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 (but for EEA UCITS management companies, see 8A below),4EEA MiFID investment firms must comply with the common platform record-keeping requirements in relation to a branch in the United Kingdom.4

Application of SYSC to EEA UCITS management companies

48A.

SYSC 1 Annex 1 (Detailed application of SYSC), Part 2, 2.7AG provides guidance on the application of the common platform requirements to the UKbranch of an EEA UCITS management company.

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.4

Requirements under the UCITS Directive

411A

Article 19(8) of the UCITS Directive prohibits an EEA State from imposing additional requirements on a management company providing collective portfolio management services for a UCITS in its territory on a cross-border basis by establishing a branch or under the freedom to provide cross border services in respect of the subject matter of the UCITS Directive, except in the cases expressly permitted (see 11C below).

411B

A management company which provides collective portfolio management services on a cross-border basis by establishing a branch in another EEA State or under the freedom to provide services must comply with the rules of the UCITS Home State which relate to the constitution and functioning of the UCITS. Where the UCITS Home State is the United Kingdom, the applicable rules that the EEA UCITS management company must comply with are as follows:

(1)

COLL 12.3.4 R (Provision of documentation to the FSA:EEA UCITS management companies);

(2)

the fund application rules (see COLL 12.3.5 R (COLL fund rules under the management company passport: the fund application rules)); and

(3)

COLL 12.3.6 R (Requirement to make information available to the public or the FSA).

411C

A management company, however, which provides collective portfolio management services from a branch in another EEA State, is obliged under article 17(4) to comply with the applicable rules of the Host State regulator drawn up under article 14(1) that require a management company to:

(1)

act honestly and fairly in conducting its business activities in the best interests of the UCITS it manages and the integrity of the market;

(2)

act with due skill, care and diligence, in the best interests of the UCITS it manages and the integrity of the market;

(3)

have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities;

(4)

try to avoid conflicts of interests and, when they cannot be avoided, to ensure that the UCITS it manages is fairly treated; and

(5)

comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its investors and the integrity of the market.

411D

The rules implementing the requirements set out in paragraph 11C (1) to (5) are as follows:

(1)

SYSC, to the extent indicated in column A+ (Application to management company) of Part 3 of SYSC 1 Annex 1 (Detailed application of SYSC); and

(2)

COBS, to the extent indicated at paragraph 9.1 of Part 3 of COBS 1 Annex 1 (Application).

(3)

COLL 6.6A.2 R (Duties of AFMs of UCITS schemes and EEA UCITS schemes to act in the best interests of the scheme and its Unitholders) (branch only);

(4)

COLL 6.6A.4 R (Due diligence requirements of AFMs of UCITS schemes and EEA UCITS schemes) (branch only); and

(5)

COLL 6.6A.5 R (Compliance with the regulatory requirements applicable to the conduct of business activities of a UCITS management company) (branch only).

4Territorial application of the Handbook

The auction regulation

511E

Where an incoming EEA firm exercises an EEA right under the auction regulation to provide services or establish a branch in the United Kingdom, it is carrying on auction regulation bidding. Authorisation and supervision of a firm under the auction regulation are almost exclusively matters reserved to the Home State regulator. The only requirements which the FSA has applied as Host State regulator under the auction regulation in respect of auction regulation bidding is on a UKbranch in relation to safeguards against money laundering and financial crime as well as a statutory status disclosure obligation and requirements to notify the FSA (see Note 4 of SUP 13A Annex 1 G).

511F

An incoming EEA firm that carries on MiFID business bidding is exercising an EEA right under MiFID and is subject to the applicable provisions relating to its carrying on of MiFID business. The respective responsibilities of the Home State regulator and Host State regulator are the same as under MiFID.

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)