PERG 13.5 Exemptions from MiFID

Q35. Where do we find a list of MiFID exemptions?

In articles 2 and 3 of MiFID.

Q36. We are an insurer. Does MiFID apply to us?

No. Insurers are exempt from MiFID (article 2.1(a)).

Q37. We are a non-financial services group company providing investment services to other companies in the same group. Are we exempt under the group exemption in article 2.1(b)?

Yes, if you provide these services exclusively for your parent company, your subsidiaries and those of your parent company. This means that providing investment services for the benefit of group companies must be the only investment service that you undertake. The exemption is narrower than the corresponding exclusion in article 69 of the Regulated Activities Order (groups and joint enterprises) insofar, for example, as it does not apply to investment services supplied to a joint venture participant (see PERG 2.9.10 G).

Q38. We also buy and sell financial instruments for ourselves. Are we still able to use the group exemption?

Yes. The group exemption applies to investment services and not investment activities. So, as long as your own account dealing does not involve you providing an investment service (to which MiFID applies) to non-group entities, you can still rely on the group exemption in respect of the services you provide solely to other group companies.

So far as your own account dealing is concerned, you may be able to rely upon the exemption in article 2.1(i) (see Q44 and Q45) if you meet the relevant conditions. The ability to combine reliance on article 2.1(b) and article 2.1(i) could be relevant to companies performing group treasury functions.

Q39. We provide investment services as a complement to our main professional activity. Are we exempt?

Yes, you will be exempt under article 2.1(c) MiFID if you provide these services in an incidental manner in the course of your professional activity, and that activity is regulated by legal or regulatory provisions or a code of ethics that do not exclude the provision of investment services. The meaning of ‘incidental’ is potentially subject to further Commission legislation pursuant to article 2.3 MiFID.

This exemption is relevant, for example, to firms belonging to designated professional bodies, such as accountants, actuaries and solicitors, to whom Part XX of the Act applies. It could also apply to authorised professional firms which provide investment services in an incidental manner in the course of their professional activity. In our view, the criteria set out in PROF 2.1.14 G in relation to section 327(4) of the Act are also relevant to considering whether a firm can rely on the exemption in article 2.1(c) MiFID, as they were in relation to the corresponding ISD exemption.

If an authorised professional firm has the standard requirement on its permission that it “...must not carry on the specified regulated activities otherwise than in an incidental manner in the course of the provision by it of professional services (that is, services which do not consist of regulated activities)”, our assumption is that it is exempt from MiFID if it complies with this requirement.

If you are an authorised professional firm not falling within article 2.1(c) MiFID, you may also wish to consider whether you are exempt or otherwise from MiFID requirements by virtue of the domestic implementation of the article 3 exemption (see Q48 and Q49).

The article 2.1(c) MiFID exemption may also apply to journalists, broadcasters and publishers (where they are subject to regulation or a code of ethics), although in most cases the FSAwould not expect these persons to fall within the MiFID definition of investment firm (see Q7 and Q8).

Own account

Q40. We regularly buy and sell financial instruments ourselves but never as a service to third parties. Are there any exemptions which might apply to us?

Yes, you could fall within the article 2.1(d) MiFID exemption but not if you:

• • are a market maker (please see Q41 below); or
• • deal on own account outside a regulated market or an MTF on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them. A system for these purposes might include a trading platform, website or other mechanism that functions on the basis of a set of rules.

You cannot rely, however, on the article 2.1(d) MiFID exemption if you provide any investment services or activities other than dealing on own account. If buying and selling MiFID financial instruments is not your main business, or, as the case may be, the main business of your group, you might though wish to consider further the exemption in article 2.1(i) MiFID (see Q44 and Q45).

Q41. What is a market maker?

A market maker is “a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him” (article 4.1(8) MiFID). This is likely to be the case if you are recognised or registered as a market maker on an investment exchange. However, in our view anyone who satisfies the definition will be a market maker for the purposes of MiFID, even if they are not under an obligation to make quotes, for example retail service providers who make a market in shares traded on the Stock Exchange Electronic Trading Service (‘SETS’) but without doing so as registered market makers under the rules of the London Stock Exchange.

Q42. Is there an exemption, as there was under the ISD, relating to employee share schemes and company pension schemes?

Yes, there is an exemption in article 2(1)(e) MiFID for persons providing investment services consisting exclusively in the administration of employee-participation schemes, for example employee share schemes and company pension schemes. In our view, whilst administration for these purposes could extend to services comprising reception and transmission or execution of orders on behalf of clients or placing, it would not include personal recommendations in relation to, or managing, the assets of employee share schemes or company pension schemes.

This exemption can also be combined with the “group exemption” in article 2.1(b) MiFID, by virtue of article 2.1(f) MiFID. In our view, it may also be combined with the exemption in article 2.1(i) MiFID if a firm is dealing on own account in financial instruments as an ancillary activity to its main business, or, as the case may be, the main business of its group.

Q43. Are we right in thinking that MiFID does not apply to collective investment undertakings and their operators?

Yes. Generally speaking, collective investment undertakings are specifically exempt, as are their depositaries and managers. So far as collective investment schemes are concerned, the “manager” corresponds, in essence, to the operatorof a schemeand not to a person who is managing the assets of the scheme (unless that person is also the operator). In our view, the manager of a collective investment undertaking only benefits from the exemption in respect of any investment services or activities it may carry on in that capacity. To the extent that it also provides investment services or performs investment activities in a different capacity, for example, if it provides investment advice to, or manages the assets of, an individual third party, these services and activities fall outside the scope of the article 2.1(h) exemption.

In the case of UCITS management companies, some MiFID provisions will apply to those who provide portfolio management services (other than collective portfolio management)1, investment advice or safekeeping and administration services in relation to units1 to third parties, by virtue of article 6.4 of the UCITS Directive (see Q6).

Q44. Who can rely on the exemption in article 2.1(i)?

You may be able to rely on the exemption if:

• • you deal on own account in MiFID financial instruments; or
• • provide investment services in commodity derivatives or C10 derivative contracts to clients of your main business (or if you are part of a group, the group’s main business); or
• • both.

However, the exemption will only apply if what you do is ancillary to your main business and that main business is neither the provision of investment services nor banking services. If you are part of a group, what you do must be ancillary to the main business of your group whose main business is neither the provision of investment services nor banking services.

In our view, a firm which is part of a group whose main business is not investment or banking services and which provides, for example, as a stand-alone business, investment services in commodity derivatives or C10 contracts for its own clients (who are not clients of the group’s main business), is likely to fall outside the scope of the article 2.1(i) exemption.

When considering what is a firm’s or group’s ‘main business’, in our view various factors are likely to be relevant including turnover, profit, capital employed, numbers of employees and time spent by employees. These factors should then be considered in the round in deciding whether any one operation or business line amounts to a firm’s or group’s main business. In our view, a similar approach can be applied when determining a firm’s ‘main business’ for the purposes of article 2.1(k) (see Q46).

Q45. What is an ancillary activity for these purposes?

The meaning of ‘ancillary’ is potentially subject to further European Commission legislation pursuant to article 2.3 MiFID. For an activity to be ‘ancillary’ for these purposes, in our view, it must at least be both directly related and subordinate to the main business of the group. Where, for example, a commodity producer buys or sells commodity derivatives for the purposes of limiting an identifiable risk of its main business, for instance in circumstances where the risk management exclusion in article 19 of the Regulated Activities Order would apply, in our view this would qualify as ancillary for the purposes of this exemption. On the other hand, where a commodity producer deals on own account for speculative purposes, it is unlikely that this would be ancillary to the main business in the case of article 2.1(i) MiFID. This activity may fall, however, within the article 2.1(k) MiFID exemption (see Q46).

Q46. Our main business is producing commodities and we buy and sell commodity derivatives. We are a member of a non-financial services group. Are we exempt from MiFID?

Yes. You will be exempt under article 2.1(k) MiFID because you are a person:

• • whose main business consists of dealing on own account in commodities and/or commodity derivatives, and
• • who is not part of a group whose main business is the provision of other investment services or banking services.

The question of what is your main business for the purposes of the first bullet point above is determined on an entity basis and not on a group basis (which is different from the approach taken in article 2.1(i) MiFID). You should also note that the article 2.1(k) MiFID exemption refers to commodities and/or commodity derivatives but not C10 derivatives.

Recital 22 of the MiFID Regulation indicates that the exemptions in article 2.1(i) and (k) MiFID could be expected to exclude significant numbers of commercial producers and consumers of energy and other commodities, including energy suppliers and commodity merchants.

Various other answers to questions in this section deal with certain detailed combinations of exemptions:

Q46A. Is it possible to combine the article 2 and article 3 exemptions?

Q47. We traded on an investment exchange as a local firm and were exempt from the ISD . Are we exempt under MiFID?

Yes. If you fell within the exemption in article 2.2(j) ISD for local firms and continue to perform the same services and activities, you should generally fall within the exemption in article 2.1(l) MiFID. If you provide personal recommendations in relation to MiFID financial instruments, however, you will not be able to rely upon the exemption in article 2.1(l) MiFID.

Q48. Article 3 is an optional exemption. Will the exemption apply to UK firms?

Yes, the optional exemption has been exercised by The Treasury.

Q49. Which firms might fall within this exemption?

The exemption applies to persons who meet all the following conditions:

• • they do not hold clients’ funds or securities;
• • they do not provide any investment service other than reception and transmission of orders or investment advice, or both, in relation to transferable securities and units in collective investment undertakings;
• • they transmit orders only to one or more of the following:
  • o other MiFID investment firms;
  • o credit institutions authorised under the BCD ;
  • o branches of third country investment firms or credit institutions complying with rules considered by the FSA to be at least as stringent as those laid down in MiFID, the BCD or the CAD; ;
  • o collective investment undertakings or their managers authorised under the law of an EEA State to market units to the public;
  • o EU incorporated investment companies the securities of which are listed or dealt in on a regulated market, for example investment trust companies.

If you are a UK firm that meets these qualifying conditions, you will be exempt from regulations made by the European Commission under MiFID.

Where you provide personal recommendations or receive and transmit orders in relation to derivatives which are MiFID financial instruments but not transferable securities, you will fall outside the scope of this exemption. In our view, this would be the case, for example, if you provided either or both of these investment services in relation to OTC derivatives concluded by a confirmation under an ISDA master agreement (see PERG 13 Annex 2 Table 2).

Q50. We are (or previously were) an IFA and have a permission which covers (i) arranging (bringing about) deals in investments; (ii) making arrangements with a view to transactions; and (iii) advising on investments, in each case in relation to securities but not derivatives. We are not permitted to hold client money or investments and do not have dealing or managing permissions in relation to MiFID financial instruments. Are we exempt?

The FSA expects so, assuming you do not:

• • carry on activities outside your permission; or
• • transmit orders to persons other than those listed in Q49 (for example, you will fall outside the exemption if you transmit orders directly to collective investment schemes whose units cannot be marketed to the public in any EEA State either because they are unregulated schemes or non- EEA authorised collective investment schemes); or
• • place MiFID financial instruments without a firm commitment basis (see Q22 and Q23).

We would generally not expect IFAs to be placing MiFID financial instruments without a firm commitment basis as we associate placing of financial instruments with situations where a company or other business vehicle wishes to raise capital for commercial purposes, and in particular with primary market activity.

Q51. What happens if we breach any of the qualifying conditions (see Q49)? Do we then lose the exemption?

You are required to notify us of a breach (see SUP 15.3.11 R). We will then consider whether you should continue to benefit from the exemption and what, if any, supervisory or occasionally enforcement action is appropriate in the circumstances.

Q52. If we fall within the exemption does this prevent us from acquiring passporting rights under MiFID?

No. Firms which would otherwise be exempt can apply to opt into MiFID regulation with a view to acquiring passport rights (although they would then become subject to the requirements of MiFID, including certain enhanced prudential requirements - see Q58 and Q59).

Q53. What is the practical effect of exercising the optional exemption for those firms falling within its scope?

You are not a firm to which MiFID applies and so are not a MiFID investment firm for the purposes of the FSA Handbook. As such you are not subject to the requirements of the recast CAD as transposed in the FSA Handbook and cannot exercise passporting rights.

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