A SUMMARY GUIDE TO MIFID AND THE CRD FOR NON-ISD FIRMS
   CARRYING ON BOTH CORPORATE FINANCE AND VENTURE CAPITAL
         ...
•   The Markets in Financial Instruments directive (MiFID), which comes into force on 1
      November 2007, will replace ...
provides investment services to third parties as part of its wider venture capital or
       corporate finance activities....
•   Where a firm which is a MiFID investment firm does not meet the criteria for an
    exempt CAD firm, it will be a BIPR...
Table 1
Overview of CRD impact on firms conducting both corporate finance and venture
  capital activity, based on their s...
Table 2
                     Overview of CRD impact on firms who
              arrange and / or advise as part of their Mi...
Note 1
You may wish to apply for this requirement if you do not provide the service of placing
without a firm commitment b...
Table 3
         Overview of CRD impact for firms who deal as principal or agent or
                manage investments as ...
Note 6
If you have a dealing in investments as principal permission subject to limitations or
requirements which only perm...
Standard limitations/requirements and their effects

The tables are designed to be read in conjunction with Tables 1-3 abo...
Table 4
                        New standard limitations and requirements

What limitations apply?                        ...
underwriting of financial instruments and/or
                                               placing of financial instrumen...
which are not covered by a relevant MiFID
                                              exemption
VI MiFID Client Money / ...
Table 5
                                   Client Money requirements

Present status of firm               Effect

1. Firm...
customers; and

                                    •   which makes use of the opt-out from our client
                   ...
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A summary guide to MiFID and the CRD for non-ISD firms ...

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A summary guide to MiFID and the CRD for non-ISD firms ...

  1. 1. A SUMMARY GUIDE TO MIFID AND THE CRD FOR NON-ISD FIRMS CARRYING ON BOTH CORPORATE FINANCE AND VENTURE CAPITAL ACTIVITY Background • The Capital Requirements directive (CRD) is a new directive which changes the way in which firms have to calculate and provide capital. • Firms carrying on both corporate finance business and venture capital activity are subject to the requirements of the Capital Requirements directive (CRD) from 1 January 2007 if they are subject to the requirements of the Investment Services directive (ISD). • The points below summarise a more detailed working guide we have prepared for firms carrying on both corporate finance and venture capital activity to help them decide their prudential category. This can be found in the more detailed guide, which considers, in turn, the following topics: o MiFID investment services and activities o MiFID exemptions o CRD firm categories o Do we need to vary our permission? Please read the detailed guide as it contains further information on the scope of MiFID and the CRD which you may find useful. As in the case of the detailed guide, this note does not constitute formal FSA guidance at this stage. Interaction between MiFID and the CRD 1
  2. 2. • The Markets in Financial Instruments directive (MiFID), which comes into force on 1 November 2007, will replace the ISD. It is wider in scope than the ISD and includes two new investment services which are not ISD core investment services – investment advice and placing without a firm commitment basis. • We expect that both of these investment services may be relevant to some types of corporate finance activity, and investment advice may be relevant to some types of venture capital activity. We do not expect, however, that the investment service of placing without a firm commitment basis will be relevant for most venture capital or private equity activities, though this new service may be subject to further interpretation by the European Commission and / or CESR which may have bearing on its scope. • Firms carrying on corporate finance or venture capital business which are not subject to the ISD, but are subject to MiFID, will be subject to the requirements of the CRD from 1 November 2007. • If a firm is currently outside the scope of the ISD, it should consider whether these changes bring it within the scope of MiFID and therefore the CRD. If a firm is already within the scope of the ISD, it should also consider whether the different scope of MiFID will affect its status under the CRD from 1 November 2007. Exemptions • Some firms conducting both corporate finance and venture capital business are likely to be exempt from MiFID for at least part of their business (if it entails the operation of venture capital or private equity funds) as a result of the exemption in article 2(1)(h) of MiFID for collective investment undertakings and their depositaries and managers. A similar exemption currently exists in the ISD. • Where a firm is an operator of a collective investment scheme, in our view its activities conducted in its capacity as an operator are excluded from the scope of MiFID, even if it is subject to MiFID for other reasons, for example because it 2
  3. 3. provides investment services to third parties as part of its wider venture capital or corporate finance activities. • The Treasury has given effect to the optional exemption for firms falling within article 3 MiFID – this exemption may be relevant for certain firms carrying on corporate finance and venture capital activity who are either (i) pure advisory firms whose only MiFID investment service is investment advice in relation to transferable securities and units in collective investment undertakings and which do not hold client money or securities; or (ii) only provide investment advice in relation to transferable securities and units in collective investment undertakings (and not the service of reception and transmission) to third parties in addition to their exempt CIS operator activities. • If a firm is exempt from MIFID for all of its business, it will not be subject to the CRD and capital requirements under existing IPRU(INV) rules will remain unchanged. It should apply for the new standard requirement reflecting its non- MiFID status (see Table 4, Standard Requirement V), as soon as possible. Exempt CAD firms • Where a firm is subject to MiFID requirements for all or part of its business (i.e. it is a MiFID investment firm, which will include firms currently subject to the ISD), it will only be subject to the prudential requirements of the CRD in a limited way if it satisfies the criteria of an exempt CAD firm, i.e. only the base capital requirements of the CRD will apply to its business. Alternatively, these requirements can be met by exempt CAD firms using professional indemnity insurance (PII) or a mixture of capital and PII. • If a firm which is a MiFID investment firm wishes to be an exempt CAD firm, generally speaking it will need to apply for a variation of permission as soon as possible (see Tables 2 and 4). BIPRU investment firms 3
  4. 4. • Where a firm which is a MiFID investment firm does not meet the criteria for an exempt CAD firm, it will be a BIPRU investment firm. If so, it will either be a BIPRU 50K firm or a BIPRU 125K firm or a BIPRU 730K firm (depending on its base capital requirements). In addition to considering its base capital requirements, it will need to consider its capital resource requirements and whether to apply for a variation of permission in order to become a limited licence firm or a limited activity firm, in which case it should do so immediately. 4
  5. 5. Table 1 Overview of CRD impact on firms conducting both corporate finance and venture capital activity, based on their scope of permissions, as at 1 November 2007 A.Is all of your business exempt from MiFID? [See Table 4 Standard Requirement V] Yes No B. You are not subject to the re- cast CAD C. As part of your MiFID business* do you: (i) advise on investments or (ii) arrange (bring about) deals in investments or make arrangements with a view to transactions in investments but do not deal in investments as principal or agent or manage investments in relation to MiFID financial instruments? Yes No D. Go to Table 2 E. Are you authorised to: -deal in investments as principal; or -deal in investments as agent; or -manage investments in relation to MiFID financial instruments? Yes F. Go to Table 3 *"MiFID business" means investment services and activities which are subject to MiFID. It does not include services and activities which are covered by a MiFID exemption. 5
  6. 6. Table 2 Overview of CRD impact on firms who arrange and / or advise as part of their MiFID business A. Do you hold client money or safeguard and administer (without arranging) MiFID financial instruments in relation to your MiFID business? [See Table 4 Standard Requirement VI and Table 5]. No Yes B. Do you meet the other conditions of the article 3 MiFID exemption, as implemented in the UK? I. Do you have permission to No arrange in relation to MiFID C. Do you have a requirement on your Yes instruments? (See Note 2) permission which prevents you from carrying on any MiFID investment service or Yes E. Do you wish to opt into activity on a regular basis No besides reception and MiFID regulation under the transmission and investment Treasury regulations? (The advice? (See Note 1) Treasury legislation J. You are a provides a mechanism for K. You are firms meeting the BIPRU 125k a BIPRU conditions of the Article 3 firm and a 730K firm Yes MiFID exemption to opt limited licence and a into MiFID regulation, for firm limited example if they wish to licence benefit from passporting firm (See No rights provided by MIFID.) Note 3) Yes No D. You are F. You are an exempt CAD firm. Do you have an insurance intermediary L. You are not subject a BIPRU to MiFID or the re-cast permission? 50k firm CAD and a limited Yes No licence firm H. Article 8 re-cast G. Article 7 re-cast CAD applies CAD applies (€50K/PII) (see note (€25K/PII) (Note 5) 4) 6
  7. 7. Note 1 You may wish to apply for this requirement if you do not provide the service of placing without a firm commitment basis on a regular basis as part of your MiFID business. Note 2 Arranging comprises the investment services of reception and transmission and placing of financial instruments without a firm commitment basis. Note 3 This box is unlikely to be of relevance in practice to firms conducting both corporate finance and venture capital activity. It is only relevant to those who have an advising on investments but not an arranging permission in relation to MiFID financial investments and who hold client money or securities as part of their MiFID business. If such a firm wishes to benefit from a lower base capital treatment (e.g. €125,000), it may wish to consider applying to add an arranging element to its permission in relation to the appropriate MiFID financial instruments. Note 4 For the rules transposing article 7 re-cast CAD, see the Interim Prudential Sourcebook for Investment Businesses (Exempt CAD Firms) Instrument [FSA 2007/2]: http://fsahandbook.info/FSA/handbook/LI/2007/2007_2.pdf. Note 5 For the rules transposing article 8 re-cast CAD see the same Instrument referred to in Note 4 above. Note that a firm to which article 8 re-cast CAD applies will also need additionally to meet the PII requirements imposed by the IMD. 7
  8. 8. Table 3 Overview of CRD impact for firms who deal as principal or agent or manage investments as part of their MiFID business A. Are you authorised to deal in investments as principal in relation to MIFID financial instruments for the purposes of your MiFID business? Yes No Yes I. Do you hold client money or B. Is your dealing in investments as principal permission safeguard and administer (without subject to a box management limitation or requirement? (see arranging) MiFID financial instruments Table 4: Standard Limitation III – box management) as part of your MiFID business (see Table 4 Standard Requirement VI and Table 5: client money requirements)? No C. Do you have a limitation or requirement on your No Yes permission which prevents you on a regular basis from: (i) dealing on own account in relation to MiFID K. You are a L. You are a BIPRU 50K firm BIPRU 125K firm financial instruments; and and a limited and a limited (ii) underwriting and/or placing of financial instruments licence firm licence firm on a firm commitment basis? (See Table 4: standard limitation I and Note 6.) Yes D. Do you: (i) deal in investments as agent; or (ii) manage investments; or No (iii) execute client orders by dealing in investments as principal in relation to MiFID financial instruments as part of your MiFID business? M. Do you have a limitation or requirement for a limited activity firm (see Table 4: Yes Standard Limitation II)? No F. Go to E. Do you advise Box I No Yes or arrange as part of your MiFID business? N. You are a BIPRU O. You are a Yes 730K firm and a full BIPRU 730k firm scope BIPRU and a limited No investment firm activity firm G. You are not a H. Go to Table 2 BIPRU Box A investment firm 8
  9. 9. Note 6 If you have a dealing in investments as principal permission subject to limitations or requirements which only permit you to carry on exempt MIFID business, e.g. activities carried out as an operator of a collective investment scheme, in principle you would be prevented from dealing on own account in relation to MiFID financial instruments or underwriting and placing financial instruments on a firm commitment basis. In many cases, however, the activities (including dealing in investments as principal) which make up a firm’s permission may also be subject to several other limitations, some of which will permit a firm to carry on MiFID business. For instance, where a firm currently has a limitation or requirement on its permission restricting its activities to venture capital business, corporate finance business or investment management, this could permit the firm to carry on MiFID business. So where, for example, a firm has a dealing in investments as principal permission which is limited (i) to operating a collective investment scheme but also to (ii) to venture capital business or corporate finance business, it would not be prevented from carrying on the activities in Box C of Table 3. 9
  10. 10. Standard limitations/requirements and their effects The tables are designed to be read in conjunction with Tables 1-3 above. The purpose of Tables 4 and 5 is to identify some standard limitations and requirements to help you if you are thinking about applying for a variation of permission. For instance, they set out new standard limitations and requirements that are relevant if you wish to be a limited licence firm or a limited activity firm or an exempt CAD firm. Table 5 also provides a short guide to the effect of some standard client money requirements. 10
  11. 11. Table 4 New standard limitations and requirements What limitations apply? What is the effect? I. Limited licence firms Current Standard Limitation No prior equivalent limitation exists. New Standard Limitation (in relation to Firm becomes a limited licence firm. the activity of dealing in investments as principal) Firm becomes a BIPRU 125K firm if it is able Unable on a regular basis to to hold client money and/or safeguard and (i) deal on own account in relation to MiFID administer assets (without arranging) (in financial instruments and relation to MiFID financial instruments) as part (ii) underwrite MiFID financial instruments of its MiFID business; otherwise, the firm and/or place MiFID financial instruments on becomes a BIPRU 50K firm. a firm commitment basis. II. Limited activity firms Current Standard Limitation No prior equivalent limitation exists. New Standard Limitation (in relation to Firm becomes a BIPRU 730K firm and a the activity of dealing in investments as limited activity firm. principal) “May only deal on own account in MiFID financial instruments for the purpose of (i) fulfilling or executing a client order or (ii) gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order.” III. Box management Current Standard Limitation Firm becomes limited licence firm (without the - Limited to unregulated cis box operations need to apply for Standard Limitation I). New Standard Limitation This is based on the assumption that the firm’s No new standard limitation envisaged permission is not subject to other limitations and requirements which permit it to carry on the relevant MiFID investment services and activities, namely dealing on own account or 11
  12. 12. underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis. For example, if a firm’s dealing in investments as principal permission enables it to carry on venture capital business or corporate finance business because of a separate limitation to this effect, it will not automatically follow that the firm will be a limited licence firm. Firm becomes a BIPRU 125K firm if they are able to hold client money and/or safeguard and administer assets (without arranging) in relation to MiFID financial instruments as part of their MiFID business; otherwise firm becomes a BIPRU 50K firm. IV Exempt CAD firms Current Standard Limitation/Requirement A firm wishing to be an exempt CAD firm No prior equivalent limitation or requirement should apply for this requirement if it has both exists. an arranging (bringing about) deals in investments and advising on investments New Standard Requirement permission in relation to MiFID financial “Unable to carry on any investment services instruments. and activities (to which MiFID applies) on a regular basis except reception and If it has permission to advise on investments transmission of orders in relation to one or but not arranging (bringing about) deals in more financial instruments or investment investments in relation to MiFID financial advice.” instruments, it should apply for this requirement omitting the words "reception and transmission of orders in relation to one or more financial instruments or". If it has permission to arrange (bringing about) deals in investments but not advising on investments in relation to MiFID financial instruments, it should apply for this requirement omitting the words "or investment advice". V Exempt MiFID firm Firm is not subject to MiFID or CRD Current Standard Limitation/Requirement requirements. No prior equivalent limitation or requirement exists. A firm subject to this requirement can still carry on investment services and activities New Standard Requirement which fall within a MiFID exemption, for "Unable to carry on any investment services example arranging, dealing, managing or and activities (to which MiFID applies) on a advisory activities carried on in its capacity as regular basis." a CIS operator. It will not be able to conduct MiFID investment services and activities 12
  13. 13. which are not covered by a relevant MiFID exemption VI MiFID Client Money / Assets The firm will not be able to hold client money Restriction or safeguard and administer assets (without Current Standard Limitation/Requirement arranging) in relation to its MiFID business. No prior equivalent limitation or requirement exists. The firm will not be authorised to hold client money for the purposes of the CRD. New Standard Requirement "Unable to hold client money or safeguard A firm subject to this requirement can still hold and administer assets (without arranging) in client money and safeguard and administer relation to any investment services and assets (without arranging) in relation to activities (to which MiFID applies)." investment services and activities which fall within a MiFID exemption, for example client money or assets it may hold in its capacity as a CIS operator. 13
  14. 14. Table 5 Client Money requirements Present status of firm Effect 1. Firm has a requirement not Firm will not be authorised to hold client money for to hold client money. purposes of CRD. 2. Firm has a requirement Firm will not be authorised to hold client money for allowing it to control but not purposes of CRD hold client money 3. Firm has a requirement as Firm will not be authorised to hold client money for follows: purposes of CRD. "The general requirement not to hold or control client money does not restrict the firm from controlling client money if it arises from an agreement under which the firm effects settlement through a mandate or otherwise." 4. The firm receives money Even if its permission contains a limitation of the type in 1, from clients under the 'opt-out' 2 or 3 above (or 6 and 7 below), in a limited number of from the client money rules for cases the firm’s base capital resources requirement may still intermediate customers and be affected. This is because MiFID will prevent us from market counterparties (see maintaining the opt-out for MiFID related business after 31 CASS 4.1.8 to 14). October 2007. This does not necessarily mean the firm will be holding client money in the future, although it may have this effect in some cases. Firms should carefully consider the outcome of our proposals relating to the loss of the professional "opt-out" as part of the client money regime.1 From this, they should ascertain whether the proposals will affect their base capital and capital resources requirements. This issue will be of particular relevance to a firm whose permission: • does not allow it to hold client money or safeguard and administer financial instruments; • enables it to carry on business with professional 1 See Policy Statement PS07/2, "Implementing the Markets in Financial Instruments Directive (MiFID) – Feedback on CP06/14, CP06/19 and CP06/20", Chapter 8: http://www.fsa.gov.uk/Pages/Library/Policy/Policy/2007/07_02.shtml , and the Client Assets Sourcebook (MiFID Business) Instrument 2007 [FSA 2007/4]: http://fsahandbook.info/FSA/handbook/LI/2007/2007_4.pdf 14
  15. 15. customers; and • which makes use of the opt-out from our client money rules for intermediate customers and market counterparties. If the above applies to your firm and having reviewed our proposals your firm plans to hold client money after 31 October 2007, you should apply before then for a variation of permission. This application would be to remove the existing client money requirement from your permission so as to take effect as of 1 November 2007. You will be able to benefit from the client money 'opt out' regime until then, assuming you comply with the relevant Handbook provisions and FSMA requirements. 5. Firm has a requirement as Firm will be authorised to hold client money for purposes follows: of CRD. See, also, guidance relating to this issue in CASS 7.2.12 G - 7.2.13 G: The general requirement not to http://fsahandbook.info/FSA/handbook/LI/2007/2007_4.pdf hold or control client money does not apply if the client money arises from an agreement under which commission is rebated to the client. 6. Firm has a requirement to Firm will not be authorised to hold client money for the hold and control client money purposes of the CRD. in respect of non-investment insurance contracts (insurance mediation activities only) 7. Firm has a requirement to Firm will not be authorised to hold client money for the hold and control client money purposes of the CRD. in respect of regulated mortgage contracts (regulated mortgage activities only) 15

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