Q1. Why does it matter whether or not we fall within the scope of MiFID?

Depending on whether or not you fall within the scope of MiFID, you may be subject to:

• • domestic legislation implementing MiFID (for example, FCA rules);
• • directly applicable legislation made by the European Commission (the MiFID Regulation and EU CRR3); and
• • domestic legislation implementing theCRD33 (see PERG 13.6).

The question is also relevant to whether you can exercise passporting rights in relation to investment services or activities - only firms to which MiFID applies can do so.

Q2. Is there anything else we should be reading?

The Q and As complement, and should be read in conjunction with, the relevant legislation and the general guidance on regulated activities, which is in chapter 2 of our Perimeter Guidance manual (‘PERG’).

The Q and As relating to the CRD and the EU CRR (which allow the recast CAD to apply to certain firms)3 should be read in conjunction with the relevant parts of our Prudential sourcebook for Investment Firms (IFPRU), the Interim Prudential sourcebook for Investment Businesses (IPRU(INV)), the3 General Prudential sourcebook (‘GENPRU’) and the Prudential sourcebook for banks, building societies and investment firms (‘BIPRU’).

Q3. How much can we rely on these Q and As?

The answers given in these Q and As represent the FCA's views but the interpretation of financial services legislation is ultimately a matter for the courts. How the scope of MiFID and the CRD and the EU CRR3 affect the regulatory position of any particular person will depend on his individual circumstances. If you have doubts about your position after reading these Q and As, you may wish to seek legal advice. The Q and As are not a substitute for reading the relevant provisions in MiFID, the CRD and the EU CRR (and the recast CAD for certain firms)3, the MiFID implementing measures and The Treasury’s implementing legislation, including the statutory instruments listed in Annex 4 (‘Principal Statutory Instruments relating to MiFID scope issues’).

Moreover, although MiFID and the CRD and the EU CRR3 set out most of the key provisions and definitions relating to scope, some provisions may be subject to further legislation by the European Commission. In addition to FCA guidance, MiFID’s scope provisions may also be the subject of guidance or communications by the European Commission or the European Securities and Markets Authority (‘ESMA’) 3 . Similarly, the CRD and the EU CRR provisions may be the subject of technical standards and3 guidance or communications by the European Commission or the European Banking Authority (‘EBA’).

Q4. We provide investment services to our clients - does MiFID apply to us?

Yes if you are:

• • an “investment firm” and the exemptions in MiFID do not apply to you; or
• • a “tied agent” as defined by MiFID.

If you are a non-EEA firm, for example the UK branch of a US firm, MiFID does not apply to you. However, if MiFID would have applied to you if you had been incorporated or formed in the EEA, you will be a third country investment firm under the FCA's rules. As a result, certain MiFID based requirements will apply to you.

See the flow charts in Annex 1 for further information and PERG 13.5 for guidance relating to exemptions. See Q7 and 8 for guidance on whether you are an investment firm and Q11 for guidance relating to tied agents.

Q5. We are a credit institution. How does MiFID apply to us?

If you are an EEA credit institution, article 1.2 MiFID provides that selected MiFID provisions apply to you, including organisational and conduct of business requirements, when you are providing investment services to your clients or performing investment activities. In our view, MiFID will apply when you are providing ancillary services in conjunction with investment services. Where you provide ancillary services on a standalone basis, MiFID will not apply in relation to those services. Article 1.2 MiFID is reflected in paragraph (2) of the Handbook definition of “MiFID investment firm”.

Q6. We are a UCITS management company that, in addition to managing unit trusts, contractual schemes and investment companies, provides portfolio management services to third parties. How does MiFID apply to us? 2

If you are the management company1of a UCITS scheme with a permission to manage investments including MiFID financial instruments pursuant to article 6.3 of the1UCITS Directive, certain MiFID provisions apply to you when you provide investment services to third parties (see article 6.41UCITS Directive). These include initial capital endowment, organisational and conduct of business requirements. You are a UCITS investment firm for the purposes of the Handbook. Article 6.4 of the1UCITS Directive is reflected in paragraph (3) of the Handbook definition of “MiFID investment firm”.

4 Q6A. We are an AIFM that, in addition to managing AIFs, provides portfolio management services to third parties. How does MiFID apply to us?

If you are the AIFM of an AIF with a Part 4A permission to manage investments including MiFIDfinancial instruments pursuant to article 6.4 of AIFMD, certain MiFID provisions apply to you when you provide investment services to third parties (see article 6.6 of AIFMD). These include initial capital endowment, organisational and conduct of business requirements. You are an AIFM investment firm for the purposes of the Handbook. Article 6.6 of AIFMD is reflected in paragraph (3) of the Handbook definition of "MiFID investment firm".

Q7. We provide investment services to our clients. How do we know whether we are an investment firm for the purposes of article 4.1(1) MiFID?

If your regular occupation or business includes the provision of investment services in relation to MiFID financial instruments to others on a professional basis, you are an investment firm and require authorisation unless you benefit from an exemption or are a tied agent (see Q11).

Where you are a firm with more than one business, you can still be an investment firm. We expect that the vast majority of firms which were subject to the requirements of the ISD are subject to MiFID requirements where they continue to provide the same investment services. We also expect some firms that were not subject to the ISD (for example, certain commodity dealers) to be investment firms for the purposes of MiFID and subject to MiFID based requirements. What amounts to a “professional basis” depends on the individual circumstances and in our view relevant factors will include the existence or otherwise of a commercial element and the scale of the relevant activity.

Q8. We do not provide investment services to others but we do buy and sell financial instruments (for example, shares and derivatives) on a regular basis. Are we an investment firm for the purposes of MiFID?

Yes, if you are trading in MiFID financial instruments for your own account as a regular occupation or business on a “professional basis”. You can be an investment firm even if you are not providing investment services to others; this is a change from the position under the ISD, arising from the fact that you are also an investment firm under MiFID where you perform investment activities on a professional basis.

Even if you are an investment firm you may still be able to rely on one or more exemptions in article 2 MiFID, in which case MiFID will not apply (see PERG 13.5 and in particular article 2.1(d) (see Q40 and Q41)), 2.1(i) (see Q44 and Q45) and 2.1(k) (see Q46).

Q9. We are a credit institution that does not provide investment services to customers but we do have a treasury function. Are we subject to MiFID?

Not necessarily. Although you may be dealing on own account in relation to MiFID financial instruments, you may be able to rely upon the exemption in article 2.1(d) MiFID (see Q40). In our view, credit institutions can rely on exemptions in article 2 where they meet the conditions of the exemptions.

Q10. Is there any change to the “by way of business” test in domestic legislation?

There is no change to article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 as part of MiFID implementation by the Treasury, so the domestic test for whether you are carrying on 'regulated activities by way of business' and require authorisation remains unchanged.

Q11. How will we know whether we are a tied agent (article 4.1 (25) )?

A tied agent under MiFID is a similar concept to an appointed representative under the Act. A tied agent does not require authorisation for the purposes of MiFID, just as an appointed representative does not require authorisation under the Act. In our view, you will only be a tied agent if your principal is an investment firm (including a credit institution) to which MiFID applies. So, if you act for a principal that is subject to an exemption in either article 2 or 3 MiFID (as implemented by The Treasury - see Q48 and Q49), you are not a tied agent for the purposes of MiFID although you may be an appointed representative for domestic purposes. You will still not require authorisation under MiFID, either because you are not performing investment services and activities or, if you are, because you fall within an exemption in article 2 or 3 MiFID.

Assuming your principal is an investment firm to which MiFID applies, if you are registered as an appointed representative on the Financial Services Register and carry on the activities of arranging (bringing about) deals in investments or advising on investments, in either case in relation to MiFID financial instruments, you are likely to be a tied agent for the purposes of article 4.1(25).

It is possible for a UK representative to be a tied agent of an incoming EEA firm, in which case if the representative is established in the UK it will also be a branch of its principal. However, it is not possible for a tied agent to provide investment services on behalf of more than one investment firm to which MiFID applies.

Further material on appointed representatives and tied agents is contained in chapter 12 of our Supervision Manual (‘SUP’).

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Q12. Where do we find a list of MiFID services and activities?

In Section A of Annex 1 to MiFID. There are eight investment services and activities in Section A (A1 to A8), four of which are further defined in article 4 MiFID. Those activities that are further defined are:

• • investment advice (article 4.1(4) MiFID);
• • execution of orders on behalf of clients (article 4.1(5) MiFID);
• • dealing on own account (article 4.1(6) MiFID); and
• • portfolio management (article 4.1(9) MiFID).

A further provision relating to investment advice is contained in article 52 of the MiFID implementing Directive.

Q12A. We carry out the activity of bidding in emissions auctions. Is this a MiFID service or activity?

1Article 6(5) of the auction regulation deems as an investment service or activity the reception, transmission and submission of a bid for a financial instrument (the ‘five-day future’ auction product - see PERG 2.6.19G G (3)) on an auction platform by an investment firm to which MiFID applies or a CRDcredit institution2. It does not specify which investment service or activity. In the FCA's view, it is likely to be the reception and transmission of orders in relation to one or more financial instruments, execution of orders on behalf of clients or dealing on own account.

As a result of some of bidding in emissions auctions being MiFID business, the regulated activity of bidding in emissions auctions is divided for the purposes of the Handbook, and the different requirements that apply, into two parts: MiFID business bidding and auction regulation bidding.

Q13. When might we be receiving and transmitting orders in relation to one or more financial instruments? (A1 and recital 20)

Under the general definition of this service, you only provide the service if you are both receiving and transmitting orders. For example, this would be the case if you transmit subscription or redemption orders received from a client to the operator of a collective investment undertaking or transmit buy or sell orders to agency brokers.

This service though is also extended to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. This meaning may be relevant, for example, to corporate finance firms. It could include, in our view, negotiating terms for the acquisition or disposal of investments on behalf of a corporate client with a potential buyer or seller, for example as part of a merger or acquisition. You may be providing this service even though, having brought the investors together, the actual offer or acceptance is not communicated through you.

The extended meaning of the service only applies if the firm brings together two or more investors and a person issuing new securities, including a collective investment undertaking, should not be considered to be an ‘investor’ for this purpose. This limitation does not apply though to the general definition of the service. Accordingly whilst an arrangement whereby a person, on behalf of a client, receives and transmits an order to an issuer will, in our view, amount to reception and transmission, one in which it simply brings together an issuer with a potential source of funding for investment in a company, will not.

If you are party to a transaction as agent for your client or commit your client to it, you may be doing more than receiving and transmitting orders and will need to consider whether you are providing the investment service of executing orders on behalf of clients.

Where you are receiving, transmitting and submitting bids on an auction platform in relation to financial instruments on behalf of your clients, you may be receiving and transmitting orders in relation to one or more financial instruments.1

Q14. We are introducers who merely put clients in touch with other investment firms - are we receiving and transmitting orders?

No. If all you do is introduce others to investment firms so that they can provide investment services to those clients, this in itself does not bring about a transaction and so will not amount to receiving and transmitting orders. But if you are a person who does more than merely introduce, for example an introducing broker, you are likely to be receiving orders on behalf of your clients and transmitting these to clearing firms and therefore may fall within the scope of MiFID.

Q15. When might we be executing orders on behalf of clients? (A2, article 4.1(5) and recital 21)

When you are acting to conclude agreements to buy or sell one or more MiFID financial instruments on behalf of clients. You will be providing this investment service if you participate in the execution of an order on behalf of a client, as opposed simply to arranging the relevant deal. In our view, you can execute orders on behalf of clients either when dealing in investments as agent (by entering into an agreement in the name of your client or in your own name, but on behalf of your client) or, in some cases, by dealing in investments as principal (for example by back-to-back or riskless principal trading).

Where you bid on behalf of your client on an auction platform for a financial instrument, you may be executing orders on behalf of clients.1

Q16. What is dealing on own account? (A3 and article 4.1(6))

Dealing on own account is trading against proprietary capital resulting in the conclusion of transactions in one or more MiFID financial instruments.

In most cases, if you were a firm who was dealing for own account under the ISD, the FCA would expect you to be dealing on own account for the purposes of MiFID if you continue to perform the same activities.

Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or ‘unmatched principal’ position on its books.

Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.

In our view, where you are a firm which meets all of the conditions of article 29(2) of CRD2 (see Q61)or article 5.2 of the recast CAD, as applicable under the CRD and the EU CRR to certain firms (see Q58A),4 you will not be dealing on own account.

Where you bid for your own account on an auction platform for a financial instrument, you may be dealing on own account.1

Q17. What is portfolio management under MiFID? (A4 and article 4.1(9))

Portfolio management is managing portfolios in accordance with mandates given by clients3on a discretionary client-by-client basis where such portfolios include one or more MiFIDfinancial instruments.3 If there is only a single financial instrument3 in a portfolio, you may be carrying on portfolio management even if the rest of the portfolio consists of other types of assets, such as real estate. Portfolio management includes acting as a third party manager of the assets of afund,3 where discretion has been delegated to the manager by the operator or manager of the fund.3 In the case of management of a collective investment undertaking, however, an exemption may be available to the operator (see Q43). The advisory agent who keeps clients’ portfolios under review and provides advice to enable the client to make investment decisions (but does not exercise discretion to take investment decisions himself) is not carrying on portfolio management but may be providing other investment services such as investment advice under MiFID.

Q18. What is investment advice under MiFID? (A5 and article 4.1(4))

Investment advice means providing personal recommendations to a client, either at his request or on your own initiative, in respect of one or more transactions relating to MiFID financial instruments.

Q19. What is a ‘personal recommendation’ for the purposes of MiFID (article 52 of the MiFID implementing Directive)?

A personal recommendation is one given to a person:

• • in his capacity as an investor, or potential investor, or as agent for either which is:
  • o presented as suitable for him or based on a consideration of his personal circumstances; and
  • o constitutes a recommendation to him to do one or more of the following:

    - buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument;

    - exercise, or not to exercise, any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument.

This is similar to the UK regulated activity of advising on investments but is narrower in scope insofar as it requires the recommendation to be of a personal nature. A personal recommendation does not include advice given to an issuer to issue securities, as the latter is not an “investor” for the purposes of MiFID or article 53 of the RAO.

Q20. Can you give us some other practical examples of what are not personal recommendations under MiFID?

A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public (article 52 of the MiFID implementing Directive) and a ‘distribution channel’ is one through which information is, or is likely to become, publicly available because a large number of people have access to it. Advice about financial instruments in a newspaper, journal, magazine, publication, internet communication or radio or television broadcast should not amount to a personal recommendation for the purposes of MiFID (recital 79 to the MiFID implementing Directive).

Merely providing information to clients should not itself normally amount to investment advice. Practical examples include:

• • advising clients on how to fill in an application form;
• • disseminating company news or announcements;
• • merely explaining the risks and benefits of a particular financial instrument; and
• • producing league tables showing the performance of financial instruments against published benchmarks.

However, you should bear in mind that, where a person provides only selective information to a client, for example, when comparing one MiFID financial instrument against another, or when a client has indicated those benefits that he seeks in a product, this could, depending on the circumstances, amount to an implied recommendation and hence investment advice for the purposes of MiFID.

If you provide an investment research service to your clients or otherwise provide recommendations intended for distribution channels or the public generally, this is not MiFID investment advice (A5) although it may be an ancillary service (B5) for the purposes of MiFID and may also amount to the regulated activity of advising on investments for which you are likely to require authorisation.

Q21. Is generic advice investment advice for the purposes of MiFID (recitals 79 and 81 MiFID implementing Directive )?

No. Investment advice is limited to advice on particular MiFID financial instruments, for example “I recommend that you buy XYZ Company shares”. If you only provide generic advice on MiFID financial instruments and do not provide advice on particular MiFID financial instruments, you are not a firm to which MiFID applies and do not require authorisation.

If you are an investment firm to which MiFID applies, however, the generic advice that you provide may be subject to MiFID-based requirements. For example, if you recommend to a client that it should invest in equities rather than bonds and this advice is not in fact suitable, you are likely, depending on the circumstances of the case, to contravene MiFID requirements to:

• • act honestly, fairly and professionally in accordance with the best interests of your clients; and
• • provide information to clients that is fair, clear and not misleading.

Q22. What is underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis? (A6)

A6 comprises two elements:

• • the ‘underwriting of financial instruments’; and/or
• • the ‘placing of financial instruments on a firm commitment basis’.

Underwriting is a commitment to take up financial instruments where others do not acquire them. In our view, placing is the service of finding investors for securities on behalf of a seller and may involve a commitment to take up those securities where others do not acquire them. We associate underwriting and 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.

In our view, the ‘firm commitment’ aspect of the placing service relates to the person arranging the placing, as opposed to the person who has agreed to purchase any instruments as part of the placing. Accordingly, placing on a firm commitment basis occurs where a firm undertakes to arrange the placing of MiFID financial instruments and to purchase some or all the instruments that it may not succeed in placing with third parties. In other words, the placing element of A6 requires the same person to arrange the placing and provide a firm commitment that some or all of the instruments will be purchased.

Where a person distributes units in a UCITS fund to investors, in our view this does not amount to placing although it is likely to involve the reception and transmission of orders.

Q23. When might placing of financial instruments without a firm commitment basis arise (A7)?

Where the person arranging the placing does not undertake to purchase those MiFID financial instruments he fails to place with third parties.

Q24. What is a multilateral trading facility? (A8, article 4.1(15) and recital 6)

The concept of a multilateral trading facility (MTF) draws on standards, issued by CESR (now known as ESMA)2, on which the FSA’s previous alternative trading system regime was based. It includes multilateral trading systems (for example, trading platforms) operated either by investment firms or by market operators which bring together multiple buyers and sellers of financial instruments.

As was the case with the alternative trading systems regime, in our view a multilateral trading facility does not include bilateral systems where an investment firm enters into every trade on own account (as opposed to acting as a riskless counterparty interposed between the buyer and the seller).

For there to be an MTF, the buying and selling of MiFID financial instruments in these systems must be governed by non-discretionary rules in a way that results in contracts. As the rules must be non-discretionary, once orders and quotes are received within the system an MTF operator must have no discretion in determining how they interact. The MTF operator instead must establish rules governing how the system operates and the characteristics of the quotes and orders (for example, their price and time of receipt in the system) that determine the resulting trades.

In our view, a firm can be an MTF operator whether or not it performs any other MiFID investment service or activity listed in A1 to A7.

Q25. What about ancillary services (Annex 1, section B)? Do we need to be authorised if we wish to provide these services?

Yes, but only when providing these services is a regulated activity, for example, if you provide custody services which fall within the regulated activity of safeguarding and administering investments. You are not an investment firm within the scope of MiFID, however, if you only perform ancillary services (regardless of whether these are regulated activities requiring authorisation under the Act).

Q26. We are an investment firm - can we apply for passporting rights that include ancillary services?

Yes, but only if:

• • you carry on the ancillary services together with one or more investment services and activities; and
• • where the ancillary service is also a regulated activity, you have a permission enabling you to carry on those activities.

You will not be able to apply for passporting rights in respect of ancillary services only. In our view, this does not restrict the ability of credit institutions to exercise passporting rights under the CRD2 which correspond to ancillary services under MiFID (for example, the activity of safekeeping and administration of securities in Annex 1 paragraph 12 of the CRD2).

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1 Q53A. Is a child trust fund (a CTF) a financial instrument?

No. A CTF account itself is not a financial instrument. The funds contributed to a CTF may be invested in financial instruments. However, in the FCA's view, the link between the underlying investment and the rights and interests acquired by the CTF account holder is too remote for the account holder to be considered as having acquired the underlying investment itself. So, the provision of services to a CTF account holder (such as in relation to the establishment of the account and the making of further contributions) will not be an investment service.

Q53B. Will the operator of a CTF be carrying on investment services or activities?

Possibly, but it is likely that he will be exempt from the scope of MiFID. Where the CTF is invested wholly or partly in financial instruments, the operator may be providing an investment service when he executes the transaction or arranges to transfer funds to a new financial instrument (such as a security or collective investment scheme unit). However, in the FCA's opinion, the exemption in article 2(1) (c) of MiFID (see Q39) should be available to CTF operators such that these activities will effectively be outside the scope of MiFID.

The key question in applying this exemption is whether the investment services are incidental to the other activities involved in operating a CTF when viewed on a global basis. In the FCA's view, this is likely to be the case as most CTFs do not involve active trading, such as day trading, by the account holder and, as a result, involve little or no ongoing investment service within the scope of MiFID.

An issue arises as to whether a focus on deal-based charges as the main source of remuneration (instead of charges related to the administration of the CTF itself) might indicate that trading is not incidental. In this respect, the FCA would expect firms designing an account in this way to follow the principle of treating their customers fairly. For example, firms may want to explain to potential account holders the possible impact of frequent switching if this incurs costs and erodes capital. More generally, where active trading is likely to have a detrimental effect on capital value, it may well be that this would be viewed as more than an incidental activity such that the exemption would not apply.

It is necessary to balance investment services against all the activities that are not investment services that have taken place or will take place in the CTF accounts that the firm operates over their full term. The FCA would not expect firms to have to investigate each CTF on a trade-by-trade basis. The exemption may still apply even if particular accounts experience higher levels of dealing activity.

Q53C. Is a person who provides services relating to investments that underlie the CTF within the scope of MiFID?

Possibly. Firms which provide investment services to the CTF operator in relation to financial instruments held within the CTF account (such as executing trades) will be within the scope of MiFID unless an exemption applies to them.

Q53D. Does the same analysis apply to other types of schemes where financial instruments may be held for the benefit of investors such as an ISA or a pension scheme?

This depends on the nature of the scheme in question. CTFs have very particular product features. Other types of schemes such as ISA accounts may simply be tax efficient ways to hold the beneficial interest in financial instruments which may, at the behest of the account holder, be transferred into his direct ownership. So, the beneficial interest that an investor acquires in a share, bond or collective investment scheme unit held under an ISA will be a financial instrument for the purposes of MiFID. And the operation of an ISA will essentially be an investment service such that the exemption in article 2.1(c) of MiFID will not be relevant. Pension schemes, on the other hand, bear a closer similarity to CTFs in that they will have particular product features and the underlying investments are held for the purpose of providing or determining the value of the member’s cash benefits. Generally speaking, a member of a pension scheme can only transfer the value of his benefits and not transfer the underlying investments into his direct ownership. For this reason, as explained in PERG 10.4A, the FCA does not consider that a member of a pension scheme acquires a financial instrument purely as a result of having a financial instrument held for his benefit under the trusts of an occupational or personal pension scheme.

Q54. What is the purpose of this section?

This section is designed to help UK investment firms consider:

• • whether the CRD and the EU CRR (which allow the3 recast CAD to continue to apply to certain firms)3 , as implemented in the UK, applies to them;
• 3 • if the CRD applies, which category of firm they are for the purposes of the FCA’s base own funds requirements, for example whether they are an IFPRU 50K firm, an IFPRU 125K firm or an IFPRU 730K firm, an exempt CAD firm or a firm falling within the transitional regime for certain commodity brokers and dealers;3
• • if the CRD allows the recast CAD to apply for certain firms, which category of firm they are for the purposes of the FCA’s base capital resources requirements, for example whether they are a BIPRU firm or a BIPRU firm falling within the transitional regime for certain commodity brokers and dealers;
• • in respect of collective portfolio management investment firms, which category of firm they are for the purpose of the FCA’s financial resources requirements, for example whether they are an IFPRU investment firm or BIPRU firm; and3
• • how the CRD and the EU CRR 3 3 otherwise impact3 3 on their business, by explaining when a firm will be a limited licence firm, a limited activity firm or a full-scope IFPRU investment firm.3 3

  This section is intended to provide a general summary of these issues and not a detailed or exhaustive explanation of the

  CRD and the EU CRR33 as implemented in the UK.

Q55. Are we subject to the CRD and the EU CRR? 3

Only investment firms4 subject to the requirements of MiFID4 are subject to the requirements of the CRD and the EU CRR (which allow the recast CAD to apply for certain firms4). This includes collective portfolio management investment firms3 (see Q6, Q6A4 and Q63).

Despite being subject to the requirements of MiFID, broadly speaking, if you are one of the following investment firms, CRD and the EU CRR3 will only apply to you in a limited way:

• • a firm whose main business consists exclusively of providing investment services or activities in relation to commodity derivatives or C10 derivatives, or both, and to whom the ISD would not have applied. If you fall into this category, you will fall within a transitional regime under which you will not be subject to the capital requirements of the EU CRR or CRD3 3 but will be subject to other requirements (see Q57); or
• • a firm that is only authorised to provide investment advice or receive and transmit orders, or both, without holding client money or securities and does not provide the ancillary service (1) referred to in Section B of Annex I to MiFID , which is safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management3 . If you fall into this category, you will be an exempt CAD firm and only subject to base capital requirements under the CRD 3 3 (see Q58 and Q59 below) ; or3
• • a firm that:
  • - does not provide the ancillary service of safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management, and is not authorised to do so
  • - is not authorised to provide the following investment services: (a) to deal in any financial instruments for its own account; (b) to underwrite issues of financial instruments on a firm commitment basis; (c) to place financial instruments without a firm commitment basis; and (d) to operate a multilateral trading facility;
  • - is authorised to provide one or more of the following investment services: (a) the execution of investors’ orders for financial instruments; or (b) the management of individual portfolios of investments in financial instruments;
  • - may be authorised to provide one or more of the following investment services: (a) reception and transmission of investors’ orders for financial instruments; or (b) investment advice; and
  • - does not hold clients’ money and/or securities and is not authorised to do so (it should have a limitation or requirement prohibiting the holding of client money and its permission should not include safeguarding and administering investments).
  If you fall into this category, you may be a BIPRU firm and as such would not be subject to the capital requirements of the EU CRR or CRD but would instead be subject to other requirements (see Q58A).

If you are an investment firm to which an exemption in either article 2 or article 3 MiFID applies (see PERG 13.5 and PERG 13 Annex 1 flow chart 2), you are not subject to the CRD and the EU CRR3. However, if you potentially fall within the article 3 exemption, but decide to opt into MiFID regulation, for instance to acquire passporting rights (see Q52), you are subject to the CRD and the EU CRR3. If you do so, you are an exempt CAD firm (see Q58 and Q59).

There is also a special exemption under the EU CRR3 for locals that do not fall within the exemption for local firms under MiFID (see Q47). However, we do not think that UK regulated firms that were subject to the regulatory regime for locals prior to MiFID implementation are likely to fall within the exemption under the EU CRR3. This is because they are likely to fall within article 2.1(l) MiFID.

Q56. We are an investment firm to which MiFID applies and do not fall into one of the limited categories described above. How does the CRD and the EU CRR apply to us? 3

You are an IFPRU investment firm3. Broadly speaking, you should go through an initial two-stage process in considering how the CRD and the EU CRR3 will apply to you:

• • consider what kind of base own funds 3 3 requirements apply to you; and
• • consider whether you are a limited licence firm, a limited activity firm or a full-scope IFPRU investment firm 3 to determine how other capital requirements of the CRD and the EU CRR 3 3 apply to you.

You are either an IFPRU 50k firm3 (subject to a base own funds3 requirement of euro 50,000) (see Q60), a IFPRU 125K firm3 (subject to a base capital requirement of euro 125,000) (see Q61), an IFPRU 730K firm3 (subject to a base own funds3 requirement of euro 730,000) (see Q62) or a collective portfolio management investment firm3 (see Q63). Your base own funds3 requirement depends essentially on the scope of your permission and any limitations or requirements placed upon it.

If you are an IFPRU investment firm3, in essence the scope of your permission and any limitations or requirements placed upon it also dictate whether you are a limited licence firm, a limited activity firm or a full-scope IFPRU investment firm3. Broadly speaking, the benefit of being a limited licence firm or a limited activity firm (see Q64 and Q65) is that you are exempt from

• • minimum own funds requirements to hold capital to cover operational risk, although you are subject to the requirements to hold own funds calculated by reference to credit risk, market risk and fixed overheads (see articles 95 and 96 of the EU CRR);3
• • the requirement to calculate a leverage ratio (see article 6(5) of the EU CRR).3

A limited licence firm is further exempt from the requirements on capital buffers (see the last paragraph of article 128 of CRD) and liquidity requirements in Part Six of the EU CRR (see article 6(4) of the EU CRR).3

A limited activity firm is exempt from the liquidity requirements in Part Six of the EU CRR unless it is both an ILAS BIPRU firm and a significant IFPRU firm (see article 6(4) of the EU CRR).3

An IFPRU investment firm includes a collective portfolio management investment firm (see Q63).3

Other derogations may apply (see IFPRU).3

If you are a full-scope IFPRU investment firm3, you are subject to the full range of requirements in CRD and the EU CRR, unless there are specific derogations that apply (see Q66).

The question of whether you are a limited licence firm or a limited activity firm may also be relevant to capital treatment at a group level. This is outside the scope of this guidance which focuses only on the application of the CRD and the EU CRR3 at the level of the individual firm.

Q57. How do we know if we are a firm to which the transitional regime for certain commodity brokers and dealers applies?

You are a firm to which the transitional regime applies if:

• • you are a firm to which the Directive 93/22/ECC (ISD) 3 3 did not or would not have applied on 31 December 2006; and
• • your main business consists exclusively of the provision of investment services or activities in relation to financial instruments set out in C5, 6, 7, 9 and 10 of Annex 1 of MiFID. See article 498 of the EU CRR or3 BIPRU TP 15 , whichever is applicable3 .

This exemption is only relevant if you are a firm to which MiFID applies, that is, you do not fall within the exemptions in articles 2 or 3 of MiFID (see Q55). Although you are exempt from the capital requirements of the CRD and the EU CRR (or the recast CAD as applicable to BIPRU firms)3, you are subject to risk management and other systems and control requirements in the form of SYSC (see BIPRU TP 15.11G or IFPRU 1.1.1 G3). You may also be subject to the requirements of chapter 3 of IPRU(INV).

If you fall into this category, you are either an exempt BIPRU commodities firm (see BIPRU TP 15 if you are a BIPRU firm) or an exempt IFPRU commodities firm (see article 498 of the EU CRR if you are an IFPRU investment firm).3

In our view, your main business for the purposes of this exemption is the main business to which MiFID applies.

Q58. How do we know whether we are an exempt CAD firm and what does this mean in practice?

This category may be relevant to you if you have permission to advise on investments or arrange deals in investments in relation to MiFID financial instruments but fall outside the article 3 MiFID exemption (for example, because you choose to opt out of the exemption or because you transmit orders to persons not listed in the exemption or provide services in relation to derivatives that are not transferable securities). You can be an exempt CAD firm if you:

• • are not authorised to hold client money or securities3 in relation to MiFID business;
• • do not have a safeguarding and administering investments (without arranging) permission in relation to MiFID financial instruments; and
• • have a requirement on your permission so that the only MiFID investment services and activities you can perform are reception and transmission of orders or investment advice or both.

Where you hold client money for purposes unconnected with providing investment advice or receiving and transmitting orders in relation to MiFID financial instruments, in our view you can still be an exempt CAD firm. This might include, for instance, when you hold money or securities for clients to whom you only provide services that do not constitute investment services and therefore fall outside the scope of MiFID.

The conditions relating to the article 3 MiFID exemption look similar to those for an exempt CAD firm. There are important differences, however, between the two:

• • the article 3 MiFID exemption (see Q49) extends only to services provided in relation to transferable securities and units in collective investment undertakings, whereas no such restriction applies to exempt CAD firms; and
• • the article 3 MiFID exemption requires orders to be transmitted to certain persons only (see Q49 and Q50), whereas no such restriction arises in the case of exempt CAD firms.

If you are an exempt CAD firm , you are subject to base capital requirements which comprise the following broad options:

• • base capital of euro 50,000; or
• • professional indemnity insurance of euro 1,000,000 for any one claim and euro 1,500,000 in aggregate; or
• • a combination of base capital and professional indemnity insurance resulting in an equivalent level of coverage to the options above.

For the rules transposing these requirements and supporting guidance, see IPRU(INV)2and in particular sections 13.1 and 13.1A and chapter 9. You will be subject to the relevant ongoing requirements in the Interim Prudential Sourcebook for Investment Businesses relating to1 personal investment firms and securities and futures firms1, as appropriate (see IPRU(INV) 13.1A.13R1 and IPRU(INV) 9.2.9R1).

If you are an exempt CAD firm which has opted into MiFID legislation (see Q52), you will need to consider whether you are subject to the audit requirements of companies legislation (see Part VII of the Companies Act 1985 and Part 16 of the Companies Act 2006). You can benefit from the auditing exemption for small companies in companies legislation if you fulfil the conditions of regulation 4C(3) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments Regulations) 2007. In other words, if you continue to meet the conditions of the article 3 MiFID exemption (notwithstanding that you are an exempt CAD firm), you can benefit from the auditing exemption for small companies, as provided for in companies legislation. For further details, see The Markets in Financial Instruments Directive (Consequential Amendments) Regulations 2007 (SI 2007/2932) . The same regulations also contain a transitional regime which has the effect of exempting exempt CAD firms from statutory audit requirements in relation to a financial year beginning before 1 November 2007 and ending on or after that date, where the exempt CAD firm was not an ISD investment firm.1

Q58A. How do we know whether we are a BIPRU firm and what does that mean in practice?

3This category may be relevant to you if you have permission to execute orders on behalf of clients and/or carry out portfolio management in relation to MiFID financial instruments. In summary, a BIPRU firm:

• • does not provide the ancillary service of safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management, and is not authorised to do so;
• • is not authorised to provide the investment services of dealing in any financial instruments for its own account, underwriting issues of financial instruments on a firm commitment basis, placing financial instruments without a firm commitment basis and operating a multilateral trading facility ;
• • is authorised to provide one or more of the investment services of executing investor’s orders for financial instruments, or management of individual portfolios of investments in financial instruments;
• • may be authorised to provide one or more of the investments services o f the reception and transmission of investors’ orders for financial instruments, or investment advice; and
• • does not hold clients’ money and/or securities and is not authorised to do so (it should have a limitation or requirement prohibiting the holding of client money and its permission should not include safeguarding and administering investments).

You may also be a BIPRU firm if you meet the conditions of article 5.2 recast CAD. Broadly speaking, this applies to firms which execute investors' orders and hold financial instruments for their own account provided that:

• • such positions arise only as a result of the firm's failure to match investors' orders precisely;
• • the total market value of all such positions is subject to a ceiling of 15% of the firm's initial capital;
• • the firm meets the requirements laid down in articles 18 and 20 recast CAD (including own funds requirements in respect of position risk and settlement and counterparty credit risk); and
• • such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.5

Where you hold client money for purposes unconnected with providing investment advice or receiving and transmitting orders in relation to MiFID financial instruments, in our view you can still be a BIPRU firm. This might include, for instance, when you hold money or securities for clients to whom you only provide services that do not constitute investment services and therefore fall outside the scope of MiFID.

There is a discretion in article 95(2) of the EU CRR which the FCA has exercised to keep BIPRU firms on the recast CAD and Banking Consolidation Directive, as they stood under national law (ie, BIPRU and GENPRU) on 31 December 2013. Consequently, if you are a BIPRU firm, you are subject to base capital resources requirement of euros 50,000 (see GENPRU 2.1.48 R) and, for the calculation of the variable capital requirement for a BIPRU firm, see GENPRU 2.1.45 R.

A collective portfolio management investment firm may also include a BIPRU firm (see Q63).

Q59. If we are subject to the Insurance Mediation Directive , does this make any difference to the requirements which apply?

Yes. If the only investment services that you are authorised to provide are investment advice or receiving and transmitting orders or both, without holding client money or securities, you can still be an exempt CAD firm. However, you are subject to different base capital requirements. Broadly speaking, article 31(2) of the CRD3 requires you to have professional indemnity insurance of euro 1,000,000 for any one claim and euro 1,500,000 in aggregate (this is the IMD requirement), plus coverage in one of the following forms:

• • base capital of euro 25,000; or
• • professional indemnity insurance of euro 500,000 for any one claim and euro 750,000 in aggregate; or
• • a combination of base capital and professional indemnity insurance resulting in an equivalent level of coverage to the options above.

For the rules transposing these requirements and supporting guidance, see the final paragraph of the answer to Q58.

As mentioned in Q58, when you hold client money or securities for purposes unconnected with providing investment advice or receiving and transmitting orders in relation to MiFID financial instruments, in our view you can still be an exempt CAD firm. This might include, for instance, when you hold client money for those to whom you provide insurance mediation services.

You should also bear in mind that if you are a firm to whom article 2 or article 3 MiFID applies (see PERG 13.5), you are not subject to the CRD3.

Q60. Are we an IFPRU 50K firm? 3

This category may be relevant to you if you are not an exempt CAD firm or a BIPRU firm3 and have one or more of the following permissions in relation to MiFID financial instruments:

• • arranging (bringing about) deals in investments;
• • dealing in investments as agent; or
• • managing investments,

provided that you are not authorised to:

• • hold client money or securities 3 in relation to MiFID business or safeguard and administer (without arranging) MiFID financial investments; or
• • deal on own account in, or underwrite on a firm commitment basis, issues of MiFID financial instruments (if you have a dealing in investments as principal permission in relation to MiFID financial instruments, you need a limitation or requirement on your permission to this effect).

Q61. Are we an IFPRU 125K firm? 3

This category may be relevant to you if you would have been an IFPRU 50K firm3 but for the fact that you are entitled to hold client money or securities3 in relation to MiFID business or hold MiFID financial instruments.

You may also be an IFPRU 125K firm3 if you meet the conditions of article 29(2) of the CRD3. Broadly speaking, this applies to investment firms which execute investors' orders and hold financial instruments for their own account provided that:

• • such positions arise only as a result of the firm's failure to match investors' orders precisely;
• • the total market value of all such positions is subject to a ceiling of 15% of the firm's initial capital;
• • the firm meets the requirements laid down in articles 92 to 95 of the EU CRR and Part Four of the EU CRR 3 3 (including own funds requirements in respect of position risk, settlement and counterparty credit risk and large exposures); and
• • such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

If you meet the conditions of article 29(2) of the CRD3 and are not authorised to hold client money or securities3 in relation to MiFID business or safeguard and administer (without arranging) MiFID financial instruments, you will be an IFPRU 50K firm3.

Q62. Are we an IFPRU 730K firm? 3

If you are an IFPRU investment firm and are neither an IFPRU 50K firm nor an IFPRU 125K firm nor a collective portfolio management investment firm (see Q63), you will be an IFPRU 730K firm.3

Q63. We are a collective portfolio management investment firm. How will the the CRD and the EU CRR apply to us? Does the recast CAD continue to apply to us? 3

Collective portfolio management investment firms (AIFMs that are authorised to perform the additional services of portfolio management, investment advice, safeguarding and administering of units and reception and transmission of orders in relation to financial instruments and 3UCITS management companies that are authorised to perform the additional services of portfolio management, investment advice and safeguarding and administration of units) are subject to the CRD and the EU CRR in parallel with the capital requirements in AIFMD and/or the UCITS Directive (as applicable). This category of collective portfolio management investment firms are also IFPRU investment firms. See IFPRU and IPRUINV link.3

As an exception to the above, collective portfolio management investment firms which are also a BIPRU firm (see Q58A) are subject to the recast CAD in parallel with the capital requirements in AIFMD and/or the UCITS Directive (as applicable). See GENPRU, BIPRU and IPRUINV link.

If you are a collective portfolio management investment firm, your minimum base own funds requirement is contained in IPRUINV link.3.1R.3

In our view, a collective portfolio management investment firm should be a limited licence firm, as AIFMD and/or the UCITS Directive (as applicable) prevents it from dealing on own account outside its scheme management activities. As a result, where a collective portfolio management investment firm has a dealing in investments as principal permission, this will only be required as a result of its individual portfolio management activity and it will not be dealing on own account for the purposes of the MiFID and the CRD and the EU CRR (or the recast CAD as applicable to BIPRU firms).3

Q64. Are we a limited licence firm?

A limited licence firm is one that is not authorised to:

• • deal on own account (see Q16); and
• • underwrite and/or place financial instruments on a firm commitment basis (see Q22).

You can be a limited licence firm if you are either:

• • 3an IFPRU 50K firm3 (see Q60); or
• • 3an IFPRU 125K firm3 (see Q61).

Generally, you cannot be a limited licence firm if you are an IFPRU 730K firm3. However, you may be a limited licence firm if you operate a multilateral trading facility (and therefore are an IFPRU 730K firm3) and do not have a dealing in investments as principal permission enabling you to deal on own account or to underwrite or place financial instruments on a firm commitment basis.

For calculation of the variable capital requirement for an IFPRUlimited licence firm (including a collective portfolio management investment firm) see article 95 of the EU CRR.3

Q65. Are we a limited activity firm?

A limited activity firm is an IFPRU 730K firm3 that deals on own account only for the purpose of:

• • fulfilling or executing a client order; or
• • gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order.

If you wish to be a limited activity firm, you should apply for a limitation on your dealing in investments as principal permission reflecting these conditions.

There is also a category for certain firms which, among other things, do not hold client money or securities and have no external customers.

Q66. What is the effect of being an IFPRU investment firm subject to the CRD and the EU CRR which is neither a limited licence firm nor a limited activity firm? 3

You will be a full-scope IFPRU investment firm, subject to the full range of CRD and EU CRR requirements, unless there are specific derogations that apply. 3

3 4 4 3 4 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

Flow chart 1- Does MiFID apply to us?

Flow chart 2- Am I exempt under article 2 MiFID?

Are you subject to the CRD and EU CRR (or allowed to be subject to the recast CAD)? 2

2

IFPRU investment firms (excluding collective portfolio management investment firms) 2

Are we an IFPRU 50K firm , an IFPRU 125K firm or an IFPRU 730K firm ? 2

2 2

Note

It is possible, in principle, that an IFPRU investment firm2 may only provide the investment service of investment advice and hold client funds or securities, in which case the starting point is generally that it is an IFPRU 730K firm.2 In practice, if such a firm wishes to benefit from a lower capital treatment (for example euro 125,000), it may wish to add an arranging (bringing about) deals in investments element to its permission to enable it to receive and transmit orders in relation to MiFID instruments.

2 2