CESR recommendations on the passport under MiFID:Annex 2

CESR recommendations on the passport under MiFID

Annex 2

Geldend

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

EUROPEAN COMMISSION

Internal Market and Services DG

FINANCIAL SERVICES POLICY AND FINANCIAL MARKETS

Securities markets

Brussels, 6 July 2007

MARKT/G/3/MV D(2007)

Working document ESC/28/2007

Subject: Functioning of the MiFID passport after 1 November 2007

1. The issue at stake

1.1. Legal context

Article 5(1) of Directive 2004/39/EC on Markets in Financial Instruments (‘MiFID’) provides that Member States may only allow firms to carry on investment services if they have been authorised in accordance in MiFID in their home Member State. The passporting procedure required before a firm can provide services or establish branches on the basis of this authorisation in host States is based on the notification of prescribed information, provided by the firm, between the home and host State competent authorities ( art. 31 par. 2–4 and 6, art. 32 par. 2–6). The procedures for the operation of the passport, the conduct of business in host States and the supervision of passporting firms in Articles 31 and 32 of MiFID work only if both the home and the host State have transposed the Directive, i.e. have the full MiFID regime in place in their national law. Both provisions assume that a firm that wishes to provide services or establish a branch in a host State will be authorised and supervised in accordance with MiFID by the properly designated competent authority in its home Member State. Article 32 also assumes that rules transposing the obligations mentioned in Article 32(7)4. are in force in the host State. Finally, host authorities also have the power under Article 62 to take precautionary measures if a firm providing services in its territory is in breach of its obligations under the MiFID in the host State.

1.2. Problems of late transposition

If some Member States do not have the full MiFID regime in place from 1st November 2007 there is a considerable risk of disruption to the continuity of cross-border business. The Directive does not provide for a transitional passport regime in the event of late transposition by either State.

On the basis of the information provided by Member States, there is a risk that transposition will not be complete in all Member States by 1st November 2007. The consequences of non-transposition for the State itself in terms of infringement action and possible claims for damages, and for their firms and their markets in terms of loss of business opportunities, could be considerable:

—

The Commission will continue to pursue infringement proceedings vigorously against late-transposing Member States.

—

Those Member States that fail to transpose by 1st November 2007 risk being subject to actions for damages before national Courts by firms that have sustained losses caused by the State's failure by implement MiFID by the legal deadline. Similar problems could arise, if implementing rules are in force by 1st November 2007, but have been adopted after 31st January 2007: firms might have considerable difficulties and finally not be able to adopt the necessary systems and structures in time to fully comply with the MiFID requirements by 1st November 2007. Therefore firms could have sufficient grounds to ask for compensation before national courts.

—

Firms themselves might incur liability vis-à-vis their clients for not complying with the obligations in the MiFID in case Member States have transposed later than 31st January 2007 but before November 2007, but firms did not have the time to put in place the necessary arrangements in order to become MiFID compliant by that same date.

—

Regulators in those Member States which are late transposing and which tolerate operation of non-compliant MiFID firms might be responsible for damages as well by individuals or the firms (detailed analysis of this aspect follows under 2.).

—

Firms and regulators might incur liability even in those cases where the firm limits its activity in its home Member State, in case this Member State has not transposed on time and/or the firm is not MiFID compliant after 1st November 2007. The obligations established by the MiFID apply to all EU firms wishing to provide the services covered by the MiFID, irrespective of whether they make use of the passport or not.

There is, therefore, a cascade of possible liability issues that could cause significant problems2..

2. Description of possible cases

The legal and practical problems that would arise may vary depending on whether the home or host State is late in implementing, as well as whether the delay of transposition goes beyond November 2007.

2.1. Late transposition by home Member State

Under this scenario one can distinguish two situations:

2.1.1. Continuing provision of ISD services

Different issues emerge under this assumption depending on

(i)

whether the home Member State has not transposed on 1st November 2007 or

(ii)

transposition is in force on that date, but firms did not have the time to adapt to the new rules because the Member State ‘absorbed’ the extra nine month period granted to firms in order to adapt themselves to the new MiFId requirements.

(i) No transposition by 1st November 2007

It is clear from Article 5.1 that Member States must require firms carrying on investment services to be authorised in accordance with MiFID. Nevertheless, if an investment firm is already providing services in a host Member State before 1st November 2007 under the ISD regime and wishes to continue providing the same services under the MiFID passport, it may not have a MiFID authorisation and it is not subject to the full range of MiFID rules since its home member State has not transposed.Article 71(1) ‘grandfathers’ pre-MiFID authorisations for investment firms. Firms already authorised in their home MS to provide investment services are deemed to have a MiFID authorisation for the same services, provided that the pre-MiFID laws of the State under which the authorisation was granted required the firm to comply with conditions comparable to those under Articles 9 to 14 of MiFID3.. This may need to be examined on a case-by-case basis, Member State by Member State, to ensure that the ISD rules, as transposed, were comparable. Along the same lines, Article 71(4) ‘grandfathers’ passporting notifications made under the ISD, so that no further notification is required under Articles 31 and 32 of MiFID.

Nevertheless, two issues arise in this context:

(a)

There is a question as to whether these provisions are only effective if the home Member State of the firm in question has actually implemented MiFID.

It could be argued that compliance with the MiFID systems and controls is a necessary precondition to MiFID passporting rights in all cases. If this view is correct, then grandfathering under Article 71(4) of the ISD passport of any firm already carrying on business in a host State could not operate until the home Member State of that firm had implemented MiFID.

(b)

Under the assumption that the authorisation granted under the ISD remains valid, Article 16(1) of MiFID requires firms to comply at all times with the conditions for their initial authorisation, including operating conditions ( art. 13 of MiFID and …of the implementing Directive). This provision obviously requires transposition before it can be binding on firms. If transposition has not taken place in the home Member State, the competent authority of this Member State cannot request compliance with these provisions.

This gives the right to the host Member State competent authority to take precautionary measures under Article 62 par. 1 and 2 of the MiFID. Indeed, if the competent authority does not take those measures it might face issues of responsibility for not complying with its own obligations under Article 62 to make sure that irregularities committed on its territory are put to an end.

(ii) Late transposition - firms are not ready by 1st November 2007

Under this assumption, the legal doubts about the possibility of grandfathering of authorisations is no longer an issue since the home Member State has transposed by the date of entry into force of the MiFID. Nevertheless, ‘grandfathered’ firms need to respect MiFID authorisation conditions under Article 16, even though authorisation was originally granted under the ISD.

In case the MiFId has been transposed with delay and firms did not have time to adapt to the new requirements, under a strict application of MiFID, under Article 8 d) of MiFID, competent authorities should withdraw authorisations from firms that do not meet the MiFID operating conditions. However, the firm may be able to challenge that decision in the national courts on the grounds that its breach was caused by the delay of the State in failing to meet the transposition deadline.

The problems would be exacerbated if firms that were not fully MiFID-compliant wished to exercise the passport to provide services in other Member States. In such cases the host State might, as a result of its lack of compliance with MiFID standards might face the need to take precautionary measures under Article 62.

If the host State competent authority does not take those measures it could face issues of responsibility for not complying with its own obligations under Article 62. (see also under i).

In the context of provision of services in the host Member State through a branch, the situation is less problematic, taken into consideration that firms that have established branches in host States will be subject for certain aspects to host State supervision and host State conduct of business rules, etc. in accordance with Article 32(7). However, these concerns remain valid as far as organisational requirements are concerned ( art. 13) — which in any case fall within the competence of the home Member State.

Nevertheless, there are some obligations under the MiFID where certain regulatory forbearance would be conceivable: this would be the case with respect to certain obligations imposed upon firms where there is no ‘client facing’ (e.g. transaction reporting), and therefore less risk for regulators to incur liability. This applies in both cases, i.e. with respect to the home regulator and its obligation to withdraw authorisations in case the conditions set in Article 8 d) are present as well as for the host regulator with respect to the use of precautionary measures under Article 62. On the contrary, with respect to obligations related to the relationship between the investment firm and its clients (e.g. conduct of business rules, best execution etc) regulators would bear the risk of incurring liability if they tolerate non compliance by investment firms.

2.1.2. New provision of services

(i) No transposition by 1st November 2007

The analysis of Article 71(1) and (4) set out above applies only in relation to the grandfathering of existing authorisations under the ISD. If an investment firm wishes to expand the scope of its former ISD authorisation to encompass new services after 1st November 2007, then those new services would not be subject to the grandfathering provisions under Article 71. By the same logic, a firm which was not authorised under the ISD cannot be authorised under MiFID if its home State has not yet implemented that Directive, and accordingly it will not be able to provide services or establish branches in other Member States until such a time as its home State transposes the Directive and its competent authority is able to grant a MiFID authorisation and give the necessary notification under the Directive.

Accordingly, if a home Member State fails to implement by 1st November, its firms will not be able to provide services for the first time in a host State (either remotely or through a branch), or to expand the scope of existing ‘ISD’ services.

The problem is more acute in those cases where an investment firm from a Member State which has not transposed has been carrying out in a host Member State services in financial instruments (for instance derivatives) that were not covered by the ISD but will be now covered by the MiFID. Before the entry into force of the MiFID, the provision of those services was taking place on the basis of national law. After the entry into force of the MiFID this type of business could be challenged and would, most probably, need to be suspended on the territory of the host Member State since the firm will not have the appropriate authorisation anymore. Even if the competent authority of the host Member State accepts these firms to continue their activities on its territory it might face problems of legal responsibility for not complying with art. 62 of the MiFID as well as be subject to further civil law challenges before the national courts.

(ii) Late transposition - firms are not ready by 1st November 2007

The same concerns as explained above under 2. 1.2. point (i) are present when the firms are not compliant with the new MiFID requirements: the home Member State is not in a position to grant them a new MiFID authorisation or expand their existing ISD licence in order to allow them to provide services in new MiFID financial instruments.

The risk of having their authorisations suspended by the host competent authority is also present in this case.

2.2. Late transposition by host Member State

The failure of a host State to transpose the Directive does not allow it to refuse to accept notification from the home competent authority of an incoming firm, or to prevent the firm from carrying on business in the territory of that State in accordance with its passporting rights either remotely or through a branch. In addition, a host State cannot use its failure to transpose MiFID as a justification for imposing requirements on incoming firms, or taking any action in relation to such firms, that is inconsistent with MiFID.

Certain rights under MiFID, and aspects of the MiFID passport in particular, might be found to have direct effect4.. It is established by ECJ case law that, even in the absence of national implementation, provisions of directives which are unconditional and sufficiently precise may be relied upon by individuals before national courts against any provision of domestic law which is incompatible with the directive. Individuals (including legal persons) may also rely on directly effective provisions of an unimplemented directive where they define rights which the individual is able to assert against the State or other public bodies. If a provision of a directive is capable of having direct effect, the competent authority should not apply any conflicting national law in the specific case: the directly effective EC law would prevail5.. Moreover, Member States and their national authorities have a legal obligation — long established by the ECJ6. — to give effect as far as possible to rights envisaged by a non-transposed Directive once the transposition deadline has expired by using the most appropriate tools that they have available to them under the applicable legal framework (‘indirect effect’).

In the context of the MiFID passport to offer services remotely, this would mean that host Member States cannot impose or apply any national requirements to the activities of those firms, or otherwise interfere with the right that they have by virtue of Article 31 of MiFID.

The issue is slightly more complex in the case of firms which are exercising the passport by establishing a branch in accordance with Article 32. Unlike Article 31, Article 32 allocates some specified supervisory functions, in respect of investment business carried on within the territory of the host State, to the host competent authority, and it has been agreed by Member States that the host State rules implementing the obligations mentioned in Article 32(7) should apply for the purposes of that business. If the host State has not yet implemented those obligations, the division of supervisory functions that is envisaged in Article 32(7) cannot function entirely as intended by the co-legislators.

However, this cannot be allowed to deprive authorised firms of their clear rights under MiFID to provide services through a branch because local firms would not be subject to properly implemented MiFID obligations either.

A further issue is linked to the absence of a competent authority in charge of receiving notifications for cross-border provision of services or establishment of branches by the competent authority of investment firms in a Member State which has transposed. An obvious practical step that should be taken by those Member States, is to ensure that their competent authority can accept passport notifications.

This may mean that, before 1st November, such States should, if necessary, designate the competent authorities by separate laws or under any available executive powers or urgent legislative procedures, and specify their powers, so that those competent authorities are not prevented from giving effect to rights conferred by EC law, even if MiFID is not fully implemented.

2.3. Cases where neither the home State nor the host State has transposed

There may also be cases where neither the home nor the host State of an investment firm has implemented by 1st November. As explained above there are concerns on the validity of ISD authorisations under art. 71. In this context, the ‘indirect effect’ doctrine could apply, i.e. an obligation on both home and host Member States to give effect, as far as possible within the framework of their existing laws, to the rights intended by MiFID. Moreover, competent authorities should adopt practical arrangements for notification and reception of passports. This of course does not relieve the concerns with respect to liability that both the home and the host Member State competent authorities might incur.

3. Conclusions

If full MiFID compliance by that date cannot be ensured, Member States should put in place transitional measures that will allow the MiFID passport to function. However, such solutions would not exclude that regulators might be judged liable vis-à-vis individuals or firms. We therefore urge Member States to finalise transposition before 1st November 2007.

Deze functie is alleen te gebruiken als je bent ingelogd.