The UK’s financial regulatory framework is complicated, with several directives and permissions in place to ensure the integrity of the financial markets. Two important components of this framework are the MiFID services and Part 4A permissions. These two often overlap but have distinct characteristics. PERG 13 of the FCA Handbook acts as a guide, providing clarity on these aspects. This article explores their definitions, differences and the practicalities of aligning MiFID services with Part 4A permissions.
MiFID Services Defined
The Markets in Financial Instruments Directive (“MiFID”) is a European Union legislation that came into effect on January 3rd, 2018 and has been incorporated into UK law. It outlines specific investment services and activities, such as:
- Reception and transmission of orders in relation to financial instruments.
- Execution of orders on behalf of clients.
- Dealing on own account.
- Portfolio management and investment advice.
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis.
Part 4A Permissions Explained
Part 4A permissions, derived from the Financial Services and Markets Act 2000, are the UK’s regulatory gateway for firms to conduct regulated activities. These permissions are granted by the FCA and cover a broad spectrum of financial services, including but not limited to those under MiFID.
Part 4A permissions represent the regulatory approval granted by the FCA for firms to conduct specific financial activities. These permissions are not one-size-fits-all; they are tailored to the firm’s business model, the risks it poses, and the types of activities it intends to carry out. The scope of Part 4A permissions can range from deposit-taking and insurance-related activities to investment services and consumer credit.
To obtain Part 4A permissions, firms must demonstrate that they meet the FCA’s threshold conditions, which include suitability, business model, governance arrangements and capital adequacy. The application process is comprehensive, requiring detailed information about the firm’s operations, management and how it intends to meet ongoing regulatory requirements.
Examples of Part 4A Permissions
- Advising on Investments: This permission allows firms to provide personal recommendations to clients on investment products.
- Arranging Deals in Investments: Firms with this permission may undertake deals in investments without providing advice or dealing as Principal.
- Managing Investments: This includes discretionary management of investment portfolios on behalf of clients.
Distinctions and Overlaps
While MiFID services are specific to the EU’s directive, Part 4A permissions are broader, encompassing a wider range of regulated activities. A firm may hold Part 4A permissions for activities that fall outside the scope of MiFID services. However, if a firm wishes to conduct MiFID-regulated activities, it must ensure that its Part 4A permissions align with those services.
Overlaps
- A firm with Part 4A permission to manage investments may also be providing the MiFID service of portfolio management.
- Firms authorised to execute orders on behalf of clients under Part 4A permissions are also engaging in a MiFID service.
Distinctions
- Part 4A permissions may include non-MiFID activities such as insurance mediation or mortgage provision, which are not covered under MiFID.
- MiFID services are harmonised across the EU, whereas Part 4A permissions are specific to the UK and can include additional requirements.
Examples in Practice
Consider a UK-based investment firm, ‘Alpha Investments’, which holds Part 4A permissions for managing investments. This permission allows them to manage portfolios containing MiFID financial instruments. However, if Alpha Investments wants to expand its services to include the reception and transmission of orders, it must apply for additional Part 4A permissions that match this specific MiFID service.
Matching MiFID Services with Part 4A Permissions
PERG 13 provides guidance on how firms can match their Part 4A permissions with MiFID services. The process involves:
- Identifying the MiFID services the firm intends to provide.
- Reviewing the firm’s current Part 4A permissions to determine if they encompass the intended MiFID services.
- Applying for additional Part 4A permissions if there are gaps between the firm’s current permissions and the MiFID services it seeks to offer.
Conclusion
Understanding the regulatory requirements of MiFID services and Part 4A permissions can be challenging. However, with a clear understanding of their definitions, distinctions and the guidance provided by PERG 13, firms can align their services with the necessary permissions. This alignment ensures compliance and positions firms to capitalise on the opportunities within the UK’s financial markets.
How Can Complyport Help?
As experienced and leading Authorisation Consultants, we can assist you in identifying the right regulated cryptoasset activities based on your business model. Upon identification of the cryptoasset services, we can help you navigate the complex application requirements and guide you in the preparation of the required policies and procedures that need to be submitted.
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