The reform and broadening of the regulations on markets for financial instruments published in mid-October by the EU Commission also call for increased rules for providers of securities services and investment activities from third countries, i.e. from non-EU countries. Authorization for onshore business through a branch will, among others, only be granted by the competent authorities of the EU Member State if a double-taxation agreement on par with OECD standards has been concluded.
PBI: How are providers of securities services and investment activities from third countries affected by the MiFID II proposal?
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Marcel Aellen, KPMG Switzerland (MA): Market participants from non EU countries will be affected by the MiFID II and MiFIR insofar as they offer services within the EU. Cross-border business originating from third countries will be regulated in detail. The new provisions stipulate that service offerings to retail clients will only be permitted through branches in an EU country and that there will be a standardized process for obtaining a license for such branches. The provision of services offshore will subsequently only be open to so called eligible counterparties and will be subject to a standardized EU regulation regime as well. If also "per se" professional clients can be served offshore needs to be clarified.
PBI: How do the requirements for the establishment of a branch within the EU look like in detail?
MA: The EU appears to be more conscious in its efforts to address the legal relationships with service providers from third countries and is establishing significant hurdles. The requirements to establish a branch by a third country provider are quite heavy. There are obvious ones like that the service provider is subject to effective regulation in its country of origin or the branch shall be operated by executives which are fit and proper. Others will go further like the conclusion of a double-taxation agreement on par with OECD standards. The EU Commission suggests also that the third country regulation is recognised to be equivalent to the EU financial market regulation. The relevant decision shall be taken by the Commission itself. The EU Council has taken a more liberal position recently, on 21 June 2013, and suggests deleting the equivalency requirement. But still, the access to the EU-market will remain a challenge for third country providers. The EU Council votes for deleting totally the proposals to regulate the offshore business as well.
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By GlobalDataPBI: Which authorities are supposed to give the approval for the third country providers?
MA: If the proposed equivalency requirement remains it will be, as already mentioned, the EU-Commission to take the relevant decision. As a second step, it will be the competent authority of the EU-Member State which will approve a branch for the onshore business with retail clients. For the offshore business with eligible counterparties a registration with the European Securities Markets Authority (ESMA) is foreseen.
PBI: What is now the link to the automatic exchange of information in tax matters?
MA: As I already mentioned, one of the requirements for the onshore business with retail clients is the con-clusion of a double-taxation agreement on par with the OECD Model Tax Convention on Income and on Capital standards which specifically fully complies with the standards laid down in article 26 to ensure an effective exchange of information in tax matters.
PBI: Since Switzerland is under pressure in tax issues, this link will have quite an impact to your country and to Swiss banks and financial services providers. Is this correct?
MA: Yes, there will be several impacts and issues. The Federal Council published a consultation to a draft amendment to the anti-money laundering legislation in Switzerland in February 2013. The bill will imple-ment extended due diligence requirements which should prevent untaxed assets from being accepted by financial intermediaries in Switzerland. Now, the mechanism of MiFID II which calls for an effective ex-change of information in tax matters undermines obviously this due diligence approach. The OECD Model Tax Convention will foresee sooner than later an automatic exchange of information. So, the due diligence with regard to untaxed assets, declared by the Federal Council as an element of the Swiss white money strategy, will become obsolete.
PBI: But, the automatic exchange of information is not a global standard, yet. Why do you think that the Swiss market is concerned already?
MA: The recent discussions underpin clearly that the automatic exchange of information shall soon be what is declared as an effective exchange of information in tax matters in the meaning of article 26 OECD Model Tax Convention. Most of the OECD Member States are aiming for the automatic exchange of information. Austria and Luxembourg, so far in line with the Swiss position and strictly against the automatic exchange of information, changed their approach recently. This clearly proves that rethinking is taking places. So, in Switzerland the discussion has started as well and the automatic exchange of information is no longer a taboo subject.
PBI: Is therefore the implementation or the support of the automatic exchange of information part of the strategy for the financial sector in Switzerland?
MA: Yes indeed; the Federal Council issued a revised position recently. An element of this, is to offer the implementation of the automatic exchange of information against an open or light market access; e.g. vis-à-vis the EU. But again, the mechanism of the third country rules of MiFID II with the link to a mandatory dou-ble-taxation treaty in line with specifically article 26 of the Model Convention will not give any space for Switzerland to negotiate the framework of market access in the EU. So, the offer of the Federal Council will have so for no effect in relation to the EU. In any case, a double-taxation treaty which complies with the recent or prospective OECD standards will be a requirement for Swiss intermediaries to maintain or imple-ment business with retail clients in the EU anyway.
Marcel Aellen, is senior manager audit financial services at KPMG Switzerland
Click here for more information on the Newsletter Compliance Matters, December 2011 Provision of services by financial intermediaries from third countries in EU financial markets regulation"
