SECTION 1: Market outlook
1.1 Please clarify which products or markets your jurisdiction hosts that are affected by Mifid II.
Mifid II will affect Irish investment firms (such as brokers, asset managers, wealth managers and corporate advisory firms) and market operators, data reporting service providers and banks carrying out Mifid investment services. The Irish funds industry is a major part of the Irish financial services offering. Ireland has over 800 fund managers from 50+ countries with assets administered in Ireland. At an international level, Ireland offers offshore managers access to the EU, with the EU-wide marketing passport for Undertakings for collective investment in transferable securities (Ucits) and alternative investment funds (AIFs).
The far reaching indirect impact of Mifid II on the asset management industry and funds industry will introduce important changes to the regulatory environment in Ireland as Ucits management companies (mancos) and AIF managers (AIFMs) not authorised to carry out Mifid investment services will now be required to comply with certain requirements so that Ucits and AIFs can continue to be sold in the EU.
SECTION 2 (a) – EU member states: Implementation
2.1 Outline the possible key differences in (a) gold-plating; and (b) exercise of national discretion, where provided for in Mifid II in your jurisdiction
(a) Gold Plating
The legislative body responsible for transposing Mifid II into Irish law, the Department of Finance, will be implementing Mifid II directly and will not be introducing any gold plating requirements. The national competent authority in Ireland, the Central Bank of Ireland (the Central Bank) has confirmed it will be relying on guidance from European Securities and Markets Authority (Esma).
(b) Exercise of National Discretion
Safe Harbour Regime
The current Irish Safe Harbour regime for third countries carrying out wholesale investment services will be retained. Firms will continue to be considered not to be operating in Ireland where certain conditions are met. However, the application of this Safe Harbour will be limited under Mifid II to eligible counterparties and professionals and will not apply in certain circumstances. The narrowing of the Safe Harbour regime means that some third country firms may no longer be able to provide investment services in Ireland without being authorised by the Central Bank. Prior to the implementation of Mifid II, firms that wish to provide such services under the Safe Harbour must ensure their clients are properly classified as professional clients or eligible counterparties for Mifid II and that their home country meets the new requirements.
National discretion will be exercised in respect of the optionally exempt firms qualifying under Article 3 (1) (a), (b) and (c) (Exempt Firms) from Mifid II, though these Exempt Firms must still meet the Mifid II requirements in Article 3(2).
Third Country Branches
The branch requirement when a third country firm intends to provide investment services to retail and elect-up professional clients in Ireland will be transposed into Irish law. This requirement provides greater protection for retail clients and ensures a level playing field in respect of investment firm rules.
National discretion will be exercised to implement criminal sanctions for infringements of Mifid II. Maximum fines of €5 million for national persons and €10 million for legal persons will be imposed. These sanctions are aligned with fines under the Central Bank's Administrative Sanctions Regime.
2.2 What is the biggest concern in respect of these variations and possible types of divergences?
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 (the IIA) and the Central Bank's Consumer Protection Code (the CPC). The Mifid II investor protections will not apply to Exempt Firms, and these firms will only be subject to investor protection requirements under the CPC. To address the potential for any regulatory arbitrage, the CPC will be amended so that Exempt Firms will be subject to certain enhanced CPC investor protections, similar to the Mifid II Protections. The Exempt Firms will be held to the same standards as Mifid II in respect of product governance, remuneration requirements, suitability assessments and disclosure requirements, amongst other provisions. This will ensure the end client will be afforded sufficient protection regardless of the applicable regulatory regime.
The Investment Intermediaries Act 1995 will be amended for Exempt Firms in order to improve consumer protection in relation to retail investment products, while providing for proportionate treatment for relevant investment service providers, which otherwise would be subject to full Mifid II requirements.
2.3 What are the most important extraterritorial issues regarding Mifid II in your jurisdiction?
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, 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 will be impacted because the relevant service providers will 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 may also be requested to provide information as part of the provision of this support (e.g. fund administrators/transfer agents). Therefore, Ucits mancos, AIFMs and Mifid firms will be expected to work together to ensure all the necessary Mifid II information is available so that the end client receives the Mifid II investor protections.
Non-Mifid firms may also be required to facilitate Mifid firms in respect of the payment for investment research under Mifid II. These requirements will increase the administrative burden of non-Mifid firms in dealing with Mifid firms.
SECTION 3: Research
3.1 Please summarise the challenges Mifid II will pose in your jurisdiction with regards to research.
The investment research rules require those on the buy-side to determine whether they will pay for research directly or if they will pass the cost onto their clients. This will impact the broker-dealer and asset management industry in Ireland.
Fund boards and management companies will be indirectly impacted by the research rules and should engage with any Mifid investment managers to understand the proposed model for investment research.
3.2 Is pricing research compatible with market practices and existing legal frameworks?
In deciding how to price research the market practice is still being developed in Ireland. The Irish market tends to look to UK market practices, due to the similar regulatory and legal systems. In the asset management sector, it is common for portfolio management services and other fund service providers to be delegated to the UK under the 'delegated' model.
However, the FCA has applied gold-plating for the research and inducement requirements. The effect of this is that the Irish research pricing model will be different to the UK research model.
3.3 Is there clarity on how to resolve challenges in unbundling research and complying with Mifid II in this respect?
The Central Bank has indicated that it does not intend to issue guidance to industry beyond what is produced by Esma, in the interest of encouraging supervisory convergence on a European scale.
The Central Bank encourages investment firms to take advantage of Esma's Q&A Tool, to allow stakeholders to submit questions directly for consideration.
SECTION 4: Trading/market structure
4.1 Which areas of trading / type of instruments will be most impacted by Mifid II in your jurisdiction and how might they be impacted?
The pre- and post-trade transparency regime will be applicable to non-equity instruments, including structured finance products bonds, emissions allowances and derivatives and will impact the trading of these products in Ireland.
Position limits for commodity derivatives will apply to investment funds and clients of portfolio managers at fund level rather than at the level of the manager. This will impact the funds industry (excluding Ucits) where the investment manager is trading in commodities on behalf of a number of fund clients to a limited extent.
These trading changes under Mifid II apply at an EU level and Ireland will not apply any additional gold-plating requirements.
The new requirements that apply to structured deposits under Mifid II will impact the current regulatory regime of structured deposits in Ireland under domestic legislation, the IIA and the CPC. A structured deposit under Mifid II must be fully repayable, and if this is not the case, it will likely be a derivative.
However, under the Irish regulatory regimes, structured deposits with 100% capital protected and also deposits with less than 100% capital protected are categorised as tracker bonds. These products are investment instruments regulated by the IIA and the CPC, and are not subject to Mifid.
4.2 What will be the key challenges with regards to transaction reporting and pre-trade transparency?
Mifid II has expanded the scope and level of prescription of investment firms' transaction reporting obligations. The transaction reporting requirements will apply to firms receiving and transmitting orders to third party brokers for execution. This will be a challenge for Irish firms, which rely upon brokers located in other member states or non-EU brokers to execute their client orders. Such firms must assess how to discharge their transaction reporting obligations in accordance with Mifid II. The pre-trade transparency requirements applicable to non-equity instruments will present a challenge, as firms will have to ensure they have sufficient procedures in place.
As these requirements co-exist with the reporting requirements under the Regulation on Wholesale Energy Market Integrity and Transparency (Remit), European Market Infrastructure Regulation (Emir) and the Short Selling Regulation, it will be challenging for firms to ensure that they comply with the appropriate standards in respect of each transaction. It will also be important for firms to ensure that their IT systems are capable of tracking each transaction accordingly.
4.3 What are the main considerations that trading venues and exchanges will have to make?
Trading venues and exchanges, such as the Irish Stock Exchange, will need to ensure that firms executing orders submitted accurate and up to date Legal Entity Identifiers (LEI). LEI issuing organisations including the Irish Stock Exchange will have to decide if they will issue LEIs for entities, such as pension schemes and trusts who do not fall within the definition of a legal person.
Trading venues that issue LEIs need to have procedures in place to ensure the increased number of application for LEIs can be processed by January 3 2018, and that the annual renewal process required to ensure LEIs remain active is in place.
SECTION 5: Investor protection
5.1 Explain the impact of heightened investor protection obligations in your jurisdiction
As Mifid II will introduce increased investor protections for Mifid firms in Ireland, there is potential that IIA-authorised brokers carrying out similar investment activities in relation to similar products will not be providing equivalent protections to their clients.
By amending domestic legislation (the IIA and the CPC) to impose certain Mifid II requirements upon non-Mifid II firms, there will be a higher degree of protection afforded to investors.
5.2 Which area of focus within investor protection is of most concern/importance to your jurisdiction?
The regulation of products under Mifid II will enhance investor protection in Ireland. The product governance regime applicable to manufacturers and distributors of financial instruments will require manufacturers to take responsibility for product design, and to co-operate with distributors to ensure that products are sold into designated target markets.
Whilst the Mifid product governance regime is not explicitly extra-territorial (given the rules only apply to Mifid firms) these obligations lead to a measure of extra-territorial effect.
The enhanced suitability and appropriateness requirements will also create considerable challenges due to the large retail market in a wealth management context. This extensive retail market presents a large administrative burden, as investment firms must obtain a significant amount of information from their clients in respect of their knowledge and experience, financial situation and investment objectives in order to determine the suitability of products.
SECTION 6: Outlook 2017
6.1 What are the overall risks or opportunities that Mifid II might bring to your market? Will Mifid II impact the competitiveness of your market?
Firms should fully understand the effect this legislation will have on both their businesses and on the industry as a whole and should engage with other market participants and their legal advisors to ensure they implement Mifid II in line with industry best practice and in a manner that works for their business model.
The Central Bank expects firms to manage regulatory amendments proactively as by preparing for and understanding the changes that are about to occur, firms put themselves in the best position possible to take advantage of opportunities that arise. Firms that do not prepare may find themselves unable to adapt to the new regulatory environment and face significant challenges in respect of continuing ordinary trading.
However, even full engagement with the Mifid II regime has its challenges. The Central Bank has noted that even firms with "significant Mifid II budgets" are facing time pressures to ensure that they are fully compliant by the implementation deadline.
6.2 What are the next steps – what should market participants be doing now to best prepare themselves?
With the implementation date looming, firms directly and indirectly impacted should:
- Be fully resourced to meet their regulatory obligations;
- Be advanced in terms of implementing their project plans, with key decisions made at this point; and
- Have fully considered the implications of Mifid II on their businesses and have made the changes to their systems, policies and procedures.
|About the author|
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 twenty years' experience in the financial services sector. Before joining Matheson in 2004, he was the managing director of the Irish fund administration unit of a leading international investment manager
|About the author|
Louise Dobbyn is an associate in the financial institutions group, specialising in financial services regulation. Dobbyn regularly advises banks, Mifid investment firms and financial institutions on all aspects of financial regulation and compliance and related matters.
Dobbyn is dual qualified and has practiced as a financial services solicitor in Ireland and England. Prior to joining Matheson, Dobbyn was legal counsel for a Swiss bank in London and a financial services associate at a silver circle firm in London.