MiFID II came into force in January 2018. The regime is a legislative framework designed to strengthen investor protection and make financial markets more efficient, resilient and transparent.
Post-Brexit, UK-based financial services firms have lost the ability to access European investors via passporting. As a result, many firms are establishing an office in the Netherlands to apply for a MiFID II license and market their products within the EU. Indeed, the pragmatic and flexible regulatory framework of the Netherlands makes it a popular jurisdiction for both UK and U.S firms to apply for a MiFID II license.
In this post, we’ll explore the impact of Brexit on MiFID II licensed UK firms and the benefits of applying for a license in the Netherlands.
What is MiFID II?
The MiFID Directive has been implemented across the EU since 2007. In 2018, MiFID II entered into force, extending the scope of the original Directive. In short, the purpose of MiFID II is to increase the competitiveness of financial markets by creating a single market for investment services and activities. The rules ensure a high degree of harmonised protection for investors in financial instruments, such as shares, bonds or derivatives. Its aim is to standardise practices across the EU and restore confidence in the industry, especially after the 2008 financial crisis.
The Directive applies to investment firms, data reporting services providers and third-country firms providing investment services or performing investment activities through the establishment of a branch in the EU.
MiFID II has far-reaching consequences. Founded on data, it requires firms to fully understand and analyse their data, report on it and use it to make subsequent decisions. For example, MiFID II Transaction Reporting requires investment firms to report complete and accurate details of their transactions to their competent authorities no later than the close of the following working day.
The impact of Brexit
The EU passporting regime for banks and financial services companies enables firms that are authorised in any EU or EEA Member State to trade freely in any other Member State with minimal additional authorisation. This regime is built on the assumption that banks and financial services firms authorised anywhere in the EU will have met the same standards, and thus should in effect be treated as if they were locally authorised.
These passports are the foundation of the EU single market. It enables financial services firms to sell their products and services across EU borders on the same basis as if they were present in the market of sale.
In the case of MiFID II, it means that a financial services firm only needs to apply for one license in the EU Member State in which they are established and under that license they can offer their services in other EU Member States, decreasing the regulation burden from multiple Member States to just one.
Brexit has had a significant impact on UK-based financial services firms over the past two years. Due to the Brexit, the passporting regime ended on 31 December 2020 for these firms. Given that the UK and EU’s Trade and Cooperation and Agreement (TCA) has not preserved or conferred special access rights for the UK, the UK has no more than a ‘third country’ status. Meaning that access to the EU or EEA markets now depends on individual national regimes and the application of third country provisions in the EU financial services legislation.
MiFID II enables EU Member States to require third country firms to establish a branch in that state before they are permitted to provide services to retail clients and certain professional clients. This means that UK firms wishing to provide financial services to clients across the EU may be required to set up branches in each Member State before they are able to provide services.
However, there is an alternative route. Many UK financial services firms are opting to apply for a MiFID II license in an EU Member State to regain access to the passporting regime. And one of their preferred routes is opening up an operational hub in the Netherlands.
Benefits of setting up your business in the Netherlands
The Netherlands has long played the role of gracious host to business outsiders, and it is easy to understand why many international companies find it the perfect place to relocate:
- Pragmatic regulatory framework, embedded in a good financial ecosystem
- Highly-qualified and English-speaking professional community
- An extensive international investor base, with deep and liquid capital markets
- Similar data protection legislation to the UK
For an increasing number of firms, the Netherlands presents the ideal gateway to set up operational hubs and apply for a MiFID II license.
How IQ-EQ can help
As businesses expand across borders, so too do compliance risks and administrative burdens. IQ-EQ provides a ‘one-stop shop’ back-office outsourcing solution for business functions including finance and accounting, tax compliance and payroll services, as well as our front-office support services.
With IQ-EQ’s support, your company can maintain growth goals while avoiding the standard business bottlenecks. Our tailor-made solution will allow your firm to focus on its core activities and retain entrepreneurial speed and agility as it grows.
Contact our team today to learn how you can establish the Netherlands as your gateway to European finance.