PERG 13.3 Investment Services and Activities

Q12. Where do we find a list of MiFID services and activities?

In Section A of Annex 1 to MiFID. There are nine5 investment services and activities in Section A (A1 to A95). Article 4 MiFID defines some of them in more detail5:

• • investment advice (article 4.1(4) MiFID);
• • execution of orders on behalf of clients (article 4.1(5) MiFID);
• • dealing on own account (article 4.1(6) MiFID); and
• • portfolio management (article 4.1(8)5MiFID).

A further provision relating to investment advice is contained in article 9 of the MiFID Org Regulation5.

As explained in PERG 13.1, this chapter only covers the MiFID activities dealt with through the authorisation regime under the Act. The other activities covered by MiFID and MiFIR are not dealt with in section A of Annex 1.5

Q12A. We carry out the activity of bidding in emissions auctions. Is this a MiFID service or activity? [deleted]5

Reception and transmission 5

Q13. When might we be receiving and transmitting orders in relation to one or more financial instruments? (A1 and recital 44)? 5

Under the general definition of this service, you only provide the service if you are both receiving and transmitting orders. For example, this would be the case if you transmit subscription or redemption orders received from a client to the operator of a collective investment undertaking or transmit buy or sell orders to agency brokers.

This service though is also extended to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. This meaning may be relevant, for example, to corporate finance firms. It could include, in our view, negotiating terms for the acquisition or disposal of investments on behalf of a corporate client with a potential buyer or seller, for example as part of a merger or acquisition. You may be providing this service even though, having brought the investors together, the actual offer or acceptance is not communicated through you.

The extended meaning of the service only applies if the firm brings together two or more investors. A5 person issuing new securities, including a collective investment undertaking, should not be considered to be an ‘investor’ for the purpose of this extended meaning. However, an issuer may be an investor for the purpose of5 the general definition of the service. Accordingly whilst an arrangement whereby a person, on behalf of a client, receives and transmits an order to an issuer will, in our view, amount to reception and transmission, one in which it simply brings together an issuer with a potential source of funding for investment in a company, will not.

If you are party to a transaction as agent for your client or commit your client to it, you may be doing more than receiving and transmitting orders and will need to consider whether you are providing the investment service of executing orders on behalf of clients.

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Q14. We are introducers who merely put clients in touch with other investment firms - are we receiving and transmitting orders?

No. If all you do is introduce others to investment firms so that they can provide investment services to those clients, this in itself does not bring about a transaction and so will not amount to receiving and transmitting orders. But if you are a person who does more than merely introduce, for example an introducing broker, you are likely to be receiving orders on behalf of your clients and transmitting these to clearing firms and therefore may fall within the scope of MiFID.

Executing orders 5

Q15. When might we be executing orders on behalf of clients (A2, article 4.1(5) and recital 45)? 5

When you are acting to conclude agreements to buy or sell one or more MiFID financial instruments on behalf of clients. You will be providing this investment service if you participate in the execution of an order on behalf of a client, as opposed simply to arranging the relevant deal. In our view, you can execute orders on behalf of clients either when dealing in investments as agent (by entering into an agreement in the name of your client or in your own name, but on behalf of your client) or, in some cases, by dealing in investments as principal (for example by back-to-back or riskless principal trading).

This activity includes the issue of their own financial instruments by an investment firm or a credit institution.5

Q15A. Is every issue of financial instruments a MiFID investment service? 5

No. Although the answer to Q15 says that executing client orders includes issuing your own financial instruments, not every issue of financial instruments amounts to the MiFID investment service of execution of orders on behalf of clients. This is explained in more detail in the rest of this answer.5

One difficult question is whether the extension of the executing orders service only applies to firms that are already investment firms because of other services and activities they provide or whether this part of the definition is also relevant to someone who is deciding whether they are an investment firm in the first place.5

In the FCA’s view, this part of the definition is not limited to someone that is already an investment firm because of its other activities and services. This is because the risks at which recital 45 of MiFID says this part of the definition is aimed apply whether or not the issuer is already an investment firm for another reason. For example, there is no reason why a firm that issues its own complicated securities to the retail market should not need authorisation if a firm that distributes ones issued by another firm requires authorisation.5

On the other hand, it cannot be the case that raising capital by issuing its own capital causes an ordinary commercial company to become an investment firm. The reasons why this should not be the case include the following:5

• • If you do not issue financial instruments on a professional basis and do not otherwise execute orders on behalf of clients, you will generally not need permission or authorisation to do this. See Q8 for more information.5
• • The investor may not be your client. For example, an ordinary commercial company issuing debt securities to financial investors is unlikely to be providing a service; it is more likely to be receiving one.5
• • Recital 45 of MiFID confirms that the definition is intended to catch issuers when distributing their own financial instruments. Thus if you get another investment firm or credit institution to distribute your financial instruments, you will not be executing client orders.5

Dealing on own account 5

Q16. What is dealing on own account (A3, 5 article 4.1(6)) and recital 24)? 5

Dealing on own account is trading against proprietary capital resulting in the conclusion of transactions in one or more MiFID financial instruments. 5

Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or ‘unmatched principal’ position on its books.

Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.

If a firm executes client orders by standing between clients on a matched principal basis (back-to-back trading), it is both dealing on own account and executing orders on behalf of clients.

A firm is still dealing on own account under MiFID if it5 meets all of the conditions of article 29(2) of CRD (see Q61) or article 5.2 of the recast CAD, as applicable under the CRD and the EU CRR to certain firms (see Q58A). However, a firm which meets all the conditions of these articles of CRD or the recast CAD will not be considered as dealing on own account when determining which category of firm it is for the purposes of the FCA’s base own funds requirements (see PERG 13.6).5

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Portfolio management 5

Q17. What is portfolio management under MiFID (A4 and article 4.1(8))? 5

Portfolio management is managing portfolios in accordance with mandates given by clients3on a discretionary client-by-client basis where such portfolios include one or more MiFIDfinancial instruments.3 If there is only a single financial instrument3 in a portfolio, you may be carrying on portfolio management even if the rest of the portfolio consists of other types of assets, such as real estate. Portfolio management includes acting as a third party manager of the assets of afund,3 where discretion has been delegated to the manager by the operator or manager of the fund.3 In the case of management of a collective investment undertaking, however, an exemption may be available to the operator (see Q43). The advisory agent who keeps clients’ portfolios under review and provides advice to enable the client to make investment decisions (but does not exercise discretion to take investment decisions himself) is not carrying on portfolio management but may be providing other investment services such as investment advice under MiFID.

Investment advice 5

Q18. What is investment advice under MiFID (A5 and article 4.1(4))? 5

Investment advice means providing personal recommendations to a client, either at his request or on your own initiative, in respect of one or more transactions relating to MiFID financial instruments.

Q19. What is a ‘personal recommendation’ for the purposes of MiFID (article 9 of the MiFID Org Regulation) 5 ?

A personal recommendation is a recommendation that meets the following conditions5:

• • it is given to a person5 in his capacity as an investor, or potential investor, or as agent for either; and5
• • it:5
  • o is5 presented as suitable for him or based on a consideration of his personal circumstances; and
  • o constitutes a recommendation to him to do one or more of the following:

    - buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument; or5

    - exercise, or not to exercise, any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument.

This is similar to the UK regulated activity of advising on investments but is narrower in scope insofar as it requires the recommendation to be of a personal nature. A personal recommendation does not include advice given to an issuer to issue securities, as the latter is not an “investor” for the purposes of MiFID or article 53 of the RAO.

As explained in PERG 8.24.1AG, there are circumstances in which the UK regulated activity is also based on giving personal recommendations. PERG 8.30B (Personal recommendations) gives guidance on the definition in the context of the UK regulated activity. In the FCA’s view that guidance is also relevant to the meaning of ‘personal recommendation’ under MiFID.6

Q20. Can you give us some other practical examples of what are not personal recommendations under MiFID?

A recommendation is not a personal recommendation if it is issued exclusively to the public (article 9 of the MiFID Org Regulation5) Advice about financial instruments in a newspaper, journal, magazine, publication, internet communication addressed to the public in general or in a5 radio or television broadcast should not amount to a personal recommendation. However, use of the internet does not automatically mean that a communication is not a personal recommendation on the grounds that it is made to the public. Therefore, for instance, while advice through a generally accessible website is unlikely to be a personal recommendation, an email communication provided to a specific person, or to several persons, may amount to investment advice.5

Merely providing information to clients should not itself normally amount to investment advice. Practical examples include:

• • advising clients on how to fill in an application form;
• • disseminating company news or announcements;
• • merely explaining the risks and benefits of a particular financial instrument; and
• • producing league tables showing the performance of financial instruments against published benchmarks.

However, you should bear in mind that, where a person provides only selective information to a client, for example, when comparing one MiFID financial instrument against another, or when a client has indicated those benefits that he seeks in a product, this could, depending on the circumstances, amount to an implied recommendation and hence investment advice for the purposes of MiFID.

If you provide an investment research service to your clients or otherwise provide recommendations intended for 5the public generally, this is not MiFID investment advice (A5) although it may be an ancillary service (B5) for the purposes of MiFID and may also amount to the regulated activity of advising on investments for which you are likely to require authorisation.

Q21. Is generic advice investment advice for the purposes of MiFID (recitals 15 to 17 to the MiFID Org Regulation 5 )?

No. Investment advice is limited to advice on particular MiFID financial instruments, for example “I recommend that you buy XYZ Company shares”. If you only provide generic advice on MiFID financial instruments and do not provide advice on particular MiFID financial instruments, you are not a firm to which MiFID applies and do not require authorisation.

If you are an investment firm to which MiFID applies, however, the generic advice that you provide may be subject to MiFID-based requirements. For example, if you recommend to a client that it should invest in equities rather than bonds and this advice is not in fact suitable, you are likely, depending on the circumstances of the case, to contravene MiFID requirements to:

• • act honestly, fairly and professionally in accordance with the best interests of your clients; and
• • provide information to clients that is fair, clear and not misleading.

Acts carried out by an investment firm that are preparatory to the provision of a MiFID investment service or activity are an integral part of that service or activity. This would include the provision of generic advice. Therefore if a person provides generic advice to a client or a potential client prior to or in the course of the provision of investment advice or any other MiFID investment service or activity, that generic advice is part of that MiFID investment service or activity.5

Providing a general recommendation about a transaction in a financial instrument or a type of financial instrument is an ancillary service within Section B(5) of Annex I of MiFID.5

Underwriting and firm commitment placing 5

Q22. What is underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis (A6)? 5

A6 comprises two elements:

• • the ‘underwriting of financial instruments’; and/or
• • the ‘placing of financial instruments on a firm commitment basis’.

Underwriting is a commitment to take up financial instruments where others do not acquire them. In our view, placing is the service of finding investors for securities on behalf of a seller and may involve a commitment to take up those securities where others do not acquire them. We associate underwriting and placing of financial instruments with situations where a company or other business vehicle wishes to raise capital for commercial purposes, and in particular with primary market activity.

In our view, the ‘firm commitment’ aspect of the placing service relates to the person arranging the placing, as opposed to the person who has agreed to purchase any instruments as part of the placing. Accordingly, placing on a firm commitment basis occurs where a firm undertakes to arrange the placing of MiFID financial instruments and to purchase some or all the instruments that it may not succeed in placing with third parties. In other words, the placing element of A6 requires the same person to arrange the placing and provide a firm commitment that some or all of the instruments will be purchased.

Where a person distributes units in a UCITS fund to investors, in our view this does not amount to placing although it is likely to involve the reception and transmission of orders.

Placing without a firm commitment 5

Q23. When might placing of financial instruments without a firm commitment basis arise (A7)?

Where the person arranging the placing does not undertake to purchase those MiFID financial instruments he fails to place with third parties.

Operating a multilateral trading facility 5

Q24. What is a multilateral trading facility (A8, article 4.1(22) and recital 7 of MiFIR)? 5

A multilateral trading facility involves a5 multilateral trading system (for example, a trading platform) operated either by an investment firm or by a market operator which brings5 together multiple buyers and sellers of financial instruments (for more on multilateral systems, see the answer to Q24B).5

A5 multilateral trading facility does not include bilateral systems where an investment firm enters into every trade on own account (as opposed to acting as a riskless counterparty interposed between the buyer and the seller).

For there to be an MTF, the buying and selling of MiFID financial instruments in these systems must be governed by non-discretionary rules in a way that results in contracts. As the rules must be non-discretionary, once orders and quotes are received within the system an MTF operator must have no discretion in determining how they interact. The MTF operator instead must establish rules governing how the system operates and the characteristics of the quotes and orders (for example, their price and time of receipt in the system) that determine the resulting trades. An MTF may be contrasted with an OTF (see Q24A for OTFs) in this regard, because the operator of an OTF is required to carry out order execution on a discretionary basis.5

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Operating an organised trading facility 5

Q24A. What is an organised trading facility (A9, article 4.1(23) and recitals 8 and 9 of MiFIR)? 5

An OTF is a multilateral system which is not a regulated market or an MTF and in which multiple third-party buying and selling interests in certain products are able to interact in the system in a way that results in a contract (for more on multilateral systems, see the answer to Q24B).5

Only bonds, structured finance products, emission allowances and derivatives may be traded. Equity instruments may not be traded on an OTF.5

Order execution must be carried out on an OTF on a discretionary basis. By contrast with the operation of an MTF or regulated market, the operator of the OTF must exercise discretion in either of, or both:5

• • placing/retracting client orders; or5
• • matching client orders.5

In exercising its discretion, the operator must comply with the requirement under article 18 of MiFID to establish objective criteria for the efficient execution of orders, and must also comply with the best execution requirements under article 27 of MiFID.5

Multilateral system 5

Q24B. Where can I find more information about what a multilateral system is (article 4.1(19)? 5

There is some guidance on multilateral systems in MAR 5AA.1.2G.5

Q25. What about ancillary services (Annex 1, section B)? Do we need to be authorised if we wish to provide these services?

Yes, but only when providing these services is a regulated activity, for example, if you provide custody services which fall within the regulated activity of safeguarding and administering investments. You are not an investment firm within the scope of MiFID, however, if you only perform ancillary services (regardless of whether these are regulated activities requiring authorisation under the Act).

Q26. We are an investment firm - can we apply for passporting rights that include ancillary services?

Yes, but only if:

• • you carry on the ancillary services together with one or more investment services and activities; and
• • where the ancillary service is also a regulated activity, you have a permission enabling you to carry on those activities.

You will not be able to apply for passporting rights in respect of ancillary services only. In our view, this does not restrict the ability of credit institutions to exercise passporting rights under the CRD2 which correspond to ancillary services under MiFID (for example, the activity of safekeeping and administration of securities in Annex 1 paragraph 12 of the CRD2).

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