Fund Intermediaries

Table of Contents

ISD & MiFID

The Investment Services Directive was given force in Ireland by the Investment Intermediaries Act 1995. The Act still applies to a limited number of entities.

The Prudential Handbook for Investment Firms applies to investment business firms authorised by the Central Bank under that Act. It does not apply to funds which are authorised by the MiFID Regulations. Authorisation under the MiFID Regulations allows passporting to the European Union and the EEA.

MiFID applies to regulated investment firms, which are firms the regular occupation or business of which is the provision of one or more investment services to third parties on a professional basis. See the separate sections in relation to investment services, which are widely defined to cover most advisory and other activities in the financial services area. It includes execution of orders, the reception and transmission of orders, dealing on own account portfolio, management underwriting and the placing of instruments.

Financial instruments are widely defined to include transferable securities, money market instruments, units in UCITS, units in an investment company; unit trust; investment in limited partnership.

The MiFID applies to the investment activities of banks, as well as both retail and professional investment, as well as the more traditional stockbrokers and investment advisors and manager’s roles. MiFID makes provisions in relation to licencing authorisation and conduct of business.

Investment entities may owe a duty of care to clients, in particular, vulnerable clients in the context of investments. Courts have made awards against stock brokers and advisors who have made clearly inappropriate investment advice, having regard to the particular needs of the individuals concerned.

Exemption

Certain entities are exempt including;

insurance undertakings,
persons providing investment services for group entities, p
persons who provide investment services only on their own account unless they are market makers or dealers on their own account outside a regulated market or MTF on an organised, frequent and systematic basis by providing a system accessible to third parties;
persons who provide investment services comprising the administration of employee participation schemes;
An Post;
NTMA;
European Central Bank System;
persons dealing on their own accounts in financial instruments;
persons providing investment services to their clients of their main business in commodity directives, if it is ancillary to the main business;
persons providing investment advice in the course of providing another professional activity, provided the advice is not specifically remunerated;
personal representatives, trustees, unless the principal object of the trust is to provide investment services;
persons appointed as liquidator or receiver in respect of those activities;
certain safe harbor, which applies to forms headquartered outside the EEA with no presence in Ireland providing services to corporates in Ireland only.

Also exempt is a practising member of an approved body not being a certified person who holds at his place of business certificates in a private limited company owned by the clients, where the member holds shares certificates in order to facilitate the management of the company’s statutory records, the holding of the shares certificates arises from provision of professional services to the client and branches of non-EEA firms established in the State;

Application for Authorisation

The Central Bank has published guidance notes and an application form in respect of an application for authorisation. There were two levels of application, which may apply.

Level I being simpler, applicable to smaller forms with noncomplex investment strategies, with capital of up to €125000, providing execution of orders, portfolio management, investment advice, reception and transmission of client orders, placing of financial instruments without own commitment;

Level II is applicable to larger firms with complex investment strategies in the above categories;

operation of multilateral trading facility;
investment firms requiring higher levels of capital, dealing on own account or underwriting financial instruments;
applicants that hold client assets;
the market operator of a retail market.

The holder of client assets is subject to a higher level of scrutiny. All applications involve the completion of key fact documents, completion of the application form, and submission of a business plan to include detailed business strategy and model and internal organisation.

Categories of Client

Clients must be categorised as retail clients, professional clients or eligible counterparties. A higher level of protection applies to retail clients.

Professional clients

entities authorised and regulated to act in financial markets
large undertakings (balance sheet) 20 million turnover, 40 million own funds, 2 million;
pension funds,
other collective investment schemes,
national and regional governments,
institutional investors.

Counterparties are other financial service providers and their management companies in respect of the execution of orders on behalf of clients, dealing on their own accounts, and receiving and transmitting orders. For the purpose of the above services, certain clients who would otherwise be treated as professional clients may become eligible counterparties. In this case, many of the conduct of business protections and requirements no longer apply.

Retail clients, and in particular, private individual investors may opt to be treated as professional clients and waive some of the protection of the Regulations and Directive. In this case, a firm must show it possesses the requisite market knowledge and experience.

Professional Clients

A professional client must

have carried out transactions with frequency of at least 10 per quarter over the previous four quarters;
the size of the financial instrument portfolio, including cash deposits, exceed €500,000;
client works in the financial sector for at least one year in a professional position, which requires knowledge of transactions and services.

Two of the above three criteria must be complied with.

An assessment must be taken out to opt in for professional treatment. Clients must apply in writing Warnings must be given as to the effect of losing the protections. The client must acknowledge in writing that he is aware of the consequences of losing the protections.

Retail Services

See the other sections in relation to the detailed obligations applicable to retail investment services. They include, in particular,

written agreement,
notification of classification,
disclosure of commission, inducements etc.,
information about the firm and services;
provision of information,
acting in the best interest,
detailed disclosure of risks,
information on cost and charges,
assessment of suitability and appropriateness,
reporting to the client’s best execution,
detailed reporting of transactions,
records.

MiFID II

MiFID II was introduced following the financial crisis. It seeks to improve transparency, stability and regulation of financial markets. It provides for more harmonised conduct of business, systems and controls for the investment sector. It commenced on 3 January 2017.

MiFID II is broader in scope. It covers a wider range of instruments and products. It includes structured deposits and emissions allowances. It amends the Insurance Mediation Directive and regulates insurance based investment products.

The ESMA has the power to prohibit and limit the marketing and distribution of certain types of instruments. The European Banking Authority has equivalent powers in relation to structured deposits.

Organised trading facilities are regulated. It applies to brokers and interdealer broker systems and to standardised derivative contracts.

Under MiFID II, passport rights may be exercised by establishing an EEA branch. This is mandatory in relation to dealing with retail and professional clients or being licenced by an EEA authority to provide services from outside the EEA on a cross-border basis. This is permissible only where the firm intends to provide services to professional clients within the deemed professional clients in the eligible counterparties category. Non-EEA firms must satisfy an equivalency test.

Changes to Conduct of Business

MiFID II introduced significant changes to the conduct of business requirements including

additional requirements in relation to the provision of investment advice; in particular, there is an obligation to notify whether it is independent and whether the firm will conduct an ongoing suitability assessment.
best execution requirements require that firms disclose their top five execution venues for each class of instruments;
additional client asset requirements for retail clients,
broader appropriateness test;
enhanced product intervention powers on the part of the ESMA, EBA and Central Bank.

This permits the prohibition of and restriction of products.

ESMA sets methodology for the use and calculation of position limits for products such as commodity directives.

There are e new trade transparency requirements. They extend beyond equities to cover equity-like instruments, bonds and derivatives.

Also exempt is a practising member of an approved financial body not being a certified person who holds at his place of business certificates in a private limited company owned by the clients, where the member holds shares certificates in order to facilitate the management of the company’s statutory records, the holding of the shares certificates arises from provision of professional services to the client and branches of non-EEA firms established in the State;

Electronic and Exchange Trading

MiFID II requires clients engaged in algorithmic trading to comply with systems and control requirements. These are to have appropriate risk controls.

They must be tested and information relating to trading strategies must be submitted to the regulator. Firms must maintain records of orders placed and cancelled and provide these to the regulator.

There is a mandatory requirement for certain derivative contracts eligible for clearing under the European Market Infrastructure Regulation to be traded on a regulated market, an MTF or OTF.

Some Other MiFID Reforms

MiFID II introduced a framework by which competition in trading and clearing of financial instruments was improved through the establishment of a harmonised regime for access to trading venues and central counterparties on a non-discriminatory basis.

Harmonised administrative sanctions apply across the EU, setting out breaches in relation to which States must provide for sanctions.