9. Passporting and branches of non-European Economic Area (EEA) firms

9. Passporting and branches of non-European Economic Area (EEA) firms

Who should read this chapter?

The passporting part of this chapter is relevant for UK MiFID investment firms wishing to provide investment services, or perform investment activities, in other EEA countries. They may do so either on a cross-border basis or through a branch or branches. 

It is also relevant to EEA firms based outside the UK and carrying on similar business in the UK. The rest of the chapter is relevant to UK branches of non-EEA firms undertaking investment services and activities.

 

Introduction

One of the purposes of MiFID II is to ensure there is an effective single market for investment services and activities. As was the case with MiFID, the main way of achieving this aim was through ‘passporting’. This is the ability of an investment firm authorised in one EEA[1]country to provide investment services, or perform investment activities, in another EEA country without requiring additional authorisation. A cross-border arrangement involves providing services to clients in another country through means such as the telephone and internet, without the firms or its tied agents having a permanent physical presence in the country concerned. It also includes services provided on a temporary basis, for example when visiting clients resident in other EEA states. The branch arrangement involves investment firms setting up a place of business in another country, or appointing tied agents to represent them in that country.

A proposed harmonised template for passporting notifications have been set out by ESMA in draft ITS 4.[2]As a result the same templates will be used by firms in all EEA countries. We will translate these into our Connect system to enable UK firms to submit their applications.

The draft amendments to the passporting chapters of the FCA Handbook are addressed to firms that are not dual regulated. PRA-authorised firms should, instead, consult the PRA Rulebook. The PRA will consult on MiFID II related changes to its Rulebook shortly.

The current FCA Handbook addresses passporting by UK and EEA firms based outside the
UK conducting business in the UK; it does not cover matters relating to non-EEA firms and
passporting under MiFID II. The Treasury consultation on transposition of MiFID II[3] seeks to
address this.

Separately from passporting, under MiFID branches of non-EEA firms which we authorise have to operate under similar rules to UK investment firms when they provide MiFID investment services and activities (such firms do not have the right to passport across the EEA). We maintain this approach under MiFID II and make a proposal to subject such firms to directly applicable regulations.

Existing provisions

MiFID included passporting provisions in articles 31 and 32. Respectively, these articles deal with cross-border activity and the establishment of branches. Under MiFID, firms seeking to provide investment services, or undertake investment activities in another country had to notify their home regulator before they could use the passport. This regulator would then pass on the notification to the relevant regulator(s) in the country (or countries) where the firms wanted to do business. If an investment firm wanted to establish a branch or appoint tied agents in another country, the regulator in the ‘host’ country was responsible for supervising the firm’s passporting activities to ensure they met their responsibilities under conduct of business rules.

The MiFID passporting provisions were transposed through a mixture of legislation (primarily amendments to Schedule 3 of the Financial Services and Markets Act, and the Passports Rights Regulations) and Handbook changes (primarily SUP 13). Together these ensure that investment firms make the required passporting notifications.

MiFID operates on the basis that branches of non-EEA firms should be treated no more favourably when undertaking investment services and activities in EEA countries than investment firms.

Drivers for change

MiFID II makes incremental changes to the MiFID passporting regime:

  • First, the range of investment services and activities that can be passported has expanded to include the operation of an OTF. The range of instruments has expanded to include a new category of emission allowances. MiFID II brings into scope some of its provisions services provided by investment firms when selling structured deposits. However, we do not think that an investment firm’s passport would extend to cover the selling of structured deposits that are not a financial instrument under MiFID II.
  • Second, the range of provisions that a ‘host’ country regulator is responsible for when an investment firm is passporting through a branch (or when tied agents are appointed) in another country has expanded. This reflects new obligations in MiFID II, particularly the obligation in most circumstances for investment firms to conclude transactions in liquid shares on a trading venue or through a systematic internaliser. It also includes obligations to provide data for transparency calculations and a requirement to keep order book data and provide it to regulators when requested.
  • Third, there will be harmonised templates for notifications, imposed through directly applicable regulations, for firms making passporting applications. These replace the templates that regulators agreed on under MiFID in the Committee of European Securities Regulators’ (the predecessor of the ESMA) ‘Protocol on Passporting Notifications’[4]

MiFID passporting rights and requirements do not apply to the activities of investment firms in relation to structured deposits, as these are not ‘financial instruments’ for the purposes of MiFID authorisation requirements. In the case of credit institutions, passport notifications in respect of structured deposits are a matter for CRD 4 and the PRA as lead regulator.[5] This is also the case regarding deposit-taking activity in general.

Much of MiFID II takes the form of directly applicable regulations. These impose obligations on investment firms but not branches of non-EEA firms which we authorise and who undertake investment services and activities. Therefore we need to introduce a rule to make sure that the obligations in the directly applicable regulations apply to such firms.

Proposals

The Treasury has already consulted on changes to Schedule 3 of FSMA and the Passport Rights Regulations[6] for the revised passporting provisions in MiFID II. However, the draft changes were not able to take account of the draft implementing technical standards with the new passporting templates. We propose changes to SUP (primarily chapters 13, 13A, 14 and Annex 3) to update references to MiFID and provide signposting to the technical standard with the new harmonised templates for applications.

We are proposing a new rule in the part of the Handbook in the High Level Standards which has the title General Provisions (GEN) to subject branches of non-EEA firms which we authorise and who undertake investment services and activities to subject such firms to the obligations in the directly applicable regulations that are a part of MiFID II.

Implications for firms

Firms will need to assess whether they need to revise their existing passporting notifications because of the change of scope between MiFID and MiFID II. While existing MiFID passports will remain valid under MiFID II, firms may wish to revise their passports in order to add new activities or instruments.

Branches of non-EEA firms will have to have regard to the MiFID II directly applicable regulations when they undertake investment services and activities.

Implications for consumers

The passporting provisions ensure that regulators in each country are aware of the firms actively providing services to consumers in their country. This helps to ensure that we can meet our operational objective of providing an appropriate degree of protection for consumers. Consumers purchasing investment services from branches of non-EEA firms which we authorise need to be properly protected.

Q23: Do you agree with our proposed Handbook changes on passporting? If not, please give reasons why
 
Q24: Do you agree with the drafting of our proposed rule to apply obligations in directly applicable regulations to UK branches of non-EEA firms? If not, please give reasons why


Footnotes

  1. ^ The amendments to the Handbook text assume that MiFID 2 is adopted by the EFTA countries and will form part of the EEA agreement
  2. ^ ITS 4 – Draft implementing technical standards under articles 34 (9) and 35 (12) of MiFID II
  3. ^ See chapter 2 www.gov.uk/government/uploads/system/uploads/attachment_data/file/418281/PU_1750_MiFID_II_26.03.15.pdf.
  4. ^ www.esma.europa.eu/system/files/07_317c.pdf
  5. ^ See paragraph [1.1.2 above] and Annex 1 paragraphs 8-9 MoU between the FCA and the PRA www.fca.org.uk/static/fca/documents/mou/mou-pra-annex.pdf
  6. ^ www.gov.uk/government/consultations/transposition-of-the-markets-in-financial-instruments-directive-ii