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Mar 13, 2017

Deadline Looms for Regulated Firms to Vary Their Permissions to Comply With MiFID II

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MiFID II comes into effect on 3 January 2018 and brings with it several important changes for regulated firms. Among these changes is an extension of the list of investment services and activities which firms require authorisation to undertake. Firms regulated in the UK should act now. Most firms will need to apply for a variation of their permissions by 3 July 2017 at the latest if they want to undertake one of the new regulated activities under MiFID II. They may also need to make a passport notification.

The UK Treasury recently published a draft statutory instrument[1] amending the UK’s Regulated Activities Order (the “RAO Amendments”) to transpose certain changes introduced by the revised Markets in Financial Instruments Directive, known as MiFID II, into UK law. The RAO Amendments will extend the scope of the activities regulated under the Financial Services and Markets Act 2000 by making changes to specified activities, specified investments and classes of investment covered by the RAO.

The key changes to regulated activities and specified investments are:

(a)       operating an organised trading facility (“OTF”) will become a regulated activity;

(b)       the scope of the regulated activities of dealing in investments as agent, arranging deals in investments, managing investments and advising on investments will be extended to include structured deposits;

(c)       the scope of the “dealing as principal” activity will be expanded due to the narrowing of some of the exemptions currently available, such as those for firms dealing on own account, and the deletion of others, such as those for persons who apply a high frequency algorithmic trading technique and commodities firms whose main business consists of dealing on own account in commodities or commodity derivatives;[2]

(d)       the introduction of new specified investments, which are:

(i)        emission allowances;

(ii)       structured deposits (in relation to those regulated activities listed in (b) above);

(iii)      certain FX derivatives that are currently treated as spot contracts under MiFID I but which will not fall within the definition of an FX spot contract under MiFID II;[3] and

(iv)      certain derivatives of a binary or other fixed outcomes nature.

These amendments will make it possible for UK firms to obtain the variations of their permissions in line with MiFID II activities, and are expected to apply from 1 April 2017.[4] The regulators are accepting applications in the interim which will be treated as draft applications until the provisions come into effect.

Structured Deposits

MiFID II introduces a number of new requirements for firms that sell or advise clients on structured deposits. A regulated firm that is currently authorised for one of the activities which will apply to structured deposits under MiFID II should inform the Financial Conduct Authority or Prudential Regulation Authority (as appropriate) before 3 January 2018 that they wish to carry on the regulated activity in relation to structured deposits. A structured deposit is a deposit which is fully repayable at maturity, including interest which is dependent on the performance of a specific index, stock or commodity. The relevant regulator will acknowledge the notice and the firm’s permission will be treated from 3 January 2018 as having been varied accordingly.

Other Variations

In relation to all other variations of permissions, completed applications need to be made before 3 July 2017. This deadline will apply for the relevant regulator to consider and decide upon the applications prior to 3 January 2018, when MiFID II comes into effect and authorisation is required to carry on the new regulated activities. Firms should act now to ensure that they are not carrying out regulated activities without permission in January 2018.

Variation of Permissions Process

The application process for variations of permissions relating to the RAO Amendments was launched on 30 January 2017. Applications should be made via Connect (for both FCA and PRA-regulated firms). As part of the application, firms must give reasons for the variation, including how the change will affect the firm and its long—term strategy, any new risks that will need to be considered and any details on outsourcing. Legal advice may be required to help firms through the application process.

The FCA has published a MiFID II application and notification user guide, which is available here.

Deadlines for VoP Applications

Permission/Investment

Deadline

Operating an MTF

3 July 2017

Dealing in structured deposits as agent

Prior to 3 January 2018

Arranging deals in structured deposits

Prior to 3 January 2018

Managing structured deposits

Prior to 3 January 2018

Advising on structured deposits

Prior to 3 January 2018

Dealing as principal (i.e. algorithmic traders, commodities firms)

3 July 2017

Emissions allowances

3 July 2017

Certain FX derivatives or those of a binary or other fixed outcomes nature

3 July 2017

Passporting Notifications

Firms must also consider whether they need to amend their existing MiFID passports to reflect the changes to the revised scope of specified activities, specified investments and classes of investment. There are changes to the passporting notification requirements under MiFID II. Both services and branch passport notifications will be required for each country in which a firm intends to provide cross-border services instead of one notification covering all of the countries. Branch passport notifications must include additional information, for example, geographical reporting lines must be included in the organisational structure explanation.

Firms operating a multilateral trading facility or OTF that want to provide cross-border access to those trading platforms must submit a passport notification for each trading platform which notification must include information on the business model for each platform. One notification will cover all of the countries for that trading platform.

The passport notification system for notifications relating to the new scope will begin on 31 July 2017. The FCA has stated that it will process the service passport notifications by 2 December 2017 and notify the relevant EEA regulators on or before 3 January 2018. The FCA has one month to process a service passport notification.

For branch passports, the FCA encourages firms to submit their applications as soon as possible because it has three months to consider the notification and the host regulator has two months to prepare for supervision before the firm can start passporting its activities through the branch. The FCA states that it will aim to process branch notifications by 3 November 2017 if notifications are received in time.

Passport Notifications

Passport Type

Deadline

Branches

3 August 2017*

Services

3 November 2017

*This deadline is set for the November 2017 target for the FCA to review branch passport notifications so that a firm can passport through from 3 January 2018.

Footnotes

[1]  Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017.
[2]  Commodities firms can only rely on an exemption if they are dealing on own account in commodity derivatives where they are not trading on a matched principal basis and where the activity is ancillary to their main business when considered on a group basis (which must not be the provision of investment or banking services, or acting as a market maker in commodity derivatives).
[3]  See Article 10(2), Commission Delegated Regulation (EU) .../... of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (available here).
[4]  Note that there are a number of other changes as a result of MiFID II that regulated firms should be aware of, such as changes to compliance manuals and terms of business, which are not covered in this update. In addition, the authorisation requirements for data reporting service providers set out in MiFID II are to be dealt with by the introduction of a separate regime in the UK, which is not covered in this update.

Authors and Contributors

Thomas Donegan

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5566

+44 20 7655 5566

London

Barnabas Reynolds

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5528

+44 20 7655 5528

London

Wilf Odgers

Associate

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5060

+44 20 7655 5060

London