SUP 13A Annex 2 Matters reserved to a Home State regulator

1Introduction

1.

The application of certain provisions in the Handbook to an incoming EEA firm or incoming Treaty firm depends on whether responsibility for the matter in question is reserved to the firm's Home State regulator. This annex contains guidance designed to assist such firms in understanding the application of those provisions. This annex is not concerned with the FSA's rights to take enforcement action against an incoming EEA firm or an incoming Treaty firm, which are covered in the Enforcement Guide (EG), or with the position of a firm with a top-up permission.

Requirements in the interest of the general good

2.

The Single Market Directives, and the Treaty (as interpreted by the European Court of Justice) adopt broadly similar approaches to reserving responsibility to the Home State regulator. To summarise, the FSA, as Host State regulator, is entitled to impose requirements with respect to activities carried on within the United Kingdom if these can be justified in the interests of the "general good" and are imposed in a non-discriminatory way. This general proposition is subject to the following in relation to activities passported under the Single Market Directives:

(1)

the Single Market Directives expressly reserve responsibility for the prudential supervision of a MiFID investment firm, BCD credit institution, UCITS management company or passporting insurance undertaking to the Firm's Home State regulator. The Insurance Mediation Directive reaches the same position without expressly referring to the concept of prudential supervision. Accordingly, theFSA, as Host State regulator, is entitled to regulate only the conduct of the firm's business within the United Kingdom;

(2)

there is no "general good" provision in MiFID. Rather, MiFID states exactly what the Host State regulator regulates (see paragraphs 8 - 10);

(3)

for a BCD credit institution, the FSA, as Host State regulator, is jointly responsible with the Home State regulator under article 41of the Banking Consolidation Directive for supervision of the liquidity of a branch in the United Kingdom;

(4)

for a MiFID investment firm including a BCD credit institution which is a MiFID investment firm), the protection of clients' money and clients' assets is reserved to the Home State regulator under MiFID; and

(5)

responsibility for participation in compensation schemes for BCD credit institutions and MiFID investment firm is reserved in most cases to the Home State regulator under the Deposit Guarantee Directive and the Investor Compensation Directive.

3.

It is necessary to refer to the case law of the European Court of Justice to interpret the concept of the "general good". To summarise, to satisfy the general good test, Host State rules must come within a field which has not been harmonised at EU3 level, satisfy the general requirements that they pursue an objective of the general good, be non-discriminatory, be objectively necessary, be proportionate to the objective pursued and not already be safeguarded by rules to which the firm is subject in its Home State.

Application of SYSC 2 and SYSC 3

4.

SYSC 2 and SYSC 3 only apply to an insurer, a managing agent and the Society.2 See paragraph 8 below for a discussion of how the common platform requirements apply. SYSC 2.1.1 R and SYSC 2.1.2 G do not apply for a relevant incoming Treaty firm.2 The FSA considers that it is entitled, in the interests of the general good, to impose the requirements in SYSC 2.1.3 R to SYSC 2.2.3 G (in relation to the allocation of the function in SYSC 2.1.3 R (2)) and SYSC 3 on an incoming EEA firm and an incoming Treaty firm; but only in so far as they relate to those categories of matter responsibility for which is not reserved to the firm's Home State regulator.

5.

Should the FSA become aware of anything relating to an incoming EEA firm or incoming Treaty firm (whether or not relevant to a matter for which responsibility is reserved to the Home State regulator), the FSA may disclose it to the Home State regulator in accordance with any directive and the applicable restrictions in Part XXIII of the Act (Public Record, Disclosure of Information and Co-operation).

6.

This Annex represents the FSA's views, but a firm is also advised to consult the relevant EU3 instrument and, where necessary, seek legal advice. The views of the European Commission in the banking and insurance sectors are contained in two Commission Interpretative Communications (Nos. 97/C209/04 and C(1999)5046).

7.

[deleted]2

Application of the common platform requirements in SYSC to EEA MiFID investment firms2

8.

Whilst the common platform requirements (located in SYSC 4 - SYSC 10) do not generally apply to incoming EEA firms, EEA MiFID investment firms must comply with the common platform record-keeping requirements in relation to a branch in the United Kingdom.

Requirements under MiFID

9.

Article 31(1) of MiFID prohibits Member States3 from imposing additional requirements on a MiFID investment firm in relation to matters covered by MiFID if the firm is providing services on a cross-border basis. Such firms will be supervised by their Home State regulator.

10.

Article 32 of MiFID requires the FSA as the Host State regulator to apply certain obligations to an incoming EEA firm with an establishment in the UK. In summary, these are Articles:

(1)

19 (conduct of business obligations);

(2)

21 (execution of orders on terms most favourable to the client);

(3)

22 (client order handling);

(4)

25 (upholding the integrity of markets, reporting transactions and maintaining records);

(5)

27 (making public firm quotes); and

(6)

28 (post-trade disclosure).

The remaining obligations under MiFID are reserved to the Home State regulator.

11.

MiFID is more highly harmonising than other Single Market Directives. Article 4 of the MiFID implementing Directive permits Member States to impose additional requirements only where certain tests are met. The FSAhas made certain requirements that fall within the scope of Article 4. These requirements apply to an EEA MiFID investment firm with an establishment in the United Kingdom as they apply to a UK MiFID investment firm.

11L

Under article 34(2) of the MCD, ensuring compliance with the obligations in articles 7(1), 8, 9, 10, 11, 13, 14, 15, 16, 17, 20, 22 and 39 of the MCD by incoming EEA branches is the responsibility of the Host State. Responsibilities for ensuring compliance with all other obligations are the responsibility of the Home State.

11M

Ensuring compliance with the obligations in articles 7(1), 8, 9, 10, 11, 13, 14, 15, 16, 17, 20, 22 and 39 of the MCD by EEA firms providing cross border services is the responsibility of the Home State.

12.

Further guidance on the territorial application of the Handbook can be found at PERG 13.6 and PERG 13.7.

213.

Examples of how SYSC 3 and/or the common platform provisions apply in practice.

(1)

The Prudential Standards part of the Handbook (with the exception of INSPRU 1.5.33 R on the payment of financial penalties and the Interim Prudential sourcebook (insurers) (IPRU(INS)) (rules 3.6 and 3.7) do not apply to an insurer which is an incoming EEA firm. Similarly, SYSC 3 does not require such a firm:

(a)

to establish systems and controls in relation to financial resources (SYSC 3.1.1 R); or

(b)

to establish systems and controls for compliance with that Prudential Standards part of the Handbook (SYSC 3.2.6 R); or

(c)

to make and retain records in relation to financial resources (SYSC 3.2.20 R and SYSC 9.1.1 R to 9.1.4 G).

(2)

The Conduct of Business sourcebook (COBS) applies to an incoming EEA firm. Similarly, SYSC 3 and SYSC 4-10 do require such a firm:

(a)

to establish systems and controls in relation to those aspects of the conduct of its business covered by applicable sections of COBS (SYSC 3.1.1 R and SYSC 4.1.1 R);

(b)

to establish systems and controls for compliance with the applicable sections of COBS (SYSC 3.2.6 R and SYSC 6.1.1 R); and

(c)

to make and retain records in relation to those aspects of the conduct of its business (SYSC 3.2.20 R and SYSC 9.1.1 R to 9.1.4 G).

See also Question 12 in SYSC 2.1.6 G for guidance on the application of SYSC 2.1.3 R (2)