On November 1 2007, the European Markets in Financial Instruments Directive (Mifid) replaced the Investment Services Directive (ISD). The act implementing Mifid in Dutch legislation also came into force on November 1. One of the main objectives of Mifid is to obtain a more harmonised regime for investment firms in all jurisdictions of the European Economic Area (EEA). Contrary to the ISD, most provisions in Mifid feature the concept of maximum harmonisation, which means that individual member states do not have the right to exceed the terms of Mifid. Implementation of these harmonised rules in the Dutch financial regulations has led to a number of changes to the regulatory regime for investment firms providing services in the Netherlands.
One of the important changes to the Dutch regulations is the new definition of 'providing an investment service'. Under the ISD, investment advice was not an investment service. Since January 1 2006, by virtue of the Dutch Act on Financial Services (Wet financiële dienstverlening), advising on financial instruments could require a licence. Although licensed investment firms that provided advice to institutional investors were allowed to offer investment advice as an ancillary service, investment firms whose sole business was to provide investment advice in principle had to obtain a licence. But since investment advice was not an investment service within the meaning of the ISD, a Dutch licence could not be passported to other EEA jurisdictions. This has changed under Mifid; companies providing investment advice will now be able to passport their licence from the Netherlands to other EEA jurisdictions and vice versa.
Mifid introduced a new regime for trading platforms. Before November 1, the Dutch regulations distinguished between regulated markets and markets in financial instruments. Regulated markets were markets within the meaning of Section 1 (13) of the ISD, such as Euronext Amsterdam. A market in financial instruments was a market subject to rules, which had the purpose of bringing together the offer and demand of financial instruments. The European Energy Derivates Exchange (ENDEX) and Alternext were examples of markets in financial instruments.
The market in financial instruments no longer exists under the new regulations. Besides regulated markets, the new rules distinguish between multilateral trading facilities (MTFs) and companies performing the activity of systematic internalisation.
An MTF is a multilateral system operated by an investment firm which brings together multiple buy and sell intentions of third parties relating to financial instruments in the system and in accordance with the licensing and continuing requirements of the Dutch regulations. Operating an MTF now requires a licence, which can be passported to other EEA jurisdictions. An investment company that deals on its own account by executing client orders outside a regulated market or MTF on an organised, frequent and systematic basis, qualifies as a systematic internaliser. This activity itself does not require a licence; systematic internalisers will only be registered with the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten). However, systematic internalisers will necessarily have to perform investment services that do require a licence, such as executing client orders. Moreover, in addition to the normal rules of conduct for investment firms, systematic internalisers have to comply with certain pre-trade transparency requirements.
Mifid broadens the scope of the term 'financial instruments' and adds commodity derivatives to their definition. Under the ISD, many European countries, including the Netherlands, had a different regime for commodity derivatives. Mifid will help energy traders, for example, because they are now able to passport a licence to all EEA jurisdictions and only have to comply with one set of rules.
Before November 1, the Dutch rules of conduct for investment firms could differ from those in other EEA jurisdictions. Mifid harmonises the rules. The regulations implementing Mifid have introduced more detailed rules, for example in respect of best execution and the principle of know-your-customer.
Under the old regulations, some rules of conduct did not apply to investment firms providing services to professional clients. Under the new regulations, there is a new client classification system. Clients are now divided into three groups: retail clients, professional clients and eligible counterparties, a more specific type of professional client. For each type of client a different set of rules applies. The new rules also provide that under certain conditions, a client can be categorised as another type of client. This means that a professional client can ask for more protection, and a retail client can ask for a treatment that is normally provided to professional clients.
Lastly, Mifid features the concept of home country control, which means that investment firms are subject to the rules of their home member state. Under the old rules, investment companies operating in the Netherlands without a local branch under a European passport were exempted from the Dutch licence obligation, but still had to comply with a number of Dutch rules of conduct. In accordance with the principle of home country control, under the new rules foreign investment firms operating under a European passport are no longer subject to the Dutch rules of conduct, unless a branch is established in the Netherlands.
Hugo Oppelaar and Wiebe de Haan
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