Joe Beashel and Louise Dobbyn of Matheson look
at how Ireland's direct implementation of Mifid II positions it
well for post-Brexit
Mifid II impacts Irish investment firms (including
brokers, asset managers, wealth managers and corporate advisory
firms), market operators, data reporting service providers,
trading venues and banks operate Mifid investment services.
Mifid II was implemented into Irish law by the Markets in
Financial Instruments Regulations (SI 375 of 2017) (Mifid II
Regulations). As a result of Brexit contingency planning for a
number of both EU and non-EU headquartered firms, Ireland has
recently seen an influx in newly authorised Mifid firms and
management companies using a Mifid top-up licence.
Mifid II has indirectly impacted the asset management
industry. Undertakings for collective investment in
transferable securities (Ucits), management companies (Mancos)
and alternative investment fund managers (AIFMs) that are not
authorised to carry out Mifid investment services, are now
required to comply with certain Mifid II outsourcing provisions
in the context of sub-delegation.
Implementation in Ireland
The Mifid II Regulations implement Mifid II directly into
Irish law and do not introduce any gold-plated requirements.
The National Competent Authority, the Central Bank of Ireland,
relies on and follows guidance issued by the European
Securities and Markets Authority (Esma).
The Irish Safe Harbour exemption for third countries
carrying out wholesale investment services has been
substantially maintained. Firms continue to be considered as
not operating in Ireland where there is no branch established
in Ireland and they provide services to professional clients
and eligible counterparties. However, the Safe Harbour
exemption does have a more limited scope under the Mifid II
Regulations than the previous regime. The narrowing of the Safe
Harbour regime means that some third country investment firms,
which previously qualified, will no longer do so. To continue
providing investment services in Ireland, such firms must be
authorised by the Central Bank. A number of firms intend to
rely on this exemption to provide services to eligible clients
post a hard Brexit.
The optional exemption from authorisation is available to
firms qualifying under Article 3(1)(a), (b) and (c) of Mifid II
(the exempt firms); however, such firms must comply with
Article 3(2), which provides that certain analogous
requirements to those under Mifid II are imposed on exempt
Third country firms that provide investment services to
retail clients and 'elect-up' professionals are required to
establish a branch in Ireland.
National discretion will be exercised to implement criminal
sanctions for infringements of Mifid II. Maximum fines, of
€5 million for natural persons and €10 million for
legal persons, will be imposed under the Markets in Financial
Instruments Bill 2018 and enacted into Irish law. These
sanctions are aligned with fines under the Central Bank's
Administrative Sanctions Regime.
A level playing field
There is a significant discrepancy between the requirements
in Article 3(2) of Mifid II and the current domestic provisions
under the Investment Intermediaries Act 1995 (IIA) and the
Central Bank's Consumer Protection Code (CPC). The Mifid II
investor protections do not apply to exempt firms, and these
firms are only subject to investor protection requirements
under the CPC. To address the potential for any regulatory
arbitrage, the CPC has been amended so that exempt firms will
be subject to certain enhanced CPC investor protections,
similar to the Mifid II Protections. The exempt firms are now
held to the same standards as Mifid II in respect of product
governance, remuneration requirements, suitability assessments
and disclosure requirements, amongst other provisions. This
ensures the end client will be afforded sufficient protection
regardless of the applicable regulatory regime.
Relating to extraterritorial issues, collective investment
undertakings and their managers are exempt from Mifid II.
However most Irish Ucits Mancos and AIFMs follow the
'delegated' model, whereby the day-to-day asset management and
marketing and distribution of a fund is delegated to third
party asset manager(s) or distributors, which are either
authorised in the EU to provide Mifid individual portfolio
management or advisory services and / or receipt and
transmission of orders, or are subject to an equivalent regime
outside the EU.
Ucits Mancos and AIFMs are impacted because the relevant
service providers need information (such as product costs and
charges, and target market information) and other support in
order to meet their obligations under Mifid II. Other services
providers to Ucits and AIFs not directly affected by Mifid II
are being requested to provide information as part of the
provision of this support (for example, fund administrators /
transfer agents). Therefore, Ucits Mancos and AIFMs and Mifid
firms are working together to ensure all the necessary Mifid II
information is available so that the end client receives the
Mifid II investor protections.
Mifid II outsourcing provisions have had an indirect impact
on non-EU portfolio management firms and investment advice
firms that act as delegates to Mifid II investment management
firms, such as US sub-advisors.
The outsourcing requirements in Article 31 of the Mifid II
Delegated Regulation 565/2017 means that a Mifid firm
sub-delegating portfolio management must remain fully
responsible for discharging all of its obligations under Mifid
II, and the end client must receive investor protections to the
same extent as if a delegation had not taken place in
circumstances where the Mifid firm has delegated portfolio
management to a non Mifid firm.
Further clarity is required on the extent of the application
of the Mifid II investor protection requirements to non-EEA
sub-delegates. The Central Bank has not outlined any
interpretative position relating to the delegation by Mifid
firms regulated by the Central Bank of portfolio management to
such firms specifically in the context of whether there should
be a 'pushdown' of Mifid unbundling requirements.
Research: conflicting approaches and guidance
Following the introduction of rules around inducements and
research under Mifid II, there has been much debate on this
topic within the industry, with concern that the rules are
overly burdensome and are impacting upon the provision of
research in the sector.
Given this and the Central Bank's interaction with industry
in Ireland in the lead up to the implementation of Mifid II, a
focused review is currently underway by the Central Bank to
assess how investment firms are treating investment research
under Mifid II. To date some of the key trend arising is that
there has been limited use of the option to use a research
payment account (RPA) to charge clients for the cost of
research used in the provision of an investment service.
The Central Bank has said it will not be introducing
guidance on Mifid II. Firms are required to rely on the
guidelines published by Esma and Esma's Q&A tool.
However, currently the Central Bank are in the process of
assessing the information received which will enhance its
understanding of the impact that the rules are having as
industry settles into a second-year cycle post-implementation
of Mifid II. This will allow the Central Bank to provide
meaningful feedback to Esma on the matter, in keeping with the
push towards supervisory convergence across the EU.
Trading and market structure
The pre- and post-trade transparency regime is now
applicable to non-equity instruments, including structured
finance products, bonds, emissions allowances and derivatives.
This has increased the regulatory burden of trading these
The continuous supervisory focus on Mifid II implementation
is a key priority for the Central Bank's Market Surveillance
Team. The Central Bank has carried out an analysis of the vast
amounts of data submitted to it as part of firms' compliance
with Mifid II.
The analysis of the data has provided the Central Bank with
insights into the activities of the firms it supervises, most
notably in the areas of transparency, the growth of alternative
liquidity sources (such as periodic auctions and systematic
internalisers) and the use of algorithmic trading
In July 2019, Esma also announced that it would not be
renewing the temporary restriction on the marketing,
distribution or sale of contracts for differences (CFDs) to
retail clients in the EU. Prior to Esma announcing this, the
Central Bank issued an announcement in June 2019 stating it
would be banning the sale of binary options to retail investors
and restrict the sale of CFDs. This is not surprising as the
Central Bank has consistently followed Esma with its approach
on other Mifid II related issues.
Even though there has been no guidance from the Central Bank
on the scope of certain transactions and despite the fact that
the Central Bank has been delayed in implementing machine to
machine transaction reporting systems, firms have gone to great
lengths to obtain resources to comply with their transaction
reporting and transparency requirements. The Central Bank
expects all firms to be in compliance with the requirements at
As regards trading venues and exchanges, the Share Trading
Obligation (STO) has impacted, to some degree, international
booking arrangements and the practice of transmitting orders to
non-EEA venues/counterparties, where there are deeper pools of
liquidity. Under the STO, a Mifid firm has to ensure that the
trades it undertakes in shares which are admitted to/traded on
a trading venue, will take place on a trading venue, systematic
internaliser, or a third-country trading venue assessed as
Brexit will have a significant impact on the STO in an Irish
context as many Irish companies are dual listed on the London
Stock Exchange and the Irish Stock Exchange, (Euronext Dublin).
In May 2019, Esma provided updated guidance that no liquid
British shares will be subject to the STO. However, all EU
shares will still be subject to the STO and therefore execution
must happen on an EU venue.
Whilst this is a positive step, it still leaves a number of
issues for EU shares. Even though a share has an EU ISIN, it
does not necessarily mean that its main pool of liquidity is in
When it comes to legal entity identifiers (LEI), financial
counterparties have proactively sought LEI codes to ensure they
can continue to trade with Mifid firms or on Mifid regulated
Issuers have proactively sought LEI codes to ensure they can
continue to trade with Mifid firms or on Mifid regulated
Boosting investor protection
Mifid II introduced increased investor protections for Mifid
firms in Ireland. Due to the CPC amendments incorporating
certain Mifid II investor protections, IIA-authorised brokers
carrying out similar investment activities in relation to
similar products are required to provide equivalent protections
to their clients.
Additionally, the Central Bank is very focused on individual
accountability for senior management and boards. The Central
Bank issued a 'Dear CEO Letter' in April 2019 that reiterated
the importance of compliance with the Fitness and Probity
Regime (Regime) by regulated financial service providers.
It was intended that Mifid II would iron outsome of the
conduct issues in wholesale market activity, however the
Central Bank has recognised this not to be the case. In
response, it launched a wholesale conduct risk thematic
inspection of firms engaged in wholesale market activity.. In
its communications with firms, the Central Bank expects firms
to have a strong Conduct Risk Framework in place which looks to
'identify, mitigate and manage market conduct risk'.
The Central Bank is also carrying out a best execution
thematic inspection of investment firms authorised under Mifid
Rules of attraction
Ireland has established itself as a gateway to Europe,
particularly from an investment management perspective. As
Ireland applies Mifid II directly into law, without any gold
plating, and has an engaged and proactive regulator, Ireland is
an attractive EU jurisdiction for Brexit contingency plans.
Mifid II will enhance investor protections, market
transparency and will strengthen financial services regulation
in Ireland. The fact that Ireland has implemented Mifid II
directly and that the Central Bank relies on EU guidance means
that there is a uniform interpretation of the requirements. As
noted above, this is an attractive factor for firms when
deciding their Brexit contingency plan and in recent months we
have seen a number of newly authorised Mifid firms enter the
However, for smaller domestic Mifid II firms the enhanced
investor protection and operational requirements exposes these
firms to great risk of regulatory non-compliance and makes it
more expensive to provide services. Some of these small
domestic firms are now merging with bigger firms to ensure
their businesses continue to be viable.
T: +353 1 232 2101
Joe Beashel is a partner in the financial
institutions group and is head of the regulatory risk
management and compliance team at Matheson. He has over
25 years' experience in the financial services
Before joining Matheson in 2004, Joe was the
managing director of the Irish fund administration unit
of a leading international investment manager.
T: +353 1 232 2094
Louise Dobbyn is a senior associate in the financial
institutions group, specialising in financial services
Louise regularly advises banks, Mifid investment
firms and financial institutions on all aspects of
financial regulation and compliance and related
Louise has practiced as a financial services
solicitor in Ireland and England. Prior to joining
Matheson, she was legal counsel for a Swiss bank in
London and a financial services associate at a silver
circle firm in London.