Media Briefing Note: Relief for Some non-European Firms but not Good News for all says Hogan Lovells as UK Government Proposes not to Implement MiFID II 'Third Country' Passport Provisions

31 March 2015 - On 27 March 2015, HM Treasury published its consultation paper on the implementation of the Markets in Financial Instruments Directive II (MiFID II). This followed the publication of a discussion paper by the Financial Conduct Authority (the FCA) on 26 March 2015.

MiFID II, and the accompanying Markets in Financial Instruments Regulation (MiFIR), will introduce wide-ranging changes to financial services regulation in Europe, to take effect on 3 January 2017.  These consultations offer the first insight into how MiFID II will be implemented in the UK.

Interestingly, the UK Government is proposing not to implement the 'third country' branch passporting provisions under Article 39 of MiFID II. 

Michael Thomas, partner in Hogan Lovells financial institutions sector, said:

"A large number of non-EU firms currently rely on the "overseas person" exclusion to access the UK market, so it may come as a relief to some key players in the industry that the UK intends to defend its existing third country arrangements as far as possible

"However there are some drawbacks to this approach as well – for example, U.S. firms with branches in the UK will not get the benefit of the MiFID II passport.  If those firms want to passport across Europe they would need to establish an authorised UK (or other EU) subsidiary instead."

Among other things, not implementing Article 39 would mean:

  • Non-EU firms which establish branches in the UK will not be able to passport wholesale business across Europe; and
  • The UK retail client base will not be able to rely on the enhanced branch requirements under MiFID II.

However, MiFID II will not restrict the ability of UK clients to access the products and services of non-EU firms if this is at the client's "own exclusive initiative".

HM Treasury is seeking comment on its proposed approach and whether the UK should further consider implementing the MiFID II third country regime. The consultation deadline is 18 June 2015.

What is a 'third country branch passport'?

Under MiFIR, firms from outside of Europe will be able to provide investment products and services throughout the EU if the European Commission recognises that their home country has 'equivalent' legal and supervisory arrangements to those within the EU.  However this will only give them the right to deal with certain types of clients – for instance banks, institutional investors, other regulated entities, national and regional governments and very large businesses who meet certain financial thresholds. 

The MiFID II Directive also envisages a 'branch passport' for non-EU firms.  Once these firms establish a branch in the EU under Article 39 they would be entitled to a 'passport' enabling them to operate throughout the EU and deal with all types of clients. 

This would mean that the only way non-European firms could deal with other types of counterparties (e.g. smaller companies, retail investors or individual professional investors) would be to set up a branch or subsidiary within the EU.

Member States have discretion as to whether or not they will implement the Article 39 arrangements.

The UK view

Existing UK exclusions currently allow "overseas persons" to deal with UK clients on a cross-border basis without requiring authorisation in the UK, in certain circumstances.

The UK government acknowledges that it would need to overhaul and significantly narrow those exclusions in order to implement the Article 39 branch passporting arrangements.  HM Treasury considers that the current regime is sufficiently tailored to client types and the risks in question, and balances the need to maintain investor protection, market integrity and financial stability, while remaining open to business internationally.  For this reason HM Treasury has said that it is "not minded" to implement Article 39.

Key points to note on MiFID II and MiFIR

  • The first Markets in Financial Instruments Directive (MiFID I) established a regulatory regime for investment services and activities, with the aim of harmonising investor protection and increasing competition in EU financial markets. In response to the financial crisis, the European Commission reviewed and revised MiFID I, resulting in MIFID II and MiFIR.
  • MiFIR is a European regulation, which means that it will automatically become part of UK law from 3 January 2017.
  • MiFID II is a Directive which means that the UK government must pass laws to implement it in the UK. 
  • MiFID II will be transposed in the UK using a combination of secondary legislation amending the UK legislation under the Financial Services and Markets Act 2000, and new FCA rules.
  • MiFID and MiFIR will apply throughout the EU from 3 January 2017.  Member States must adopt and publish their final MiFID II implementing laws by 3 July 2016.


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