An update on industry preparedness for MiFID II and regulatory implications stemming from Brexit - Michael Hodson, Director of Asset Management Supervision

26 July 2017 Speech

Central Bank of Ireland

Good morning ladies and gentlemen.Thank you to IDA Ireland for the invitation to speak at today’s event. As we are now in the second half of the year, engagements such as this allow industry participants and regulators to take stock of recent developments and reflect on forthcoming regulatory initiatives.

Despite the pipeline of legislative initiatives reducing since its peak in the immediate aftermath of the financial crisis, there has been significant change for the financial sector to have to respond to over the last six months. A challenge for industry is that this change shows no sign of abating over the short term. Most notably, there are two areas which will significantly affect the asset management industry that I will discuss today.

These are:

  • Developments in relation to Brexit and, in particular, recent European efforts to ensure that there is a coordinated approach among the remaining 27 EU Member States after a United Kingdom withdrawal; and
  • The fast approaching implementation date for MiFID II.

Let me first turn to European developments in the context of Brexit. In particular, I will focus on the recent publication by the European Securities and Markets Authority (ESMA) of a number of opinions to National Competent Authorities (NCAs). These opinions set out principles aimed at fostering consistency in authorisation, supervision and enforcement related to the relocation of entities, activities and functions from the United Kingdom. I will also briefly touch on the work of the other European Supervisory Authorities in this area.

ESMA published a general opinion at the end of May and more recently published three sector specific opinions in the area of (i) investment firms, (ii) investment management and (iii) secondary markets. These opinions are designed to foster convergence in terms of how NCAs respond to firms seeking to relocate from the United Kingdom to a EU27 Member State.

Before I discuss the opinions individually, it is important to say that the Central Bank of Ireland is strongly supportive of the work of the European Supervisory Authorities to ensure convergence in how NCAs respond to Brexit. Following the financial crisis, an ambitious agenda of regulatory and supervisory convergence was embarked upon. This has involved extensive legislative initiatives, countless opinions, guidelines and clarifications from each of the European Supervisory Authorities and a wholesale change in how financial supervision is conducted in Europe. It would be a retrograde step to allow divergence to once again become embedded in our financial system. These opinions are one of the avenues being pursued to ensure the progress made in relation to supervisory convergence continues unabated.

Cross-Sectoral Characteristics

At the outset, it is important to recognise certain overarching characteristics of the ESMA opinions. Firstly, each opinion is directed at NCAs in accordance with Article 29 of the ESMA Regulation. This therefore means it is a matter for each NCA to interpret and apply the opinions. This may add a certain degree of complexity for industry in terms of understanding the potential implications of the opinions as these instruments do not directly apply to industry participants. This may create some uncertainty for industry, nevertheless it is the Central Bank’s expectation that NCAs will apply the opinions in a similar manner. At this point, it is too early to speculate on whether ESMA will issue Q&A’s (or some other instrument) to clarify elements of the opinions. However, this may evolve over time.

An additional characteristic which influences the approach taken in the opinions, is the presumption that the United Kingdom will become a third country after its withdrawal from the EU. This has allowed ESMA to avoid speculation in relation to the ongoing Brexit negotiations and presumes the worst-case outcome in terms of market access and other considerations.

The opinions are not overly prescriptive. What is most critical is that the opinions require NCAs to be fully satisfied that there is objective justification for a firm’s decision to relocate to a particular EU27 Member State, and that this is not motivated by seeking to avoid stricter requirements in another location.

An important point to take account of in the context of the potential implications of the ESMA opinions is the Central Bank of Ireland’s approach of having well-established, transparent, policies which underline the institution’s management of financial regulation. The Central Bank is committed to having clear and open engagement with stakeholders in fulfilling its objectives. In the asset management sector for example, there is extensive guidance available and authorisation requirements are set out publicly. Where a new policy position or a proposed change may impact materially on regulated financial services providers, the approach of the Central Bank is to consult in a structured manner with interested parties in order to seek, receive, analyse and respond to feedback and build a consensus around the particular policies.2 In light of this, following an analysis of the different opinions, if it is deemed necessary to adjust Central Bank requirements that will materially impact on industry participants, this will be done in a transparent manner with the Central Bank seeking feedback on any proposed changes.

Let me now comment briefly on the sector specific opinions, highlighting particularly pertinent areas.

Investment Firms

The investment firm opinion published by ESMA sets out principles based on the objectives and provisions of the MiFID framework and should also be read in conjunction with the opinion on secondary markets. The opinion highlights a number of areas where the relevant NCA will have to undertake additional scrutiny to ensure it is satisfied with the proposals of the relocating firm. Of particular note, is the need for NCAs to “assess applications in order to ensure that the choice of Member State for relocation is driven by objective factors (and not by regulatory arbitrage. This will of course depend on a case-by-case assessment of each application received. What the Central Bank will be seeking to assess is that there is objective justification for the decisions of the applicant. This principle of objective justification will also be applied in relation to other requirements in the opinion, including (i) outsourcing arrangements, (ii) the location of human and technical resources and (iii) the use of non-EU branches.

The Central Bank has a clearly defined authorisation process for MiFID Investment Firms. This consists of three phases. The first involves the submission of Key Facts Document (KFD). The purpose of the KFD is to provide the Central Bank with a high-level overview of an applicant’s proposed activities, business model, capital and governance structure. This is to understand the firm’s proposal and to identify any significant issues, which might affect an application from progressing to authorisation in as timely a manner as possible. Following submission, the Central Bank may seek clarifications in relation to the content of the KFD. This could necessitate the amendment and resubmission of the KFD to the Central Bank. The second phase of the process is relevant to the more complex MiFID Investment Firms which may seek to relocate in the context of Brexit. This consists of a series of engagement meetings with the Central Bank which address specific aspects of the firm’s proposal. These meetings are intended to discuss areas which may require further consideration by the applicant prior to the submission of a full application. The third and final stage in the process is the submission of a full application for authorisation in accordance with the requirements set out in MiFID. Once this point is reached, it is expected that the application will progress in a timely manner as all significant issues should have been addressed earlier in the process.

It will be incumbent on prospective applicants to be mindful of the ESMA opinions when seeking to engage with the Central Bank. At a minimum, applicants should seek to address potential queries which may arise in relation to the rationale for the structure, location and characteristics of the proposed firm.

Secondary Markets

Let me now turn to ESMA’s opinion on secondary markets. This relates to trading venues relocating from the UK. In particular, this opinion provides additional clarification in relation to outsourcing arrangements under the MiFID framework for trading venues. The opinion does not seek to prohibit outsourcing to service providers, either intragroup or to third parties, instead NCAs must assess applicants to ensure there is objective justification for these outsourcing arrangements. In line with the current practice, a key consideration for the Central Bank during any authorisation process will be that oversight and control of these outsourced activities is exercised in Ireland.

The opinion also sets out requirements in terms of where key and important activities should take place. In relation to the location of technology infrastructure for example, in line with the opinion, the Central Bank will be assessing any authorisation to ensure that decision making for designing, controlling and monitoring of the technology resides in Ireland.

Investment Management

The opinion on investment management relates to authorised entities and their activities covered by the UCITS Directive and the Alternative Investment Fund Managers Directive (AIFMD). There will also be a read across for other entities (such as European Long-Term Investment Funds). The opinion sets out principles in the areas of (i) authorisation, (ii) governance and internal control, (iii) delegation and (iv) effective supervision. As you will be aware, the Central Bank has undertaken extensive work in relation to Fund Management Company governance (under the umbrella term of ‘CP86’) and therefore the Central Bank’s requirements are well defined in this regard.
In addition, in 2015 the Central Bank published guidance on Director’s Time Commitments following extensive work in this area. Therefore, again, the Central Bank’s requirements are clear in this area.

The opinion requires that NCAs apply additional scrutiny where relocating entities do not dedicate at least three locally-based Full Time Employees. It is important to note that this requirement is for NCAs to apply “additional scrutiny” and therefore any such scrutiny should take account of the nature, scale and complexity of the applicant. In addition, before granting authorisation, the Central Bank needs to be satisfied that relocating entities have transferred a sufficient and appropriate element of their core activities, of which portfolio management and risk management are the key constituents, as part of an overall approach of ensuring strong oversight and control of delegates. The Central Bank has previously published extensive Fund Management Company guidance and clearly set out in substantial detail our expectations about the centrality of oversight and control of all the relevant activities through the performance of the different managerial functions.

Another area of note is the requirement that applicants demonstrate to the Central Bank that they are in position to comply with all relevant requirements from day one of authorisation. The Central Bank will also have to carefully scrutinise whether the structure of the authorised entity, and in particular how it operates in the context of its group structure, will impact on the supervisability of the entity.

Before moving on to other matters, I will say a few words about ESMA’s Supervisory Coordination Network that has been established in parallel with the publication of the opinions. This network has met on two occasions to date and the Central Bank is an active participant. The forum provides a useful opportunity for NCAs to share views on issues arising in the context of Brexit and, in particular, discuss applications submitted for authorisation on an anonymised basis. This network indicates the practical role ESMA is playing to ensure supervisory convergence is maintained in light of recent developments. In addition to European counterparties, the Central Bank of Ireland has had extensive engagement with a wide range of industry participants as firms explore Brexit contingency options. Initially, this consisted of preliminary enquiries and engagement meetings. Following these initial engagements, a certain number of firms have either decided to proceed with locating in Ireland, are expected to locate in another EU27 Member State or have not yet concluded their decision-making. From these engagements, it is evident that a wide range of factors influence where activities should be located post Brexit. Where firms have informed the Central Bank of their intention to locate operations in Ireland, these firms have either submitted a Key Facts Document (KFD) or are expected to do so shortly. In addition to firm specific engagements, the Central Bank maintains active dialogue with industry representative bodies, advisory firms and other public sector bodies. This engagement ensures that there is a clear understanding of the Central Bank’s role, expectations and experiences. It also provides stakeholders with the opportunity to provide feedback directly to the Central Bank. As you may be aware, the Central Bank has also recently published a list of Frequently Asked Questions (FAQs) related to Brexit. These FAQ’s provide general information to firms considering relocating their operations from the UK to Ireland. The intention is that these will be updated regularly as the Brexit negotiations progress and as new issues emerge and are resolved.

Briefly, let me also comment on the work of the other European Supervisory Authorities in relation to Brexit. As you may be aware, the European Insurance and Occupational Pensions Authority (EIOPA) has also recently published principles for the supervisory approach to firms relocating from the United Kingdom. Similar to ESMA’s approach, this opinion is directed at NCAs and seeks to set out high-level principles which should be adopted by NCAs when processing applications for authorisation. The European Banking Authority (EBA) is also expected to publish an opinion in the context of Brexit in due course.

This is an evolving area for industry participants and regulatory authorities alike. However, the core underlying objective of this work is to ensure, and maintain, a level playing field for financial services throughout the European Union.


Let me now turn to forthcoming regulatory developments more broadly. As we are now just over 160 days from the implementation date, it would be remiss of me not to mention MiFID II more generally.

As final preparations are now underway, it is timely to take a step back and consider the underlying principles which motivated the introduction of MiFID II. This legislative initiative, which encompasses MiFIR5  and related requirements, seeks to address shortcomings in the financial system, exposed during the most recent financial crisis which include:

  • Addressing the weaknesses in the functioning and transparency of financial markets;
  • Rectifying limitations in prevailing corporate governance structures;
  • Increasing the investor protection mandates; and
  • Increasing the level of harmonisation across financial markets; for example through the development of a single rulebook.

Clients, regulators and market participants can all agree that these are credible and worthwhile objectives. MiFID II seeks to strengthen investor protection as well as improving the regulation of the market and firms. The need for increased investor protection and transparency in financial markets will ultimately benefit all stakeholders involved in the sector and help to safeguard the financial system against future crises. It is important to reflect on these objectives as I know industry is currently expending considerable time, energy and resources preparing for the fast approaching implementation date.

In this regard, the Central Bank is mindful of the impact of MiFID II on the asset management industry, particularly in the context of other preparatory work underway for Brexit related challenges. However, as will come as no surprise and as the Chair of ESMA recently outlined, there shall be no further delay to the implementation of MiFID II . 6

The Central Bank’s expectation is that all Irish asset management firms adequately prepare over the next number of months and be fully compliant with MiFID II from 3 January 2018.

Additionally, as you will be aware, MiFID II also removes or narrows existing exemptions currently available under MiFID. This is particularly the case for some proprietary traders and other businesses that deal in financial instruments on their own account in the course of an otherwise unregulated business model. The Central Bank has recently issued a warning to firms who routinely engage in investment activity, to take the necessary steps to ensure that they operate in compliance with MiFID II from 3 January 2018.


Let me conclude there. I would like to thank you for your time and attention this morning. There is no doubt that the latter half of 2017 will bring further challenges for the European financial system. These will most notably relate to (i) the continued uncertainty in relation to a United Kingdom withdrawal from the European Union and (ii) the implementation of MiFID II, which represents the most significant overhaul of European legislation for markets in financial instruments in over a decade. The core objectives of MiFID II involve protecting investors and improving the regulation of markets and firms. The same objectives should be at the centre of how industry participants and regulatory authorities respond to Brexit as this challenge evolve over the coming months. With both initiatives, the outcome will be judged on how effective it is for (i) mitigating risks, (ii) protecting investors and (iii) minimising disruption. It would be a retrograde step to allow divergence to once again become embedded in our financial system. It is therefore incumbent that we seek to resolve any issues which might arise in a constructive, pragmatic and effective manner.


1 Regulation (EU) No 1095/2010, Article 29

2 It should be noted that certain circumstances could dictate that the Central Bank take immediate action without undertaking a formal consultation. In all circumstances however, the Central Bank will endeavour to communicate with impacted entities either directly or via their representative bodies.

3 Available here:

4 Markets in Financial Instruments (MiFID II) - Directive 2014/65/EU. 

5 Markets in Financial Instruments (MiFIR) - Regulation (EU) No 600/2014.

6 Keynote Speech by Steven Maijoor, FIA, 7 June 2017.