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| Financial Law Update | Back to article summary. |
| Tips for obtaining a MiFID authorisation in Ireland. | ||
| Joe Beashel |
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| It is nearly a year since the Markets in Financial Instruments Directive (‘MiFID’) became law in Ireland. While a lot of emphasis was rightly put on the changes which MiFID would introduce for existing firms, MiFID also introduced significant new changes for firms seeking MiFID authorisation for the first time or those seeking to extend their existing authorisation, writes Joe Beashel. | ||
| This article sets out tips for firms seeking a MiFID authorisation. Make sure MiFID applies: It is something of a statement of the obvious but it can be difficult to find the law in this area. The Investment Intermediaries Act 1995 (‘IIA’) has not been repealed but rather it has been supplemented by MiFID. The key MiFID rules are set out in Statutory Instrument No. 60 of 2007 (though this was itself subsequently amended twice) (the ‘MiFID Regulations’). Regulation 5 sets out all of the exemptions which include, for example, insurance companies, firms which only provide group services and investment funds. Also excluded are firms that are only authorised to provide the services of investment advice and receipt and transmission of orders where they are not authorised to hold clients’ funds and where they are limited to transmitting orders to entities such as, banks, MiFID firms and funds. These entities will continue to be authorised under the IIA. Depending therefore on the proposed activities of the firm, both the MiFID Regulations and the IIA will need to be checked in order to ascertain which regime will apply.
Review the MiFID Regulations and Application Form: MiFID is a curious, and often frustrating mix, of high level principles, general rules and very specific requirements. Depending on the type of authorisation being sought the key sections of the Regulations are parts 4, 5 and 7. All of the various requirements, without exception, need to be addressed in the application process. These requirements are reflected in the Financial Regulator’s comprehensive new application form. Agree Organisation Structure: MiFID requires written processes and procedures which will ensure the firm runs in a compliant manner. There is a specific requirement to have compliance, risk management and internal audit functions. The MiFID Regulations recognise that depending on the size, scale and complexity of the firm it is not necessary to establish separate risk and internal audit functions. However it is still necessary to demonstrate that there are policies and procedures in place to manage risk. There must be a clear segregation between those performing the investment service and those checking compliance. In addition to the MiFID Regulations, the Financial Regulator has a policy regarding independent directors, for example, firms seeking authorisation to hold clients’ assets must have two independent directors with the test of independence being that set out in the UK Combined Code. Choose Directors and Senior Management: In accordance with the Financial Regulator’s ‘Fit and Proper’ requirements all directors and senior managers including the compliance officer must be approved by the Financial Regulator. A detailed individual questionnaire must be completed for each such person, even if, for example, a director was previously approved by the Financial Regulator. There can be sensitivities when providing some of the personal information requested but it is important to note that the Financial Regulator is under a statutory duty of confidentiality and such documents are not publicly available. There can also be some practical issues with a new firm where key staff cannot be recruited until the firm is up and running but the firm cannot be authorised until it has all its key staff in place. It is usually the case that a practical solution can be agreed with the Financial Regulator to such issues. Prepare detailed Financial Projections: A projected P&L and Balance Sheet must be submitted for a 3 year period following authorisation with the first year’s projections broken down monthly. These projections are examined in detail by the Financial Regulator. It is important therefore to ensure that all assumptions are clearly explained so that the Financial Regulator can easily understand each entry. Establish Capital Requirements: The Capital Requirements Directive (‘CRD’) will apply unless a firm is only seeking authorisation to provide investment advice and the receipt and transmission or orders where it does not hold clients’ assets. The CRD is a particularly difficult piece of legislation to follow as the law is spread between two statutory instruments SI No 660 of 2006 and SI No 661 of 20006 and there is quite a bit of cross-referencing between the two. It is important to work out in advance the capital requirements for the firm and to correctly structure the capital as so called Tier 1 or Tier 2 or a combination of both. To the extent that capital contributions are made or subordinated loans are made these should be documented using the Financial Regulator’s preferred form of documentation. The use of other documentation, while perhaps compliant with the CRD will face an uphill struggle to be accepted by the Financial Regulator. If the CRD does not apply the Financial Regulator will in any event impose a capital requirement the level of which will depend on the proposed activities of the firm. Draft detailed Business Plan: The application must be supported by what is referred to as a business plan. This is something of a misnomer as it is more in the nature of a detailed governance document. In addition to a typical business plan, which will have a description of the business and the particular opportunity together with some financials, the business plan to accompany a MiFID application must summarise in a reasonable amount of detail all of the process and procedures that are referred to in the MiFID Regulations. It is often useful to include a process chart to explain the process in order to supplement the narrative in the text. The requirement to describe the various procedures in the business plan can be a difficult requirement for firms establishing a greenfield operation as they need, in effect to describe procedures which are often only in the process of being drafted. Copies of some procedures must be submitted including training and recruitment procedures. The Financial Regulator reserves the right to request copies of the other procedures described in the business plan during the authorisation process. Generally, the higher the quality of the business plan submitted the less likely the Financial Regulator is to request sight of the actual procedure. For those firms seeking authorisation to hold client assets, the Financial Regulator pays particular attention to the client asset procedures of that firm. It is necessary to provide a detailed cross-referencing with the Financial Regulator’s Client Asset rules and such procedures should follow the format of the Financial Regulator’s rules. Include Third Party Agreements: Copies of agreements or draft agreements with third parties including service level agreements with outsourced service providers, client agreements and even bank agreements must be included. For outsourcing arrangements it is necessary to cross-reference the rules in the MiFID Regulations (Regulation 105) with the legal agreement so that the Financial Regulator can easily see how the MiFID requirements have been met. Meet the Regulator: Meeting the Regulator prior to submission of an application is an essential part of the process. It allows the applicant firm to get some comfort that there are no ‘showstoppers’ with the proposal and it allows the Financial Regulator to get to know the applicant which helps establish both credibility and a good working relationship. The Financial Regulator has a standard form of agenda it likes to use at such meetings which basically takes the applicant through the key aspects of the application process. In all of the above, it goes without saying that it is important to be accurate. The Financial Regulator published a settlement on 8th August 2008 with a regulated firm (under the IIA rather than MiFID) where the firm and two directors were fined €5,000 and €20,000 each respectively for submitting ‘…incomplete and inaccurate information to the Financial Regulator as part of an application for authorisation…’ The final point to make is to be patient! MiFID authorisation will involve a number of rounds of comments from the Financial Regulator and will take months rather than weeks but, as one would expect, the more effort that is put into the initial application the less pain will be suffered in the authorisation process. |
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Author Details: Joe Beashel is a partner in the Banking and Financial Services Department and Head of the Regulatory Risk management and Compliance Group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: joe.beashel@mop.ie. Further information on Matheson Ormsby Prentice is available at www.mop.ie |
