The proposals to amend MIFID and CRD IV and MIFIR and the CRR passed another milestone (should this be “1.6 kilometrestone“? – Ed) on 4th January when the European Council issued its version of the draft regulation and directive. Trilogues now begin. Given the European elections in May, query whether this will get through in time or not. This has been reported as saying that post-Brexit London firms will have to set up branches in the EU27. This is a simplification. However, it tweaks the reverse solicitation exemption, and states that third country firms where an equivalence finding is in place (one expects the UK to be in this category) can be subject to enhanced reporting and supervision by EU regulators, which may ruffle feathers, as the tenor is on the face of it hostile and is extra-territorial. Securities firms – “investment firms” – have a different risk profile from banks: market risk is their main concern, not credit risk. The CRR is based on bank risk capital requirements, and has many carve-outs for traditional securities firms as a result. One aim of the current proposal is to make the requirements proportionate, which should presumably be to the benefit of smaller traditional EU27 securities firms. Of more relevance to UK firms post-Brexit (which is where the headlines have tended to point the spotlight) are amendments to the permission to deal on a cross border basis on the basis of “equivalence”, and reverse solicitation:
- the reverse solicitation carve-out in Article 42 of MIFID II and article 46 of MIFIR have had a sentence inserted: “Without prejudice to intragroup relations, where a third-country firm, including through an entity acting on its behalf or having close links with such third-party firm or any other person acting on behalf of such entity, solicits clients or potential clients in the Union, it shall not be deemed as a service provided at the own exclusive initiative of the client”. This seems to be designed to prevent an EU27-incorporated firm encouraging (if this is what “soliciting” extends to) EU27 clients to contact their UK (or US, etc.) affiliate;
- adding a new Article 46(6a) requiring non-EU “equivalent” firms to provide detailed annual reports to ESMA about the scope of their activities into the EU27 together with “any further information” that ESMA requests which is necessary for it to perform its tasks under MIFIR;
- where the firm is “likely to be of systemic importance for the Union” the EC can attach riders to any equivalence decision requiring non-EU firms to make public post-trade disclosure of dealings in bonds, financial instruments etc. within 24 hours and only deal on approved markets (EU markets or approved equivalent non-EU markets);
- ESMA is given enhanced powers to suspend a non-EU27 firm from providing investment services or performing investment activities in the EU27.
Austrian MEP Othmar Karas was reported as explaining that this was necessary “to make sure that the Brits, once they are out, do not start to do dodgy business in the EU with weakened rules”!
Head of Knowledge Management (Finance and Projects)
Mark Daley joined DLA Piper in 2015 after over thirty years’ experience as a debt finance lawyer in private practice in London and Hong Kong.