In HM Treasury’s consultation paper on the transposition of the Markets in Financial Instruments Directive (recast) (MiFID II), the UK Government sets out its initial position concerning the transposition of Article 39 MiFID II.

Article 39 MiFID II provides that a Member State “may require that a third country firm [non-EEA firm] intending to provide investment services or perform investment activities with or without any ancillary services to retail clients or to professional clients within the meaning of Section II of Annex 2 in its territory establish a branch in that Member State.”

In relation to business conducted with retail and elective professional clients, a Member State may continue to operate its existing national regime (which may or may not require the establishment of a branch), provided this does not treat third country firms more favourably than EU firms, or may elect into the new regime under Article 39 MiFID II.

The UK Government is currently minded not to exercise the discretion to apply the MiFID II regime specified at Article 39 MiFID II. This is on the basis that it is considered that the current regime has the virtue of being sufficiently tailored to client types and to the risks in question and balances the need to maintain investor protection, market integrity and financial stability, while remaining open to business internationally.

If the UK were to elect into Article 39 MiFID II regime, the UK Government considers there would be a number of consequences, including:

  • the UK’s overseas persons exclusions would be substituted with the narrower concept of reverse solicitation for retail and elective professional clients;
  • the conditions for authorisation in Article 39(2) MiFID II would need to be incorporated into the existing threshold conditions (the requirement for branch capital would be a new addition, for example). However, the economic effect of this would be mitigated in certain respects as there is a degree of overlap between the current UK conditions and the Article 39(2) MiFID II conditions; and
  • the branch itself would need to be used when dealing with retail and elective professional clients.

The UK Government notes that if its proposed approach to maintaining the existing UK regime, rather than exercising its discretion to elect into the Article 39 MiFID II regime, is carried forward, there are still likely to be a number of consequential changes to legislation or FCA/PRA rules, such as, how the UK will approach third country firms that have Article 39 branches in other Member States.

The deadline for comments on the HM Treasury consultation is 18 June 2015.

View Transposition of the Markets in Financial Instruments Directive II, 27 March 2015