Prudential Regulation Authority Rulebook

The purpose of this chapter is to help UK firms consider:

Background
MiFID replaces the Investment Services Directive (ISD). It expands the kinds of business which must be regulated in the UK to include, in particular, activities relating to a wider range of commodity and other non-financial derivatives. As a result of MiFID, the categories of firm which can exercise passporting rights and the categories of business for which the passport is available are wider than under the ISD. In particular, whereas investment advice was a non-core service under ISD, it is an investment service in its own right under MiFID and so can be provided on a cross-border basis as a standalone business.

MiFID is supplemented by "Level 2 measures", Commission Regulation (EC) No 1287/2006 (MiFID Regulation) and Commission Directive 2006/73/EC (MiFID Implementing Directive). These implementing measures amplify and supplement certain of the concepts and requirements specified in MiFID.

MiFID scope
The scope aspects of MiFID are primarily addressed through the Regulated Activities Order ('RAO') and PERG 2 focuses on the scope of regulated activities under the RAO and includes materials on the effect that MiFID has on the RAO. This chapter focuses more on the underlying MiFID investment services and activities, as well as the exemptions.

Where a firm's regular occupation or business is providing one or more investment services to third parties or performing investment activities in relation to MiFID financial instruments on a professional basis, it is a firm to which MiFID applies unless it is exempt.

Broadly, the exemptions from MiFID are likely to be relevant to insurers, group treasurers, professional firms to which Part XX of the Act applies, many authorised professional firms, professional investors who invest only for themselves, pension schemes, depositaries and operators of collective investment schemes or other collective investment undertakings (such as investment trusts), journalists, and commodity producers and traders. The exemptions are subject to conditions and limitations described in more detail below (see PERG 13.5).

The Treasury's implementation of the article 3 MiFID exemption is likely to be relevant to many financial advisers (see Q50) including some corporate finance advisers. It may also be relevant to some venture capital firms. The Treasury legislation enables firms falling within the scope of the exemption to elect to be subject to the requirements of MiFID and thereby acquire passport rights (see Q52).

In each case, it will be for firms and individuals to consider their own circumstances and consider whether they fall within the relevant exemptions. A firm which takes the benefit of one or more of the exemptions in article 2 or 3 MiFID may nevertheless require authorisation under the Act (see PERG 2).

In addition to investment firms, MiFID is also relevant to credit institutions providing investment services or performing investment activities (see Q5) and UCITS management companies to which article 5.4 UCITS Directive applies (in other words UCITS investment firms)

This guidance is concerned with the scope of MiFID and does not address the question of whether an investment firm that falls within the scope of MiFID is providing a MiFID investment service as opposed to an investment activity.

Recast Capital Adequacy Directive (recast CAD)
Investment firms subject to MiFID, including those who fall within the article 3 MiFID exemption but opt not to take advantage of it, and UCITS investment firms are subject to the requirements of the recast CAD. There are special provisions for certain commodities firms as well as firms whose MiFID investment services are limited to giving investment advice or receiving and transmitting client orders or both and who are not permitted to hold client money or securities.

Under the UK implementation of the recast CAD, the level of capital an investment firm subject to MiFID requires is determined by the type of investment services and activities it provides or performs, its scope of permission and any limitations or requirements attaching to that permission (see PERG 13.6). A firm relying on an article 2 or 3 MiFID exemption is not subject to the recast CAD.

How does this document work?
This document is made up of Q and As divided into the following sections:


We have also included guidance in the form of flow charts to help firms decide whether MiFID and the recast CAD apply to them as well as permission maps indicating which regulated activities and specified investments correspond to MiFID investment services, activities and MiFID financial instruments (see PERG 13 Annex 1, PERG 13 Annex 2, PERG 13 Annex 3, PERG 13 Annex 4).

Article and recital references are to MiFID (Level 1 measures) unless otherwise stated. References to categories of MiFID investment services and activities and MiFID financial instruments adopt the structure of Annex 1 MiFID: for example, A1 refers to "reception and transmission of orders in relation to one or more financial instruments" and C1 relates to "transferable securities".

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:
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 recast CAD should be read in conjunction with the relevant parts of our General Prudential sourcebook ('GENPRU') and the Prudential sourcebook for banks, building societies and investment firms ('BIPRU').

More generally, you should be aware that the recast CAD forms part of the Capital Requirements Directive ('CRD'), which also amends the Banking Consolidation Directive ('BCD').

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

The answers given in these Q and As represent the FSA'sviews but the interpretation of financial services legislation is ultimately a matter for the courts. How the scope of MiFID and the recast CAD 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 recast CAD, 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 recast CAD 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 FSAguidance, MiFID's scope provisions may also be the subject of guidance or communications by the European Commission or the Committee of European SecuritiesRegulators ('CESR'). Similarly, recast CAD provisions may be the subject of guidance or communications by the European Commission or the Committee of European Banking Supervisors ('CEBS').

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

Yes if you are:

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 FSA'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 and investment companies, provides portfolio management services to third parties. How does MiFID apply to us?

If you are the management companyof a UCITS scheme with a permission to manage investments including MiFID financial instruments pursuant to article 5.3 UCITS Directive, certain MiFID provisions apply to you when you provide investment services to third parties (see article 5.4 UCITS Directive). These include initial capital endowment, organisational and conduct of business requirements. You are a UCITS investment firm for the purposes of the FSA Handbook. Article 5.4 UCITS Directive is reflected in paragraph (3) of the Handbook definition of "MiFID investment firm".

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 FSARegister 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').

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:

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

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.
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).

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 FSAwould 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 5.2 of the recast CAD (see Q61), you will not be dealing on own account.

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

Portfolio management is managing portfolios in accordance with mandates given by clientson a discretionary client-by-client basis where such portfolios include one or more MiFID financial instruments. If there is only a single financial instrument 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 a collective investment scheme, where discretion has been delegated to the manager by the operator of the scheme. 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:


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:

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:


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

A6 comprises two elements:
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, 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 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 BCD which correspond to ancillary services under MiFID (for example, the activity of safekeeping and administration of securities in Annex 1 paragraph 12 of the BCD ).

Q27. Where do we find a list of MiFID financial instruments?

In Section C of Annex 1 to MiFID. There are ten categories of financial instruments in Section C (C1 to C10). Transferable securities (C1) and money market instruments (C2) are defined in article 4. Further provisions relating to certain derivatives under C7 and C10 are contained in articles 38 and 39 of the MiFID Regulation.

Q28. What are transferable securities? (C1 and article 4.1(18))

Transferable securities refer to classes of securities negotiable on the capital markets but excluding instruments of payment. We consider that instruments are negotiable on the capital markets when they are capable of being traded on the capital markets.

Transferable securities include (to the extent they meet this test):
Examples of instruments which, in our view, do not amount to transferable securities include securities that are only capable of being sold to the issuer (as is the case with some industrial and provident society interests) and OTC derivatives concluded by a confirmation under an ISDA master agreement.

Q29. What are units in collective investment undertakings (C3)?

This category of financial instrument includes units in regulated and unregulated collective investment schemes. In our view, in accordance with article 1.2(a) and 2.1(o) of the Prospectus Directive, shares in closed-ended corporate schemes, such as shares in investment trust companies, are also units in collective investment undertakings for this purpose (as well as being. transferable securities).

Q30. Which types of financial derivative fall within MiFID scope (C4, C8 and C9)?

The scope of financial derivatives under MiFID is wider than under the ISD and includes the following:
The scope of C4, C8 and C9 does not extend to spot transactions, transactions which are not derivatives (such as forwards entered into for commercial purposes) and sports spread bets. In our view, neither C4 nor C9 comprise forward foreign exchange instruments unless they are caught by the scope of the Regulated Activities Order (see PERG 2.6.22B G). A non-deliverable currency forward which is not a "future" for the purposes of the Regulated Activities Order because it is made for commercial purposes will likewise fall outside the scope of MiFID.

Q31. What are derivative instruments for the transfer of credit risk (C8)?

Derivative instruments that are designed for the purposes of transferring credit risk from one person to another. They include, for example, credit default products, synthetic collateralised debt obligations, total rate of return swaps, downgrade options and credit spread products

Q32. Which types of commodity derivative fall within MiFID scope?

Broadly speaking, the following commodity derivatives fall within the scope of MiFID:

Q33. What is a commodity for the purposes of MiFID?

"Commodity" means any goods of a fungible nature that is capable of being delivered, including metals and their ores and alloys, agricultural products and energy such as electricity (article 2.1 of the MiFID Regulation). The fact that energy products, such as gas or electricity, may be "delivered" by way of a notification to an energy network (such as notifications under the Network Code or the Balancing and Settlement Code) does not prevent them being "capable of being delivered" for these purposes. If a good is freely replaceable by another of a similar nature or kind for the purposes of the relevant contract (or is normally regarded as such in the market), the two goods will be fungible in nature for these purposes. Gold bars are a classic example of fungible goods. In our view, the concept of commodity does not include services or other items that are not goods, such as currencies or rights in real estate, or that are entirely intangible (recital 26 of the MiFID Regulation).

Q34. Are there any other derivatives subject to MiFID regulation?
There is a miscellaneous category of derivatives in C10, which is supplemented by articles 38 and 39 of the MiFID Regulation. These relate to:


C10 derivatives must also meet at least one of the following criteria:

Q35. Where do we find a list of MiFID exemptions?

In articles 2 and 3 of MiFID.

Q36. We are an insurer. Does MiFID apply to us?

No. Insurers are exempt from MiFID (article 2.1(a)).

Q37. We are a non-financial services group company providing investment services to other companies in the same group. Are we exempt under the group exemption in article 2.1(b)?

Yes, if you provide these services exclusively for your parent company, your subsidiaries and those of your parent company. This means that providing investment services for the benefit of group companies must be the only investment service that you undertake. The exemption is narrower than the corresponding exclusion in article 69 of the Regulated Activities Order (groups and joint enterprises) insofar, for example, as it does not apply to investment services supplied to a joint venture participant (see PERG 2.9.10 G).

Q38. We also buy and sell financial instruments for ourselves. Are we still able to use the group exemption?

Yes. The group exemption applies to investment services and not investment activities. So, as long as your own account dealing does not involve you providing an investment service (to which MiFID applies) to non-group entities, you can still rely on the group exemption in respect of the services you provide solely to other group companies.

So far as your own account dealing is concerned, you may be able to rely upon the exemption in article 2.1(i) (see Q44 and Q45) if you meet the relevant conditions. The ability to combine reliance on article 2.1(b) and article 2.1(i) could be relevant to companies performing group treasury functions.

Q39. We provide investment services as a complement to our main professional activity. Are we exempt?

Yes, you will be exempt under article 2.1(c) MiFID if you provide these services in an incidental manner in the course of your professional activity, and that activity is regulated by legal or regulatory provisions or a code of ethics that do not exclude the provision of investment services. The meaning of 'incidental' is potentially subject to further Commission legislation pursuant to article 2.3 MiFID.

This exemption is relevant, for example, to firms belonging to designated professional bodies, such as accountants, actuaries and solicitors, to whom Part XX of the Act applies. It could also apply to authorised professional firms which provide investment services in an incidental manner in the course of their professional activity. In our view, the criteria set out in PROF 2.1.14 G in relation to section 327(4) of the Act are also relevant to considering whether a firm can rely on the exemption in article 2.1(c) MiFID, as they were in relation to the corresponding ISD exemption.

If an authorised professional firm has the standard requirement on its permission that it "...must not carry on the specified regulated activities otherwise than in an incidental manner in the course of the provision by it of professional services (that is, services which do not consist of regulated activities)", our assumption is that it is exempt from MiFID if it complies with this requirement.

If you are an authorised professional firm not falling within article 2.1(c) MiFID, you may also wish to consider whether you are exempt or otherwise from MiFID requirements by virtue of the domestic implementation of the article 3 exemption (see Q48 and Q49).

The article 2.1(c) MiFID exemption may also apply to journalists, broadcasters and publishers (where they are subject to regulation or a code of ethics), although in most cases the FSAwould not expect these persons to fall within the MiFID definition of investment firm (see Q7 and Q8).

Q40. We regularly buy and sell financial instruments ourselves but never as a service to third parties. Are there any exemptions which might apply to us?

Yes, you could fall within the article 2.1(d) MiFID exemption but not if you:

You cannot rely, however, on the article 2.1(d) MiFID exemption if you provide any investment services or activities other than dealing on own account. If buying and selling MiFID financial instruments is not your main business, or, as the case may be, the main business of your group, you might though wish to consider further the exemption in article 2.1(i) MiFID (see Q44 and Q45).

Q41. What is a market maker?

A market maker is "a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him" (article 4.1(8) MiFID). This is likely to be the case if you are recognised or registered as a market maker on an investment exchange. However, in our view anyone who satisfies the definition will be a market maker for the purposes of MiFID, even if they are not under an obligation to make quotes, for example retail service providers who make a market in shares traded on the Stock Exchange Electronic Trading Service ('SETS') but without doing so as registered market makers under the rules of the London Stock Exchange.

Q42. Is there an exemption, as there was under the ISD, relating to employee share schemes and company pension schemes?

Yes, there is an exemption in article 2(1)(e) MiFID for persons providing investment services consisting exclusively in the administration of employee-participation schemes, for example employee share schemes and company pension schemes. In our view, whilst administration for these purposes could extend to services comprising reception and transmission or execution of orders on behalf of clients or placing, it would not include personal recommendations in relation to, or managing, the assets of employee share schemes or company pension schemes.

This exemption can also be combined with the "group exemption" in article 2.1(b) MiFID, by virtue of article 2.1(f) MiFID. In our view, it may also be combined with the exemption in article 2.1(i) MiFID if a firm is dealing on own account in financial instruments as an ancillary activity to its main business, or, as the case may be, the main business of its group.

Q43. Are we right in thinking that MiFID does not apply to collective investment undertakings and their operators?

Yes. Generally speaking, collective investment undertakings are specifically exempt, as are their depositaries and managers. So far as collective investment schemes are concerned, the "manager" corresponds, in essence, to the operatorof a schemea nd not to a person who is managing the assets of the scheme (unless that person is also the operator). In our view, the manager of a collective investment undertaking only benefits from the exemption in respect of any investment services or activities it may carry on in that capacity. To the extent that it also provides investment services or performs investment activities in a different capacity, for example, if it provides investment advice to, or manages the assets of, an individual third party, these services and activities fall outside the scope of the article 2.1(h) exemption.

In the case of UCITS management companies, some MiFID provisions will apply to those who provide portfolio management services, investment advice or safekeeping and administration services in relation to units to third parties, by virtue of article 5.4 of the UCITS Directive (see Q6).

Q44. Who can rely on the exemption in article 2.1(i)?

You may be able to rely on the exemption if:

However, the exemption will only apply if what you do is ancillary to your main business and that main business is neither the provision of investment services nor banking services. If you are part of a group, what you do must be ancillary to the main business of your group whose main business is neither the provision of investment services nor banking services.

In our view, a firm which is part of a group whose main business is not investment or banking services and which provides, for example, as a stand-alone business, investment services in commodity derivatives or C10 contracts for its own clients (who are not clients of the group's main business), is likely to fall outside the scope of the article 2.1(i) exemption.

When considering what is a firm's or group's 'main business', in our view various factors are likely to be relevant including turnover, profit, capital employed, numbers of employees and time spent by employees. These factors should then be considered in the round in deciding whether any one operation or business line amounts to a firm's or group's main business. In our view, a similar approach can be applied when determining a firm's 'main business' for the purposes of article 2.1(k) (see Q46).

Q45. What is an ancillary activity for these purposes?

The meaning of 'ancillary' is potentially subject to further European Commission legislation pursuant to article 2.3 MiFID. For an activity to be 'ancillary' for these purposes, in our view, it must at least be both directly related and subordinate to the main business of the group. Where, for example, a commodity producer buys or sells commodity derivatives for the purposes of limiting an identifiable risk of its main business, for instance in circumstances where the risk management exclusion in article 19 of the Regulated Activities Order would apply, in our view this would qualify as ancillary for the purposes of this exemption. On the other hand, where a commodity producer deals on own account for speculative purposes, it is unlikely that this would be ancillary to the main business in the case of article 2.1(i) MiFID. This activity may fall, however, within the article 2.1(k) MiFID exemption (see Q46).

Q46. Our main business is producing commodities and we buy and sell commodity derivatives. We are a member of a non-financial services group. Are we exempt from MiFID?

Yes. You will be exempt under article 2.1(k) MiFID because you are a person:


The question of what is your main business for the purposes of the first bullet point above is determined on an entity basis and not on a group basis (which is different from the approach taken in article 2.1(i) MiFID). You should also note that the article 2.1(k) MiFID exemption refers to commodities and/or commodity derivatives but not C10 derivatives.

Recital 22 of the MiFID Regulation indicates that the exemptions in article 2.1(i) and (k) MiFID could be expected to exclude significant numbers of commercial producers and consumers of energy and other commodities, including energy suppliers and commodity merchants.

Q47. We traded on an investment exchange as a local firm and were exempt from the ISD. Are we exempt under MiFID?

Yes. If you fell within the exemption in article 2.2(j) ISD for local firms and continue to perform the same services and activities, you should generally fall within the exemption in article 2.1(l) MiFID. If you provide personal recommendations in relation to MiFID financial instruments, however, you will not be able to rely upon the exemption in article 2.1(l) MiFID.

Q48. Article 3 is an optional exemption. Will the exemption apply to UK firms?

Yes, the optional exemption has been exercised by The Treasury.

Q49. Which firms might fall within this exemption?

The exemption applies to persons who meet all the following conditions:

If you are a UK firm that meets these qualifying conditions, you will be exempt from regulations made by the European Commission under MiFID.

Where you provide personal recommendations or receive and transmit orders in relation to derivatives which are MiFID financial instruments but not transferable securities, you will fall outside the scope of this exemption. In our view, this would be the case, for example, if you provided either or both of these investment services in relation to OTC derivatives concluded by a confirmation under an ISDA master agreement (see PERG 13 Annex 2 Table 2).

Q50. We are (or previously were) an IFA and have a permission which covers (i) arranging (bringing about) deals in investments; (ii) making arrangements with a view to transactions; and (iii) advising on investments, in each case in relation to securities but not derivatives. We are not permitted to hold client money or investments and do not have dealing or managing permissions in relation to MiFID financial instruments. Are we exempt?

The FSA expects so, assuming you do not:

We would generally not expect IFAs to be placing MiFID financial instruments without a firm commitment basis as we associate 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.

Q51. What happens if we breach any of the qualifying conditions (see Q49)? Do we then lose the exemption?

You are required to notify us of a breach (see SUP 15.3.11 R). We will then consider whether you should continue to benefit from the exemption and what, if any, supervisory or occasionally enforcement action is appropriate in the circumstances.

Q52. If we fall within the exemption does this prevent us from acquiring passporting rights under MiFID?

No. Firms which would otherwise be exempt can apply to opt into MiFID regulation with a view to acquiring passport rights (although they would then become subject to the requirements of MiFID, including certain enhanced prudential requirements - see Q58 and Q59).

Q53. What is the practical effect of exercising the optional exemption for those firms falling within its scope?

You are not a firm to which MiFID applies and so are not a MiFID investment firm for the purposes of the FSA Handbook. As such you are not subject to the requirements of the recast CAD as transposed in the FSA Handbook and cannot exercise passporting rights.

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 FSA'sview, 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 FSA'sopinion, 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 FSA'sview, 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 FSAwould 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 FSAwould 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 FSAdoes 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:

Q55. Are we subject to the recast CAD?

Only investment firms subject to the requirements of MiFID are subject to the requirements of the recast CAD. This includes UCITS investment firms (see Q6 and Q63).

Despite being subject to the requirements of MiFID, broadly speaking, if you are one of the following investment firms our implementation of the recast CAD will only apply to you in a limited way:

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 recast CAD. 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 recast CAD. If you do so, you are an exempt CAD firm (see Q58 and Q59).

There is also a special exemption under the recast CAD 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 recast CAD. 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 recast CAD apply to us?

You are a CAD investment firm. Broadly speaking, you should go through an initial two-stage process in considering how the recast CAD will apply to you:

You are either a BIPRU 50K firm (subject to a base capital requirement of euro 50,000) (see Q60), a BIPRU 125K firm IFPRU 125K firm (subject to a base capital requirement of euro 125,000) (see Q61), a BIPRU 730K firm (subject to a base capital requirement of euro 730,000) (see Q62) or a UCITS investment firm (see Q63). Your base capital requirement depends essentially on the scope of your permission and any limitations or requirements placed upon it.

If you are a CAD investment firm, 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 BIPRU investment firm . 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 GENPRU 2.1.45 R).
If you are a full scope BIPRU investment firm , you are subject to the full range of recast CAD risk requirements (see Q66). See, generally, GENPRU 2.1.45 R in relation to the calculation of capital resources requirements for limited licence firms, limited activity firms and full scope BIPRU investment firms.

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 recast CAD at the level of the individual firm, although you may find the decision tree at BIPRU 8 Annex 5 helpful in considering these issues.

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:

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 recast CAD, you are subject to risk management and other systems and control requirements in the form of SYSC (see BIPRU TP 15.11G). You may also be subject to the requirements of chapter 3 of IPRU(INV).

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:

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:

If you are an exempt CAD firm , you are subject to base capital requirements which comprise the following broad options:
For the rules transposing these requirements and supporting guidance, see the Interim Prudential Sourcebook for Investment Businesses (Exempt CAD Firms) Instrument 2007and 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 to personal investment firms and securities and futures firms, as appropriate (see IPRU(INV) 13.1A.13R and IPRU(INV) 9.2.9R).
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.


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 8 recast CAD 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:

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 recast CAD.

Q60. Are we a BIPRU 50K firm?

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

Q61. Are we a BIPRU 125K firm?

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

You may also be a BIPRU 125K firm if you meet the conditions of article 5.2 recast CAD. Broadly speaking, this applies to investment firms which execute investors' orders and hold financial instruments for their own account provided that:

If you meet the conditions of article 5.2 recast CAD and are not authorised to hold client money in relation to MiFID business or safeguard and administer (without arranging) MiFID financial instruments, you will be a BIPRU 50K firm.

Q62. Are we a BIPRU 730K firm?

If you are a CAD investment firm and you are neither a BIPRU 50K firm nor a BIPRU 125K firm nor a UCITS investment firm (see Q63), you will be a BIPRU 730K firm.

Q63. We are a UCITS investment firm. How will the recast CAD apply to us?
UCTIS investment firms ( UCITS 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 recast CAD in parallel with the capital requirements in the UCITS Directive.

If you are a UCITS investment firm, your base capital requirement is contained in GENPRU 2.1.48 R (which refers to UPRU 2.1.2 R (1)) and in summary is:

In our view, a UCITS investment firm should be a limited licence firm, as the UCITS Directive prevents it from dealing on own account outside its scheme management activities. As a result, where a UCITS investment firm has a dealing in investments as principal permission, this should be limited to box management activities where MiFID financial instruments are concerned. In our view, a UCITS investment firm which has this limitation and complies with it will not be dealing on own account for the purposes of the MiFID and the recast CAD.

Q64. Are we a limited licence firm?

A limited licence firm is one that is not authorised to:
You can be a limited licence firm if you are either:
Generally, you cannot be a limited licence firm if you are a BIPRU 730K firm. However, you may be a limited licence firm if you operate a multilateral trading facility (and therefore are a BIPRU 730K firm) 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 a BIPRU limited licence firm (including a UCITS investment firm), see GENPRU 2.1.45 R.

Q65. Are we a limited activity firm?

A limited activity firm is a BIPRU 730K firm that deals on own account only for the purpose of:

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. We do not think that any UK regulated firms are likely to fall within this third category of limited activity firm.

Q66. What is the effect of being a CAD investment firm which is neither a limited licence firm nor a limited activity firm?

You will be a full scope BIPRU investment firm, subject to the full range of recast CAD risk requirements.

Q67. What is the territorial application of MiFID?

If a firm is established in one Member State, and carries on all its investment business in that state, that state has responsibility for the entire financial services regulation of the firm

If, however, the firm provides investment services or activities in another Member State, or establishes a branch in another Member State, the questions arise 'Whose rules apply?' and 'Which regulator has responsibility for enforcing them?'.

The general principle is that prudential regulation is the responsibility of the Home State but conduct of business regulation is the responsibility of the Host State.

A Host State may also impose requirements relating to matters that fall outside of the scope of the directive - for example, market abuse, anti-money laundering controls and the conditions for cold calling.

Q68. What is 'prudential regulation' and 'conduct of business regulation' in this context?

Prudential regulation relates primarily to the capital adequacy of a firm and its systems and controls. In general terms, this means every aspect of a firm's activities relating to financial services except those areas where the firm is concerned with a client. So provisions, for example, relating to communicating with clients, client agreements, best execution and order handling are seen as 'conduct of business' requirements and are not prudential.

Q69. What does this mean for my firm?

MiFID is about the regulation of markets in financial instruments ? it is not about setting capital standards. It does, however, contain provisions about systems and controls and conduct of business. It also contains other market specific provisions which allocate the responsibilities between the home and host Member States.

If a firm establishes a branch in another Member State, the competent authority of the State where the branch is located has responsibility for the services and activities provided by the branch within that territory. As article 32(7) of MiFID provides, that authority has responsibility for ensuring compliance with the rules referred to in column 1 of the table below. The location of those rules is set out in column 3.

	Subject matter	Location
1	Conduct of business obligations to clients	COBS generally but see Notes 1 and 2
2	Best execution	COBS 11.2 (Best execution)
3	Client order handling	COBS 11 (Dealing and managing)
4	Market integrity, transaction reporting and maintaining records	SUP 17 (Transaction reporting)
5	Making public firm quotes (transparency)	MAR 6 (Systematic internalisers)
6	Post-trade disclosure	MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF)
	Notes: 1. Further guidance on the territorial scope of COBS is given in COBS 1 Annex 1, Part 3 and in SUP 13A Annex 2. 2. The MiFID conduct of business rules in article 19 are implemented in: (a) COBS 2.1 (Acting honestly, fairly and professionally) (b) COBS 2.2 (Information disclosure before providing services) (c) COBS 4.2 (Fair, clear and not misleading communications) (d) COBS 4.3 (Financial promotions to be identifiable as such) (e) COBS 8.1 (Client agreements: designated investment business) (f) COBS 9.2 (Assessing suitability) (g) COBS 10.2 (Assessing appropriateness: the obligations) (h) COBS 10.3 (Warning the client) (i) COBS 10.4 (Assessing appropriateness: when it need not be done) , and (j) COBS 16 (Reporting information to clients).

Q70. How are the high level standards, like the Principles, affected by MiFID?

The position is summarised in the table below.

	Subject matter	References	Summary
1	The Principles	PRIN 3.1.6 R (Who?)	A firm is not subject to the Principles to the extent that it would be contrary to MiFID (and the other Single Market Directives).
2		PRIN 4.1.2 G (Where?)	The territorial scope of some Principles has been extended and others narrowed according to the type of firm.
3	Systems and controls	SYSC 1 Annex 1.2.15R to 1.2.18R	A UK MiFID investment firm is a common platform firm. It is subject to the common platform requirements in SYSC 4 to SYSC 10 and is not subject to the requirements in SYSC 2 and SYSC 3. The common platform requirements generally apply in relation to activities conducted from an establishment in the United Kingdom or another EEA State. However, this is subject to some modification, for example in relation to requirements on record keeping and financial crime. Most of the common platform requirements also apply in a prudential context to the activities of a UK MiFID investment firm from an establishment outside the EEA. An EEA MiFID investment firm is not a common platform firm and is therefore not subject to the common platform requirements. However, it is subject to the common platform record keeping requirements. Some provisions in SYSC 9 will apply to the UK establishment of an EEA MiFID investment firm but only in respect of matters that are not reserved to the Home State regulator. This is particularly relevant to the provisions on systems and controls concerning financial crime and money laundering in SYSC 6.3 .
4	Approved persons	SUP 10.1 , APER 1.1.4 G and APER 2.1.1A P	The territorial scope of some of the controlled functions under the approved persons regime and of the application of the Statements of Principle is modified as a result of MiFID.
5	The threshold conditions	COND 1.1.4 G (Where?)	The guidance indicates that the threshold conditions apply in relation to all the regulated activities of a firm wherever they are carried on except, for example, in relation to incoming EEA firms in certain cases. MiFID has not affected this.

Q71. What is the position in relation to record keeping in branches?
The effect of article 13(9) of MiFID is also to shift the default position (of regulation by the Home State) to regulation by the Host State for the record-keeping requirements imposed on a branch (see SYSC 1 Annex 1.2.17R).

Q72. Will a branch need to report to the competent authority of the Member State where it is located?

For some purposes, yes. Article 61 of MiFID gives a Host Member State the power to require reports for statistical purposes and to require branches to provide information necessary for monitoring compliance with the standards of the Host Member State (see SUP 16.7 (Financial reports)). These standards are the ones referred to in Article 32(7) as set out in Q69.

Flow chart 1- Does MiFID apply to us?

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

Table 1 - MiFID Investment services and activities and the Part IV permission regime

MiFID Investment Services and Activities	Part IV permission	Comments
A1- Reception and transmission of orders in relation to one or more financial instruments	Arranging (bringing about) deals in investments (article 25(1) RAO).	This was an ISD service. Generally speaking, only firms with permission to carry on the activity of arranging (bringing about) deals in investments in relation to securities and contractually based investments which are financial instruments can provide the service of reception and transmission. This is because a service must bring about the transaction if it is to amount to reception and transmission of orders. The activity of arranging (bringing about) deals in investments is wider than A1, so a firm carrying on this regulated activity will not always be receiving and transmitting orders. See Q13 and Q14 for further guidance.
A2- Execution of orders on behalf of clients	Dealing in investments as agent (article 21 RAO) Dealing in investments as principal (article 14 RAO)	This was an ISD service. Usually, where a firm executes orders on behalf of clients it will need permission to carry on the activity of dealing in investments as agent. Where a firm executes client orders on a true back-to-back basis or by dealing on own account, it also needs permission to carry on the activity of dealing in investments as principal. See Q15 for further guidance.
A3- Dealing on own account	Dealing in investments as principal (article 14 RAO)	Dealing on own account falls within the ISD, but only where a service is provided. Under MiFID, dealing on own account is caught even if no service is provided. Where a firm is dealing on own account, it needs permission to carry on the activity of dealing in investments as principal. See Q16 for further guidance.
A4- Portfolio management	Managing investments (article 37 RAO) Dealing in investments as principal (article 14 RAO) Dealing in investments as agent (article 21 RAO) Arranging (bringing about) deals in investments (article 25(1) RAO) Making arrangement with a view to transactions in investments (article 25(2))	This was an ISD service. A firm performing the portfolio management service needs a permission to carry on the activity of managing investments. Firms may also need permission to perform other regulated activities to enable them to give effect to decisions they make as part of their portfolio management (see adjacent column). See Q6, Q17 and Q43 for further guidance.
A5- Investment advice	Advising on investments (article 53 RAO)	This was an ISD non-core service. A firm providing investment advice will need permission to carry on the activity of advising on investments. See Q18 and Q19 for further guidance.
A6- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis	Dealing in investments as principal (article 14 RAO) Dealing in investments as agent (article 21 RAO)	This corresponds broadly to the service of underwriting and/or placing described in Section A4 of the Annex to ISD. Where a firm underwrites an issue of financial instruments and holds them on its books before they are sold or offered to third parties, it needs permission to carry on the activity of dealing in investments as principal. Where an underwriting firm sells the relevant instruments as agent for the issuer and then purchases any remaining instruments as principal, it needs permission to carry on the activity of dealing in investments as agent in relation to its selling activity and of dealing in investments as principal in relation to its purchase of the remaining instruments. See Q22 for further guidance.
A7- Placing of financial instruments without a firm commitment basis	Dealing in investments as agent (article 21 RAO) Arranging (bringing about) deals in investments (article 25(1) RAO)	This corresponds in part to the service in Section A4 of the Annex to ISD outlined in the commentary to A6. Where a firm arranges the placement of financial instruments with another entity, it needs permission to carry on the activity of arranging (bringing about) deals in investments. Where a firm sells the relevant instruments on behalf of the issuer, it also needs permission to carry on the activity of dealing in investments as agent. See Q22 for further guidance.
A8- Operation of Multilateral Trading Facilities	Operating a multilateral trading facility (article 25D RAO)	This service replaces the ATS operators regime. Firms performing this service will need permission to carry on the regulated activity of operating a multilateral trading facility. Broadly speaking, any authorised person who operated an alternative trading system prior to 1 November 2007 was automatically granted permission to operate a multilateral trading facility, unless it notified the FSA to the contrary by 1 October 2007. Firms will not require permission to carry on any other regulated activities if all they do is operate a multilateral trading facility. If they carry on additional regulated activities, they should ensure that their permission properly reflects this. See Q24 for further guidance.

Table 2: MiFID financial instruments and the Part IV permission regime

MiFID financial instrument	Part IV permission category	Commentary
C1- Transferable securities	share (article 76) debenture (article 77) government and public security (article 78) warrant (article 79) certificate representing certain securities (article 80) unit (article 81) option (excluding a commodity option and option on a commodity future) future (excluding a commodity future and a rolling spot forex contract) contract for differences (excluding a spread bet and a rolling spot forex contract) spread bet	Transferable securities are securities negotiable on the capital market excluding instruments of payment and include: (a) shares in companies; (b) bonds; (c) depositary receipts; (d) warrants; and (e) miscellaneous securitised derivatives. Transferable securities comprise various categories of derivatives in the permission regime: for example, options (excluding commodity options and options on commodity futures); futures (excluding commodity futures and rolling spot forex contracts); contracts for differences (excluding spread bets and rolling spot forex contracts). The permission investment categories above, however, are wider than the MiFID definition of transferable securities, as they comprise both securitised and non-securitised instruments. Firms with permissions containing these investment categories will fall outside the article 3 MiFID exemption as transposed in domestic legislation, where they provide investment services in relation to financial instruments which are non-securitised investments (for example, OTC derivatives concluded by a confirmation under an ISDA master agreement). For further guidance on the article 3 exemption see Q49; for further guidance on transferable securities see Q28.
C2- Money market instruments	debenture (article 77) government and public security (article 78) certificate representing certain securities (article 80)	The definition in article 4.1(19) MiFID refers to classes of instruments normally dealt in on the money markets.
C3- Units in a collective investment undertaking	unit (article 81) shares (article 76)	C3 includes units in regulated and unregulated collective investment schemes. This category also includes closed-ended corporate schemes, such as investment trust companies (hence the reference to shares in the adjacent column). For further guidance, see Q29.
C4- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash	option (excluding a commodity option and an option on a commodity future) commodity option and option on a commodity future future (excluding a commodity future and a rolling spot forex contract) rolling spot forex contract contract for differences (excluding a spread bet and a rolling spot forex contract) spread bet	C4 includes the financial instruments in sections B3-6 of the Annex to the ISD and in our view derivatives relating to commodity derivatives, for example options on commodity futures. For further guidance, see Q30 and Q32. Note that for the purposes of the permission regime, commodity options and options on commodity futures are treated as a single permission category. (see PERG 2 Annex 2 G Table 2).
C5- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)	commodity option and option on a commodity future commodity future contract for differences (excluding a spread bet and rolling spot forex contract)	C5 instruments are generally contracts for differences. Where a C5 instrument provides for the possibility of physical settlement, it may also be either a commodity future or commodity option, depending on its structure. For further guidance see Q32 and Q33.
C6- Options, futures, swaps, and any other derivative contracts relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF	commodity option and option on a commodity future commodity future contract for differences (excluding spread bet and rolling spot forex contract)	C6 instruments will generally be either commodity futures or commodity options, depending on their structure. Those instruments with a cash settlement option may also be contracts for differences. For further guidance see Q32 and Q33.
C7- Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls	commodity option and option on a commodity future commodity future contract for differences (excluding spread bet and rolling spot forex contract)	C7 is supplemented by Level 2 measures (see article 38 of the MiFID Regulation). For further guidance see Q32 and Q33.
C8- Derivative instruments for the transfer of credit risk	option (excluding a commodity option and an option on a commodity future) contract for differences (excluding spread bet and rolling spot forex contract) spread bet rolling spot forex contract	C8 derivatives are financial instruments designed to transfer credit risk, often referred to as credit derivatives. For further guidance see Q31.
C9- Financial contracts for differences	contract for differences (excluding spread bet and rolling spot forex contract) spread bet rolling spot forex contract	In our view, C9 derivatives could include those contracts for differences with a financial underlying, for example the FTSE index.
C10- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.	option (excluding commodity option and option on a commodity future) future (excluding a commodity future and a rolling spot forex contract) contract for differences (excluding spread bet and rolling spot forex contract) spread bet	C10 is supplemented by Level 2 measures (see articles 38 and 39 of the MiFID Regulation) and comprises miscellaneous derivatives. For further guidance see Q34.
Note: In our view, the categories of financial instrument in C1 to C10 are not mutually exclusive, so a financial instrument may fall within more than one category. For example, an interest in an investment trust company falls within C1 and C3.

Flow chart 1 - Are you subject to the recast CAD?

Flow chart 2 - CAD investment firms (excluding UCITS investment firms )

Are we a BIPRU 50K firm , a BIPRU 125k firm or a BIPRU 730K firm

Note
It is possible, in principle, thata CAD investment firm 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 isa BIPRU 730K firm. 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.

1. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006 [SI 2006 No. 3384]
2. The Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 [SI 2007 No 126]
3. The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Modification of Powers) Regulations 2006 [SI 2006 No 2975]
4. The Financial Services and Markets Act 2000 (Appointed Representatives) (Amendment) Regulations 2006 [SI 2006 No 3414]
5.The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2007 [SI 2007 No 125]