Authorisation and initial capital

As a result of the definitions provided by Annex I of the MiFID II, any undertaking of investment services and investment activities on financial instruments is a reserved activity. In this respect, Art. 5 MiFID II stipulates that:

Each Member State shall require that the provision of investment services and/or the performance of investment activities as a regular occupation or business on a professional basis be subject to prior authorisation in accordance with this Chapter. Such authorisation shall be granted by the home Member State competent authority designated in accordance with Article 67.

The competent authority grants the authorisation, to the benefit of the investment firm, for one or more investment services and/or investment activities required by the applicant. Any initial authorisation(s) granted for one or more of the activities does not prohibit the investment firm concerned from making a further request, at a later stage, for an extension of the authorisation, so that additional activities can be included. The authorisation may cover also one or more of the ancillary services, whilst Art. 6( 1 ) provides that authorisation “shall in no case be granted solely for the provision of ancillary services”.

From a practical point of view, the authorisation process may be a timeconsuming and costly process. This is indicative of the legal complexity inhibiting the administrative procedure, where the supervisor shall be thorough to the point that he “is fully satisfied that the applicant complies with all requirements under the provisions adopted pursuant to this Directive”.^[1] However, the time allocated to the relevant authority is not without restriction. Art. 7(3) MiFID II suggests an allotted time period for each Member State of six months in which the process must be completed, and the approval or rejection of the application disclosed. As already stated, the reserved investment services and investment activities can also be exercised by an authorised EU bank. This may require additional, but no separate authorisation under MiFID II.^{[2] [3]}

As with credit institutions, an investment firm must have minimal capital so as to ensure that the business has a financial buffer to absorb losses, and is carried out seriously and with certain degree of commitment. The initial required capital of an investment firm can be found in the Capital Requirements Directive IV (CRD IV) and is at least EUR 730,000.^b However, this minimal capital may be reduced to EUR 125,000 for investment firms which have a more limited activity.^[4] Moreover, at the discretion of the relevant Member State, the initial minimum required capital may be further reduced to EUR 50,000 for an investment firm that “is not authorised to hold client money or securities, to deal for its own account, to underwrite issues on a firm commitment basis”.^[5]

The EU passport

Also for investment firms, there is an EU passporting regime. Under this passporting regime, investment firms are allowed to provide their services or perform their activities cross-border within the EU, either through the establishment of branches or by directly offering their services cross-border, for instance through a website.^[6] The details of this cross-border activity and the relevant modalities are contained in Art. 34 MiFID II, as far as the freedom to provide cross-border investment services and activities is concerned. Art. 35 MiFID II entails rules on the freedom to establish a branch. Essentially, these provisions are analogous to those provided for credit institutions.^[7] The most important modality for providing investment services and activities cross-border is the notification procedure.

The notification procedure must be fulfilled for each Member State where the investment firm wishes to extend its operations to. It must first notify the competent authority of its home Member State of its intention to extend its operations cross-border. The competent authority then informs the competent authority of the host Member State of such intention. Where it concerns operations that are carried out cross-border directly, the competent authority of the home Member State will, within one month after receiving the information of the investment firm, forward it to the competent authority of the host Member State. The investment firm may then start to provide its investment services and activities in the host Member State (Art. 34(3) MiFID II). Where it concerns the intention to open a branch in another Member State, the home Member State authority will inform the host state authority within three months after receiving the investment firm’s information, “[u]nless the competent authority of the home Member State has reason to doubt the adequacy of the administrative structure or the financial situation of an investment firm, taking into account the activities envisaged”. According to Art. 35(6) MiFID II Directive, the branch may be established and commence its business once it has received a communication from the competent authority of the host Member State, or, if such a communication was not sent, “at the latest after two months from the date of transmission of the communication by the competent authority of the home Member State”.

Fitness of directors and qualifying shareholders

The investment firm operates in a delicate area where integrity is key. MiFID II therefore demands specific requirements for the management body of an investment firm. It also requires notification of qualifying holdings and assessments of qualifying shareholders.

Art. 9(3) MiFID II prescribes that each Member State shall be required to ensure that

the management body of an investment firm defines, oversees and is accountable for the implementation of the governance arrangements that ensure effective and prudent management of the investment firm including the segregation of duties in the investment firm and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interest of clients.

Art. 9(4) MiFID II requires that the members of the management body “are of sufficiently good repute, possess sufficient knowledge, skills and experience and commit sufficient to perform their functions in the investment firm”. Art. 9(6) MiFID II stipulates that national legislation must ensure that the management of the investment firms be undertaken by at least wo persons - the “four-eyes principle” - meeting the requirements laid down earlier.

With regard to qualifying shareholders: part of the authorisation process for taking up the business as an investment firm is that the identity of persons having, directly or indirectly, a qualifying holding in an investment firm must be communicated to the relevant competent authority. Pursuant to Art. 10(1) MiFID II, the competent authority must refuse authorisation if, “taking into account the need to ensure the sound and prudent management of an investment firm, they

¹

Art. 35(3) MiFID II.

are not satisfied as to the suitability of the shareholders or members that have qualifying holdings”.

MiFID II also regulates qualifying holdings after authorisation. It contains an obligation to notify and assess the suitability of the proposed acquirer. If someone intends to acquire or to further increase a qualifying holding (reaching or exceeding 20%, 30%, 50%, or leading to the acquisition or cessation of control of the firm) in an investment firm, this must be communicated to the relevant competent authority, prior to the conclusion of any agreement to such an effect (Art. 11(1), first subparagraph, MiFID II). After the notification, the competent authority will assess the proposed acquisition, taking into account, inter alia, the reputation and the financial soundness of the proposed acquirer (Art. 13 MiFID II). An intention to dispose of or reduce a qualifying holding must also be notified to the competent authority (Art. 11(1), second subparagraph, MiFID II).

• [1] Art. 7(1) MiFID II.
• [2] Recital 38 ofMiFID II.
• [3] Art. 28(1) CRD IV.
• [4] More specifically, according to Art. 29( 1) CRD IV, an investment firm not dealing in any financial instruments for its own account or [not underwriting] issues of financial instruments on a firm commitment basis, but which holds client money or securities and which offers one or more of the following services [...]: (al the reception and transmission of investors' orders for financial instruments; (b) the execution of investors' orders for financial instruments; (cl the management of individual portfolios of investment in financial instruments.
• [5] Art. 29(3) CRD IV. The EU legislator is currently considering a separate legal instrument regulating capital requirements for investment firms: https://ec.europa.eu/info/publications/ 171220-investment-firms-review_en.
• [6] Art. 6(3) MiFID II.
• [7] See Chapter 7.