Under Article 3 of MiFID, the EU Member States have the option to exempt some firms from authorisation as MiFID investment firms.
The firms, which may be exempted under Article 3 of MiFID, are those which:
- provide investment advice and / or receive and transmit orders,
- do not hold client funds or securities,
- only receive and transmit client orders for transferable securities and collective investment schemes (CIS) units and/or provide related investment advice, and are only be allowed to transmit such orders to identified firms or funds,
- do not do MiFID business outside of their home Member State.
MiFID requires Member States to subject Article 3 MiFID exempt firms to national regulation.
MiFID II includes the same exemption but Article 3 firms must now be subject to 'at least analogous' requirements.
These include a wide range of authorisations, conduct of business and organisational requirements, but not the whole range of those that will apply to MiFID investment firms.
In the UK FCA's view (Markets in Financial Instruments Directive II Implementation, FCA Consultation Paper II, July 2016, CP16/19, p. 11), the new ‘at least analogous’ test means that the domestic requirements applied to Article 3 firms must achieve the same effects as MiFID II, and be substantially similar, to each of the individual requirements listed in Article 3(2)(a) to (c) and their corresponding implementing measures.
The EU Member States have, however, discretion to choose whether new obligations in MiFID II that fall outside the ‘analogous requirements’ provisions are applied to Article 3 firms.
Article 3 of MiFID II
1. Member States may choose not to apply this Directive to any persons for which they are the home Member State, provided that the activities of those persons are authorised and regulated at national level and those persons:
(a) are not allowed to hold client funds or client securities and which for that reason are not allowed at any time to place themselves in debit with their clients;
(b) are not allowed to provide any investment service except the reception and transmission of orders in transferable securities and units in collective investment undertakings and/or the provision of investment advice in relation to such financial instruments; and
(c) in the course of providing that service, are allowed to transmit orders only to:
(i) investment firms authorised in accordance with this Directive;
(ii) credit institutions authorised in accordance with Directive 2013/36/EU;
(iii) branches of investment firms or of credit institutions authorised in a third country and which are subject to and comply with prudential rules considered by the competent authorities to be at least as stringent as those laid down in this Directive, in Regulation (EU) No 575/2013 or in Directive 2013/36/EU;
(iv) collective investment undertakings authorised under the law of a Member State to market units to the public and to the managers of such undertakings; or
(v) investment companies with fixed capital, as defined in Article 17(7) of Directive 2012/30/EU of the European Parliament and of the Council ( 2 ) the securities of which are listed or dealt in on a regulated market in a Member State; or
(d) provide investment services exclusively in commodities, emission allowances and/or derivatives thereof for the sole purpose of hedging the commercial risks of their clients, where those clients are exclusively local electricity undertakings as defined in Article 2(35) of Directive 2009/72/EC and/or natural gas undertakings as defined in Article 2(1) of Directive 2009/73/EC, and provided that those clients jointly hold 100 % of the capital or of the voting rights of those persons, exercise joint control and are exempt under point (j) of Article 2(1) of this Directive if they carry out those investment services themselves; or
(e) provide investment services exclusively in emission allowances and/or derivatives thereof for the sole purpose of hedging the commercial risks of their clients, where those clients are exclusively operators as defined in point (f) of Article 3 of Directive 2003/87/EC, and provided that those clients jointly hold 100 % of the capital or voting rights of those persons, exercise joint control and are exempt under point (j) of Article 2(1) of this Directive if they carry out those investment services themselves.
2. Member States’ regimes shall submit the persons referred to in paragraph 1 to requirements which are at least analogous to the following requirements under this Directive:
(a) conditions and procedures for authorisation and on-going supervision as established in Article 5(1) and (3), Articles 7 to 10, 21, 22 and 23 and the corresponding delegated acts adopted by the Commission in accordance with Article 89;
(b) conduct of business obligations as established in Article 24(1), (3), (4), (5), (7) and (10), Article 25(2), (5) and (6), and, where the national regime allows those persons to appoint tied agents, Article 29, and the respective implementing measures;
(c) organisational requirements as laid down in the first, sixth and seventh subparagraph of Article 16(3) and in Article 16(6) and (7) and the corresponding delegated acts adopted by the Commission in accordance with Article 89.
Member States shall require persons exempt from this Directive pursuant to paragraph 1 of this Article to be covered by an investor-compensation scheme recognised in accordance with Directive 97/9/EC. Member States may allow investment firms not to be covered by such a scheme provided they hold professional indemnity insurance where, taking into account the size, risk profile and legal nature of the persons exempt in accordance with paragraph 1 of this Article, equivalent protection to their clients is ensured.
By way of derogation from the second subparagraph of this paragraph, Member States that already have in place such laws, regulations or administrative provisions before 2 July 2014 may until 3 July 2019 require that where the persons exempt from this Directive pursuant to paragraph 1 of this Article provide the investment services of the reception and transmission of orders and/or of the provision of investment advice in units in collective investment undertakings and act as an intermediary with a management company as defined in Directive 2009/65/EC, those persons are jointly and severally liable with the management company for any damages incurred by the client in relation to those services.
3. Persons exempt from this Directive pursuant to paragraph 1 shall not benefit from the freedom to provide services or to perform activities or to establish branches as provided for in Articles 34 and 35 respectively.
4. Member States shall notify the Commission and ESMA of the exercise of the option under this Article and shall ensure that each authorisation granted in accordance with paragraph 1 mentions that it is granted in accordance with this Article.
5. Member States shall communicate to ESMA the provisions of national law analogous to the requirements of this Directive listed in paragraph 2.