article

EU market access for third-country firms: Increased scrutiny and continued complexity

 Sharon Gowdy, Senior Associate

Author: Sharon Gowdy, Senior Associate

05 April 2022

|

Area: Cross-border distribution

EU market access for third-country firms: Increased scrutiny and continued complexity

In this article, our Marketing Restrictions senior lawyers examine the current state of play for third-country firms accessing the EU market.

Overview

The landscape for third-country firm access to European financial markets has been subject to increased scrutiny over recent years, particularly in the context of the UK leaving the EU single market. There has been much discussion as to whether current third-country regimes are sufficient for non-EEA firms or funds to both obtain and maintain EU business and whether access should be facilitated or, conversely, tightened. Equivalence determinations are not currently expected to be forthcoming and therefore, for third-country firms that do not have a branch or subsidiary in the EEA, there is a particular focus on the availability of alternative routes.

Status of Brexit temporary transitional measures

In an attempt to ease Brexit roadblocks, a limited number of Member States implemented temporary transitional regimes for UK investment firms and managers, most of which have now lapsed, with only a few remaining in play (such as Liechtenstein and Norway which both run until 31 December 2022 and Denmark’s conditional licences which expire on 30 June 2022).

As such, for the most part, UK firms have joined third-country firms from other regions such as Asia and the U.S. in navigating a patchwork of national licensing regimes to determine whether, and the extent to which, they are able to market or provide their products and services to clients in each EEA Member State.

Assessing the options

Assessing market access options requires consideration of the whether the proposed activities would trigger national licensing requirements and if so, whether a local presence will be required. 

Some Member States have useful exemptions to their licensing requirements (such as in Ireland) and some have a specific third-country firm regime or cross-border authorisation option. Examples of such cross-border authorisations include Luxembourg, where a third-country firm from an equivalently determined jurisdiction (which includes the main global financial hubs) can apply for authorisation to provide investment services to per se professional clients and eligible counterparties on a cross-border basis and Belgium, where third-country investment firms or credit institutions can provide investment services and activities on a cross-border basis to certain eligible clients upon notification to FSMA.

Similarly, in the Netherlands, a third-country firm from particular jurisdictions may be able to provide services without requiring a local licence where it meets certain conditions and makes the appropriate notification to the Dutch regulator. However, we note this option is not currently available to UK firms.  Likewise, in Germany it is possible to for a third-country firm to apply for an “exemption order” from the BaFin where activities will be restricted to certain types of “institutional client”. In the Nordics, both Denmark and Finland also enable third-country investment firms or credit institutions to be able to apply for a cross-border licence, without establishing a local presence, subject to conditions.

Reforms to third-country market access arrangements

Recent EU regulatory reform signals that the direction of travel is towards tightening access for third-country firms. In the CRD VI proposals, the EU Commission has indicated an intention to limit access for third-country banks wishing to provide financial services in EU Member States through the introduction of a harmonised regulatory and supervisory framework (see bulletin prepared by Allen & Overy LLP for more details on these proposals).  Further, in the new rules on pre-marketing funds introduced by the CBDF Directive, a restriction on pre-marketing by non-regulated EU firms was introduced, paradoxically meaning that in certain jurisdictions the restrictions on a third-country firm pre-marketing are tighter than those which apply for marketing itself.

The CBDF Directive also included a narrowing of the circumstances under which it is possible to rely on a reverse enquiry by means of an 18-month restriction on relying on a reverse enquiry following pre-marketing activities. In their implementation of this provision, we have tended to see Member States extend the scope so that it applies to pre-marketing of AIFs with a non-EEA element. This coupled with ESMA’s previous warning against abuse of the MiFID II reverse solicitation principle highlights the limitations on relying on reverse solicitation as a distribution strategy.

Notably, what we are also not seeing is a discussion of the extension of the AIFMD passport regime to the marketing of AIFs with a third-country element in the context of the ongoing AIFMD II review (but instead proposals to tighten up delegation arrangements and for the EU to take control of the eligibility requirements of third-country firms to use the national private placement regimes).  Neither has there been any indication of a forthcoming equivalence decision by the EU Commission to switch on the Article 47 MiFIR third-country passport in respect of investment firms providing investment services or performing investment activities to eligible counterparties and professional clients.

At individual Member State level, there have however, been some indications of an intention to improve third-country firm access to local markets by removing the local presence requirement.  In the Czech Republic there is currently a proposal going through parliament which would provide an exemption from the licensing requirement in respect of the provision of investment services to some professional clients (most notably Czech financial institutions) by third-country firms.  Further, in July 2021 the Spanish regulator published a communication confirming the conditions for access by third-country firms to eligible counterparties and a limited number of per se professional clients, without requiring the establishment of a branch.  We will continue to monitor the implementation of these proposals and in particular, how they interact with the CRD VI proposals discussed above.

Navigating the complex

Any third-country firm intending to market or provide cross-border products or services into an EEA Member State will need to consider whether the activity in question falls within that Member State’s regulatory perimeter and adapt it business accordingly, an assessment that can only be carried out on a case-by-case basis.

How aosphere can help

Our two online legal subscription services, Rulefinder Marketing Restrictions and Rulefinder Marketing Restrictions – Asset Management, can help you navigate these complexities by providing practical guidance applicable to the marketing of financial products and services and the marketing of open and closed-ended funds and managed accounts, covering the position for institutional and retail investors across 80+ jurisdictions.

How aosphere can help