The granting and the renewal of authorisations for investment firms is undertaken in the home member state. The competent authority (the central bank) must ensure that the investment firm has sufficient additional resources for its activities that the persons directing it have sufficient integrity professional experience and that the holders of interests in the entity are suitable persons.
Authorisations must be accompanied by proposed operation details. The authorisation must be given or refused within six months of an application. Member states must inform the commission of any authorisation of subsidiary or parent in a third country. Where the commission believes that the third country is not granting community investment firms market access comparable to that granted by the community, it may initiate negotiations to secure comparable opportunities for EU investment firms.
Each state must permit investment firms authorised in other states to carry out activities in their state by either providing services cross-border or establishing a branch. There are procedures for notification when it is intended to establish a branch or provide services cross-border.
There are procedures to be followed by the authorities of the home or host state. A firm has established a branch or provide services, it has to comply with provisions in force in the member state. The body is bound by consumer protection rules and conduct of business rules in the host state.
These firms must be registered and the register must be accessible to the public. Each authorisation is notified to the European Securities and Markets Authority (ESMA).
The authorities of the home state are responsible for prudential supervision. There is a directive on prudential requirements for investment firms. The rules of conduct and compliance matters such as consumer protection are within the competence of the host state.
Details of the changes in the ownership of the investment firm must be notified to the authorities so that the suitability of the shareholders and members may be appraised.
Investment firms must publicise the compensation scheme of which they are a member.
The Markets in Financial Instruments Directive (MiFID) provides a common regulatory regime for the execution of investor transactions by stock markets, investment firms, and other trading systems.
States must harmonise their rules in relation to the provision of investments services. A system of authorisation is established which allows firms to operate through the European Union.
Investment firms, banks, and stock exchanges may offer their services cross-border on the basis of the home state authorisation. The consumer protection rules/conduct of business rules are harmonised.
There are rules in relation to prudential assessment in the context of establishment and in mergers and acquisition.
Investor protection is enhanced by establishing minimum standards for the powers of national regulators have at their disposal in investigating and prosecuting breaches of the rules.
There is an obligation to safeguard market integrity, to report transactions and keep records. There is an obligation to establish pre-trade transparency. Wholesale markets are not subject to these pre-trade transparency rules. MiFiD seeks to establish a fair market for retail investors and prevent discrimination between investors. There are obligations which member states must enforce.
MiFiD considerably enhanced investor protection by setting conduct of business rules for providing investment services to clients and minimum standards for the mandate and powers that national competent authorities must have at their disposal. It also establishes effective mechanisms for real-time cooperation in investigating and prosecuting breaches of the rules.
The directive created an obligation to safeguard market integrity, to report transactions and to keep records. ESMA has access to this information. In particular, it establishes a pre-trade transparency obligation. This requires ‘internalisers’ (i.e. firms dealing on their own account by executing client orders outside regulated markets or multilateral trading facilities ) to disclose the prices at which they are willing to buy from and/or sell to their clients. However, it limits this disclosure obligation to transactions not above standard market size, defined as the average size of orders executed in the market.
Each EU country is responsible for establishing a list of regulated markets and communicating this to the other EU countries and ESMA.
The directive includes a set of protective measures for ‘systematic internalisers’ when they are obliged to quote prices so that they can provide this essential service to clients without running undesirable risks. These measures include the possibility of updating and withdrawing quoted prices.
The directive also establishes a fair market for retail investors. It prevents financial institutions from discriminating between such investors, e.g. by offering some of them improvements to publicly quoted prices.
On 20 October 2011, the European Commission adopted a legislative proposal for the revision of MiFID which took the form of a revised Directive and a new Regulation. After more than two years of debate, the Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and the Regulation on Markets in Financial Instruments, commonly referred to as MiFID II and MiFIR, were adopted by the European Parliament and the Council of the European Union.
MiFID II and MiFIR ensure fairer, safer and more efficient markets and facilitate greater transparency for all participants. New reporting requirements and tests will increase the amount of information available, and reduce the use of dark pools and OTC trading. The rules governing high-frequency-trading will impose a strict set of organisational requirements on investment firms and trading venues, and the provisions regulating the non-discriminatory access to central counterparties (CCPs), trading venues and benchmarks are designed to increase competition.
The protection of investors is strengthened through the introduction of new requirements on product governance and independent investment advice, the extension of existing rules to structured deposits, and the improvement of requirements in several areas, including on the responsibility of management bodies, inducements, information and reporting to clients, cross-selling, remuneration of staff, and best execution.
The role of the compliance officer is enhanced under MiFID II. Compliance officers need to ensure that staff selling or advising on MiFID financial instruments understand the compliance requirements under MiFID II. There are also stricter remuneration controls in place for staff advising or selling to clients. This is to ensure staff act in the best interests of their clients. Disclosure of information to clients of investment firms has also increased. For example, advisory and portfolio management clients receive a detailed suitability assessment periodically.
Competent authorities, such as the Central Bank, and European Supervisory Authorities, such as the European Securities and Markets Authority (ESMA), or the European Banking Authority (EBA) now have the ability to restrict or suspend the marketing and/or sale of financial instruments under certain circumstances when elevated investor or financial stability risks exist.
MiFID II places stricter governance requirements on MiFID investment firms. Qualified senior management and directors must commit sufficient time to perform their functions.
New financial instruments are within scope (such as emissions allowances and structured deposits). MiFID II has also removed or narrowed some exemptions. For example, MiFID II now brings investment firms whose sole activity is dealing on their own account using a high-frequency trading technique into scope. Consequently, some firms may now require an authorisation under MiFID II.
MiFID II ensures a standardised authorisation process across Europe.
The Organised Trading Facility (OTF) has been introduced which caters for trading in non-equity instruments (such as bonds, structured products and derivatives).
MiFID II requires firms to report significantly more information including the identification of individuals or computer algorithms responsible for an investment decision.
MiFID II strengthens the overall transparency regime for the financial markets. It does this by broadening the transparency requirements from equities and equity-like instruments to non-equity instruments. This will ensure a broader range of pre-trade and post-trade disclosures are made in relation to orders submitted to and transactions conducted on trading venues.
Investment Provider Capital
Investment firms and credit institutions must have a minimum capital of €125,000 if they
- hold client’s money or securities;
- receive or transmit orders for investors;
- manage portfolios.
Other investment firms must have a capital of at least €730,000. There are provisions for derogations in certain areas in order to take account of the various types of firm and the operations they undertake.
There is a base requirement by which each investment firm must have own funds equivalent to one-quarter of the previous year’s fixed overheads. This is intended to cover risks including
- risk of market collapse,
- reducing a firm’s income to a level insufficient to cover its expense;
- safeguard the ongoing financial soundness of firms.
Investment firms and credit institutions must assess their daily position at market prices. They must transmit the requisite information to their regulator to enable and verify that the rules are being complied with.
A trading book consists of positions in securities and financial instruments held for trading purposes that are subject to market risks and exposures. Each firm must keep in the form of capital a percentage of its long and short positions after allowance is made for hedging.
There are requirements in relations to foreign exchange risks which may arise from adverse movements under certain circumstances.
Each investment firm is required to formulate an internal capital adequacy assessment process (ICAAP) as a means of determining that they have an adequate level of capital required to cover the business’s risks.
Member states must establish investor compensation schemes. Investment firms providing investment services must belong to the scheme. Credit institutions who are members of other guarantee protection schemes equivalent compensation are exempted subject to conditions.
The scheme must be operative when
- member states determine that an investment firm is unable to meet its obligations arising out of investor claims and is no early prospect of being able to do so.
- the judicial authority has made a ruling which is the effect of suspending investors’ ability to make claims against the firm.
Cover must be provided for claims arising out of an investment firm’s inability to repay money owed or belonging to investors or held by their behalf or return instruments belonging to them administered or managed on their behalf in connection with investment business.
There is a minimum level of compensation of €20,000. A higher level may be provided by states. Certain categories of investment may be excluded from coverage or afforded lower coverage.
There are procedures to be followed when an investment firm fails to comply with its obligations. Branches of an investment firm may join compensation schemes in the host state if they wish.
The compensation applies to the complete claim irrespective of the number of accounts, currency, and location in the community. In the case of joint business, claims are divided equally between investors.
EU citizens and businesses may purchase property and shares in other states. This includes primary or secondary residences and holiday home.
There are transitional provisions for some member state which limit rights to property and agricultural forestry in a specific state. Most of the EU states which joined in 2004 and 2007 were subject to a 5- to a 7-year transition period in respect of rights to purchase land. There are different provisions in relation to a secondary residence, agricultural land, and forestry. In some cases, there are longer transitional periods up to 12 years limiting the acquisition of agricultural land and forestry.
There is a directive on minimum shareholder rights in stock exchange listed companies. The rules apply to all companies with registered offices within the European Union which are admitted to trading on a regulated market.
In advance of general meetings, companies must give:
- at least 21 days notice.
- include essential information in the notice including date, the location of the meeting, agenda, description of voting, participation, procedures;
- publish on the company’s Internet site the notice, the full draft text of resolutions’ essential practical information.