MiFID II: threat or opportunity?

As we prepare for yet another piece of regulation to come into force, just what might it mean for the finance industry in the Channel Islands?

New EU rules governing securities trading and increasing investor protection come into effect at the beginning of next year. The question on many lips is whether they present a threat or a real opportunity for Channel Islands financial services firms.

From 3 January 2018, MiFID II and MiFIR (see overleaf) will bring new disciplines to the EU’s financial investment industry. The previous EU directive, MiFID I, which came into force in 2004, aimed to produce a single market in investment services and improve competitiveness.

It also set out rules for trading in shares and in related financial instruments. MiFID II updates these rules and broadens the scope of regulation. Its key aim is greater investor protection – and it reaches into many corners of the financial services sector.

“Any EU investment firm or third-country firm doing business in the EU will be affected by MiFID II,” says Claire Wallace, a Senior Manager in PwC’s asset management regulation practice.

“It’s the overarching EU regulation that governs the way in which investment firms are authorised and run. Every aspect of an investment firm’s business – from authorisation, product creation, selling, trading and execution – will be caught by MiFID II.” 

In terms of Channel Islands firms, the businesses that could fall within the scope of MiFID II are those that deal in investments and/or manage them, and those that give investment advice, such as banks, stockbrokers and financial advisers. They must also be delivering these services to clients within the EU. For them, the work involved could be arduous. 

“They’ll have to know their way around the regulations,” explains Ben Morgan, Head of the corporate and finance group at law firm Carey Olsen. “They’ll have to know when a client is caught by MiFID. They’ll be reviewing all of their policies and procedures and all of their compliance manuals to make sure that they do comply. 

“This is quite a big deal, but the thing they’re most closely focused on is working with our regulators to make sure that we get the equivalence recognition.” 

A waiting game

‘Equivalence’ is EU legal jargon for approval of third countries to offer their services within the single market. On the face of it, MiFID II would seem to be the latest wave of onerous regulation to break over financial services firms. 

This may be the case for some firms, but its impact may not be as hard-hitting across the industry as a whole. “We did a survey of all the investment businesses in the island,” says Mike Jones, Director of Policy at the Jersey Financial Services Commission (JFSC).

“Around half of the 90 responded. We asked them where their clients were located and what sort of category of clients they were. We learned that about a quarter of them had clients in the EU but the vast majority of these were based in the UK. 

“We’ve had to review the situation again in light of Brexit, because after Brexit, the UK will be outside of the EU. For Jersey to rewrite its financial services regime for a small percentage of EU clients – excluding the UK – may not be worthwhile.” 

For the time being, regulators in both Jersey and Guernsey are biding their time. “We’re still reviewing the situation and liaising closely with industry,” Jones continues.

“We’ll be making a strategic decision in the first half of this year and issuing some consultation on exactly what we’ll be doing, and any necessary changes to our regime, later in the year.” 

At the Guernsey Financial Services Commission (GFSC), its Director of Financial Stability and International Policy, Dr Andy Sloan, believes it’s “very much continue as you are”, and compares MiFID II compliance with that for the Alternative Investment Fund Managers Directive (AIFMD). 

“AIFMD contained a strict regime for alternative investment funds marketed into the EU, where you had to conform to the rules,” he explains. “There was no alternative and there was a stated timetable for turning off national regime routes to EU market access. MiFID II, however, contains rules for harmonised regimes with no particular signposted road map for the national rules to be turned off.”

All things being equal

For the majority of firms, then, MiFID II isn’t an urgent matter, especially if they’re part of larger businesses such as banks and fund managers that are based in the EU. They will follow the lead of their parent companies through which they’re likely to be able to passport their products into the EU. Longer term, however, there are bigger fish to fry, and this comes back to equivalence.

If Channel Islands jurisdictions receive approval from the European Commission that their financial services regulation is equivalent to MiFID rules, then the firms they regulate will be able to sell their products and services across the EU to non-retail clients without being subject to the national regulation of EU member states.

“Without equivalence, firms in the Channel Islands can’t tap into what is, in effect, a new market,” says Ben Morgan. “The excitement of MiFID II is that it provides access to a market that wasn’t available under MiFID I.”

The excitement has, however, to be tempered by the added complication of the UK’s decision to leave the EU. “The whole equivalence process is up in the air due to Brexit and concerns about setting a precedent with the UK,” says the JFSC’s Mike Jones.

The GFSC’s Andy Sloan adds: “In January, the UK said it would stick to its national regime for access to retail clients rather than introducing the MiFID II branching requirement, which, as an island, was something we lobbied for. 

“Generally, in terms of dealing with the UK, it will mean keeping things as they are. So now the question is whether a MiFIR equivalence assessment (a passport for services to institutional clients) is desirable. In terms of dealing with the other EU 27, we’ll need to take a view of whether an equivalence assessment would bring any benefits to the island.”

So, while Channel Islands regulators are taking a wait-and-see approach on whether to seek equivalence status, both Jones and Sloan strike a note of caution. They say the devil of what MiFID compliance may actually mean is likely to be in the detail. 

Compared with the mandatory tax transparency and reporting measures associated with FATCA and CRS, for example, the potential negative business impact for financial services businesses of non-compliance with MiFID II is much less onerous. 

MiFID II compliance may, in the end, turn out to be more of an opportunity than a risk for Channel Islands firms, because it would potentially open up the professional client EU market to them. While there would be penalties for non-compliance, it would enable them to scale up their businesses to cover 450 million potential clients.