Boundaries of EU single market in financial instruments

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In an earlier article of our financial sector series, we wrote about proposals for amending the legal framework of the EU market in financial instruments. This article explores the EU single market in financial instruments as a key aspect of the EU financial instruments market legislation.
The EU single market in financial instruments
The EU single market in financial instruments1 operates on the principle of mutual recognition, for which the financial sector frequently uses the concept of European licensing passport. This passport is not a formal document in the usual meaning of this word, but rather an abstract instrument that allows credit institutions and other investment service providers that are licensed in one EU or EEA member state (EU/EEA member states collectively the “member state”) to freely provide their services in other member states. Applying the passport in practice means that an investment service provider licensed in one member state is permitted to provide investment services in another member state, either directly or through a branch set up in the other member state. Thus, given the close cooperation between the competent agencies (regulators) of member states, the states will mutually recognise licences granted for the provision of investment services on the assumption that the national financial sector legislation is of equal quality across the EU/EEA.
The EU legislation also lays down a number of restrictions on how the passport can be applied.
Firstly, the passport is restricted to investment services (and ancillary services) for the provision of which an investment service provider has taken out a licence in his member state of origin. This means that the host member state will recognise and allow the investment service provider to offer only the investment services (and ancillary services) for which he has requested and obtained a licence in his member state of origin.2
Secondly, the passport can be used only if the investment service provider offers these services either directly as cross-border services3 or through a branch set up in the host member state.4 If an investment service provider holding a licence in his member state of origin incorporates a subsidiary in another member state, the subsidiary will be required to take out a separate licence for the provision of investment services, because the passport does not cover subsidiaries set up by investment service providers.
Thirdly, although the legal framework for the EU market in financial instruments has been built in a way that minimises as far as possible the host member state’s control over investment service providers operating there under the mutual recognition principle, a number of restricting powers have been granted to national competent agencies.5 For instance, article 85(1) of MiFID II provides that the competent agencies of member states may demand that all investment broker companies with branches in their territories should provide the competent agencies with regular reports on the branches’ operations for statistical purposes. Article 85(2) also provides that national competent agencies may demand that branches of investment broker companies should provide information necessary for monitoring their compliance with standards adopted by the host member state. It is important to remember, however, that such requirements laid down by a member state cannot be more stringent than the ones the member state has laid down for monitoring its local companies’ compliance with the same standards.
The new MiFID II rules will bring many changes to the Financial Instruments Market Act, including certain aspects of the single market rules. If you believe these changes may affect you, please reach out to PwC Legal experts (67094400).
1 This publication is based on Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU with EEA relevance (MiFID II), which will be applicable across the EU from 3 January 2018.
2 Investment services and ancillary services are listed in Annex 1 (A–B) to MiFID II. Investment services and ancillary services intended for Latvia are listed in section 3(4–5) of the Financial Instruments Market Act until such time as MiFID II is passed into the Financial Instruments Market Act.
3 Article 34 of MiFID II
4 Article 35 of MiFID II
5 Such as the Financial and Capital Markets Commission
Janis Gavars
PwC Legal, Lawyer
Tel: +371 67094400
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