The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Amendment) Regulations 2007

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations, which amend the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 (S.I. 2007/126) (“the principal regulations”), the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (S.I. 2001/1217), the Financial Services and Markets Act 2000 (EEA Passport Rights) Regulations 2001 (S.I. 2001/2511) and the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) (Amendment) Regulations 2006 (S.I. 2006/3413), implement in part Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (OJ No L 145, 30.4.2004, p.1) (“the Directive”). The Directive is also implemented by other statutory instruments including the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006 (S.I. 2006/3384) (“the 2006 Order”) and by the Financial Services Authority (“the FSA”) using powers under the Financial Services and Markets Act 2000 (c. 8) (“the Act”).

Regulations 2 and 3 implement Article 3 of the Directive which allows Member States to exempt certain investment firms from the requirements of the Directive provided that they (1) are not allowed the freedoms which investment firms subject to the Directive have to provide investment services in and establish branches in other Member States, and (2) comply with specified requirements limiting the scope of their activities (“the limiting requirements”). The Regulations achieve this by inserting new provisions into the principal regulations. In particular, new regulation 4A(3) defines the expression “exempt investment firm”, new regulation 4B ensures that exempt investment firms do not have the freedoms mentioned and new regulation 4C applies the limiting requirements to exempt investment firms as if they were requirements imposed by the FSA under the Act.

The regulation 2 and 3 amendments come into force for all purposes on 1 November 2007 and a transitional provision, in regulation 9A, provides that an authorised investment firm complying with the limiting requirements immediately before that date automatically becomes an exempt investment firm on that date unless its FSA permission under Part 4 of the Act permits it to carry on certain activities or it has previously given the FSA notice that it does not wish to become an exempt investment firm. The amendments come into force on 1 April 2007 for the purposes of giving such notice.

Regulations 4 to 6 contain transitional provision consequential on the amendment of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) (“the RAO”) by the 2006 Order to make operating a multilateral trading facility a separate specified activity and to extend the specified investments of options, futures and contracts for differences as required by the Directive. The transitional provisions extend the permissions under Part 4 of the Act of authorised persons who are investment firms, credit institutions or UCITS management companies, without the need for the person to make an application or for the FSA to amend the permission. Permissions are only extended where immediately before 1st November 2007 the authorised person has permission under Part 4 of the Act to carry on an approximately equivalent regulated activity or where immediately before 1st November 2007 the authorised person has a permission under Part 4 of the Act in relation to an approximately equivalent kind of investment. The transitional provisions are framed by reference to the categories used by the FSA for permissions under Part 4 of the Act. These categories use terms defined in FSA rules under the Act by reference to the RAO.

Regulation 7, which amends the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001, contain transitional provision in relation to the contracts of appointed representatives of principals who are investment firms or credit institutions. Regulations 8 and 9 make corrections to the Financial Services and Markets Act 2000 (EEA Passport Rights) Regulations 2001 and the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) (Amendment) Regulations 2006.

A transposition note has been prepared which sets out how the main elements of the Directive will be transposed into UK law. A Regulatory Impact Assessment of the effect of this instrument and the other instruments transposing the Directive on the costs of business has been prepared. Both may be obtained from the Financial Services Strategy Team, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ. They are also available on HM Treasury’s website (www.hm-treasury.gov.uk). Copies of both documents have been placed in the libraries of both Houses of Parliament.