Banking & Finance Alert
December.06.2017
By: Patrizio Messina, Gianrico Giannesi, Raul Ricozzi, Madeleine Horrocks, Emanuela Molinaro, Annalisa Dentoni-Litta, Francesca Isgrò, Marco Zechini
The performance of investment services and activities by entities established in third countries in Italy is becoming an increasing concern among specialized operators for the obvious reason, which will be discussed hereinafter, of the close entry into force of the new law provided from Directive 2014/64/EU (“MiFID II”) and Regulation (EU) No. 600/2014 (“MiFIR” and, together with MiFID II, “MiFID II Regulations”).
In this perspective and in the process of implementation of MiFID II Regulations, the Legislative Decree No. 129 of 3 August 2017 amended Legislative Decree No. 58 of 24 February 1998 (“Consolidated Financial Law” – “TUF”), by including Article 28 (“Third-country firms other than banks”) and Article 29-ter TUF (“Third-country banks”) [1].
The new rules provide that the performance of investment services and activities in Italy, with or without accessory services, by investment firms and third-country banks (“Non-European Entity” or “Non-European Entities”) may be carried out through different strategies depending on the type of customers receiving the above-mentioned services and activities. In this regard, a specific distinction concerns retail clients and professional clients on request (“Retail Clients” and “Professional Clients on Request”) or qualified counterparts and professional clients (“Qualified Counterparts” and “Professional Clients”) [2] .
If, pursuant to Article 29-ter paragraph 4, TUF expects that the Bank of Italy, after consulting Consob, will regulate the specific conditions for issuing the authorization for the performance of investment services and activities by third-countries banks, it is well known that Consob has long been in the process of amending its regulations also in accordance with article 28, paragraph 4, TUF.
On 19 October 2017, Consob submitted to public consultation, with the document “Amendments to the Intermediary Rules on the functionality in Italy of Third-Country firms other than banks in adoption of Directive 2014/65/EU (Mifid II)”, the regulation on implementing rules of TUF on intermediaries, adopted by resolution No. 16190 of 29 October 2007 (the “Intermediary Rules”) [3].
The main duties of Consob in this respect concern: (i) the recognition of cross-border activity at client's initiative; and (ii) the terms and procedures required for the authorization for investment firms already authorized in third countries, which wish to operate in Italy through branches or under the freedom to provide services [4].
1. LIMITS TO THE ACTIVITY - CROSS-BORDER - CLIENT INITIATIVE
As known, the main objective of the MiFID II Regulations is to harmonize national provisions concerning certain specific sectors, including, inter alia, those related to the activities of financial intermediaries, and of the market, together with investor protection.
For this reason, for the first time, the European legislator has decided to intervene and regulate, within the same MiFID II Regulations, also the case of the performance of services or the conduct of investment activities in the Union by Non-European Entities “on the client's initiative” (“reverse-solicitation”).
To this end, the following principles are established:
With reference to the latter, it can be said that the investment service and activity are provided at the client's initiative if:
Conversely, the investment service and activity are NOT provided at the client's initiative if he requires investment services or activities in response to a tailored communication from or on behalf of the Non-European Entity and provided that such invitations are aimed at influencing the client over a specific financial instrument or financial transaction.
The principles here referred to and inspired by MiFID II [5] have been implemented in our national system with the aforementioned amendments to Article 28 and Article 29-ter TUF. Apart from the hypothesis of performance of investment services and activities at customer's initiative, it is established that the provision of investment services and activities with or without ancillary services in Italy in respect of:
2. CROSS-BORDER ACTIVITY FOR RETAIL CLIENTS OR PROFESSIONAL CLIENTS ON REQUEST
Functionality involving investment services and activities in Italy by Non-European Entities and addressed to Retail Clients and Professionals Clients on Request, as mentioned, require the establishment of a branch upon authorization to be submitted to the Italian supervisory authority (e.g. Consob or Bank of Italy).
The authorization is also required if the Non-European Entity, although it initially provided its business in Italy on the basis of a specific initiative of the Union's client, intends to proceed with the marketing of new product categories or investment services to the same client [6].
With specific reference to third-country investment firms, the content and documentation to be attached to the application for authorization are set out in the new Annex No. 1 of the Intermediary Rules in consultation.
When filing the authorization request, it must be attached, inter alia:
3. CROSS-BORDER ACTIVITY WITH REGARD TO QUALIFIED COUNTERPARTIES OR PROFESSIONAL CLIENTS OF RIGHT
In the different scenario where a Non-European Entity intends to perform its activity in Italy with Qualified Counterparts and Professional Customers, it will also be permitted under freedom to provide services - without an application for authorization - according to the conditions outlined below. Article 28, paragraph 5, and Article 29-ter paragraph 5 TUF, by referring to the provisions of Articles 46 and following MiFIR, state that this may only be permitted if:
- the mechanism for the exchange of information between ESMA and the competent authorities of the third country;
- the mechanism for timely communication to ESMA in the event that the competent authority of the third country considers that the Non-Community Entity subject to its supervision violates the conditions of its authorization;
- the procedures concerning the coordination of supervisory activities and on-site inspections.
4. CROSS-BORDER ACTIVITY OF THIRD COUNTRIES WITHOUT DECISION OF EQUIVALENCE
In the event that (i) the required Equivalence Decision has not been adopted by the Commission or (ii) in the event that the Equivalence Decision is no longer in force, the Non-European Entity may operate in Italy under freedom to provide services - therefore, without branches - only if specifically authorized by the Italian supervisory authorities.
With sole reference to investment firms in third countries, the Intermediary Rules in consultation provides for details of the content and documentation required for the application to be filed for the purpose of obtaining the authorization to operate on the territory of the Italian Republic in a regime of freedom to provide services.
Consob requires an informative and documentary set of investment information from third-country investment companies, which largely replicates what is already described in sub-paragraph No. 2, numbers 1 to 5. It is reasonable to assume that the same information will be required from third-country banks under the minor standardization of the Bank of Italy pursuant to Article 29-ter paragraph 4 TUF.
In addition, the version of the Intermediary Rules in consultation, in Article 19 (pre-examination of the application), requires Consob, after hearing the Bank of Italy, to make its views within 120 days from when the application has been received. However, these terms shall be suspended until stipulation of: (i) agreements between the national supervisory authorities and the supervisory and vigilance authorities of third countries of investment firms; and (ii) tax agreements between Italy and the country of origin of the same investment firms.
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