The potential loss of passporting and its impact on distribution to the EU: MiFID

The MiFID passport currently allows UK firms to undertake investment business across the UK, either on a cross-border basis or through opening a local branch. If the UK’s future relationship does not retain MiFID passporting rights, the UK is likely to be considered a “third country” under MiFID II regulations. This page sets out the different passporting options that would be open to the UK as a third country, assuming there is no material change to current provisions under MiFID II.

Current state (with MiFID passporting)

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  1. The UK asset manager is able to provide services that it is regulated to provide in the UK throughout the EU, using the MiFID passport
  2. There is no requirement to open a branch in the EU, but if it does, the UK asset manager can provide the same services throughout the EU from this branch
  3. The branch must meet the requirements of the regulator of the member state where it is located, as well as the FCA

 

Summary of third country access

There are two types of passporting that are open to third countries: cross-border passport and the branch passport. Through third country passporting UK firms can continue to provide services to retail and professional clients, however this access is more limited than current MiFID provisions, and there are additional considerations that UK firms must meet in order to be granted this access.

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Cross-border passport

The cross-border passport would enable UK firms to provide services (that they are  regulated to provide in the UK) to professional clients throughout the EU.

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In order to provide these services, the following conditions must be met:

  1. UK regulatory regime must be considered to be equivalent with the EU. Under MiFID II the European Commission has the authority to determine whether the UK regulatory regime is equivalence with the EU
  2. There must cooperation between the FCA and ESMA
  3. The UK asset manager must register with ESMA to use the third country passport

 

Branch passport

The branch passport would enable UK firms to provide services (that they are regulated to provide in the UK) to professional and retail clients only in the country that the branch is located in. if the UK asset manager wants to provide services in several countries using the branch passport, it would need to set up a branch in each country. Branch passporting is not an automatic provision of MiFID II; member states need to actively opt in to allow third countries to use branch passports to access their national markets. If a UK firm wishes to do business in an EU member state that has not opted in, it would need to follow that country’s national regime, which falls outside EU regulation.

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In order to provide these services, the following conditions must be met:

  1. There must be cooperation between the FCA and the regulator in each member state where the branch(es) is/are located
  2. Each branch must meet the regulatory requirements of the member state where it is located, as well as the UK

 

 

Notes:
All references to “EU” should be taken to mean “EU excluding the UK”