective investment schemes or other collective investment undertakings (such as investment trusts), journalists, and commodity producers and traders. The exemptions are subject to conditions and limitations described in more detail below (see PERG 13.5).

The Treasury’s implementation of the article 3 MiFID exemption is likely to be relevant to many financial advisers (see Q50) including some corporate finance advisers. It may also be relevant to some venture capital firms. The Treasury legislation enables firms falling within the scope of the exemption to elect to be subject to the requirements of MiFID and thereby acquire passport rights (see Q52).

In each case, it will be for firms and individuals to consider their own circumstances and consider whether they fall within the relevant exemptions. A firm which takes the benefit of one or more of the exemptions in article 2 or 3 MiFID may nevertheless require authorisation under the Act (see PERG 2).

In addition to investment firms, MiFID4 is also relevant to credit institutions4 providing investment services or performing investment activities (see Q5), to AIFMs to which article 6.4 of AIFMD applies (in other words, AIFM investment firms)4 and to UCITS management companies2 to which article 6.4 of the2 UCITS Directive applies (in other words, UCITS investment firms).2

This guidance is concerned with the scope of MiFID and does not address the question of whether an investment firm that falls within the scope of MiFID is providing a MiFID investment service as opposed to an investment activity.

CRD IV3

Investment firms subject to MiFID, including those who fall within the article 3 MiFID exemption but opt not to take advantage of it, are subject to the requirements of the CRD and the EU CRR3. There are special provisions for certain commodities firms as well as firms whose MiFID investment services and activities3 are limited to only one or more of the following investment services and activities:3

  • • execution of orders on behalf of clients;
  • • portfolio management;
  • • giving investment advice; or
  • • receiving and transmitting client orders, and3
who are not permitted to hold client money or securities nor are authorised to provide ancillary service (1) referred to in Section B of Annex 1 to MiFID (which is safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management)3.

Collective portfolio management investment firms (a term that is used to refer to both AIFM investment firms and UCITS investment firms) are subject to the requirements of the CRD and the EU CRR, unless they are firms whose MiFID investment services and activities are limited to those in the preceding paragraph.3

Under the UK implementation of the CRD and the EU CRR3, the level of capital an investment firm subject to MiFID requires is determined by the type of investment services and activities it provides or performs, its scope of permission and any limitations or requirements attaching to that permission (see PERG 13.6). A firm relying on an article 2 or 3 MiFID exemption is not subject to CRD and the EU CRR.3

How does this document work?

This document is made up of Q and As divided into the following sections:

We have also included guidance in the form of flow charts to help firms decide whether MiFID and the CRD and the EU CRR (which allow the 3 recast CAD to apply to certain firms)3 apply to them as well as permission maps indicating which regulated activities and specified investments correspond to MiFID investment services, activities and MiFID financial instruments (see PERG 13 Annex 1, PERG 13 Annex 2, PERG 13 Annex 3, PERG 13 Annex 4).

Article and recital references are to MiFID (Level 1 measures) unless otherwise stated. References to categories of MiFID investment services and activities and MiFID financial instruments adopt the structure of Annex 1 MiFID: for example, A1 refers to "reception and transmission of orders in relation to one or more financial instruments" and C1 relates to "transferable securities".

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