Under MiFID II, "article 3" or "exempt investment" firms must meet all the following criteria:
• Not be allowed to hold client money or assets and therefore cannot owe their clients' money.
• Limit their business to "arranging" and "advising" on certain investments only – they cannot, for example, execute deals for their clients or provide discretionary management services.
• In the course of that business, they must transmit orders only to regulated investment firms or credit institutions (or their third-country equivalents), authorised Ucits or other regulated funds, or listed investment companies with variable capital, such as investment trusts.
Any firm that cannot operate within these constraints will need to be an investment firm. Many firms that do not wish to be limited in their order transmission will be investment firms, but will be categorised as "exempt CAD firms".
These are firms whose permissions are also restricted to providing investment advice and/or receiving and transmitting orders, without holding client money or securities or providing custody services.
However, exempt CAD firms may transmit orders to a wider range of persons than those listed in article 3 and can provide services in relation to derivatives that are not transferable securities.
Their status means they can benefit from a favourable capital requirements treatment, as they were traditionally exempt from the Capital Adequacy Directive (the forerunner of CRD IV).
- Mifid II measures take effect on January 3, 2018.
- The rules apply regardless of Brexit.
- They apply to many advisers regardless of whether they have clients in Europe.
Any firm providing, for example, dealing or discretionary management services will fall within both MiFID II and CRD IV, and its capital will in principle be higher, with a base requirement depending on the precise activities it carries out.
IFAs should by now have assessed their businesses to check they are correctly categorised. Any firm needing to vary its permissions, for example to switch from being an article 3 firm to a MiFID firm, should have applied to FCA to do so by July 3 in order to ensure the FCA will have determined the application by January 2018.
Article 3 firm consequences
Being an article 3 firm and choosing to be exempt from MiFID does not mean that less onerous rules can apply as a matter of course. MiFID II includes a requirement that member states cannot be seen to favour firms that are not MiFID firms. So the FCA is bound to apply rules that are "at least analogous" to the relevant MiFID II requirements in many cases.
In addition to changes to legislation, for which the Treasury is responsible, the FCA has to date published one discussion and five consultation papers on MiFID II implementation and, at the date of writing this article, only one feedback statement.
From the consultations, there are, as a result of the "at least analogous" requirement, likely to be only a few significant differences in how FCA will treat MiFID firms and article 3 firms in respect of the key conduct of business and systems and controls rules.
Questions appear on the last page of this article.