The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Amendment No. 2) 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”), 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) and by the Financial Services Authority (“the FSA”) using powers under the Financial Services and Markets Act 2000 (c. 8) (“the Act”).

Regulation 2(2) inserts transitional provision into the principal Regulations for investment firms authorised in other EEA States exercising the right to provide services or establish a branch in the United Kingdom similar to the transitional provision in regulation 7 of the principal Regulations for UK investment firms. This transitional provision enables an investment firm to continue to provide the same investment services in the United Kingdom on and after 1st November 2007 (the date on which the Directive has effect) without the need for any action on the part of a firm, its home State competent authority or the FSA. The transitional provision will not apply where it conflicts with any law in the home State of the investment firm.

Regulation 2(4) partially replaces the transitional provision made in regulation 7(3) of the principal Regulations for UK investment firms authorised to passport the non-core service of investment advice under Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ No L 141, 11.6.1993, p. 27). Unless they opt out, investment firms authorised to passport this service will, from 1st November 2007, be authorised to passport under the Directive the ancillary service of investment research and financial analysis where the FSA has notified the competent authority of the State concerned.

Permissions under Part 4 of the Act of firms authorised to carry on activities regulated under the Act in the United Kingdom often contain a limitation under section 42(7)(a) of the Act or requirement under section 43 of the Act as to the category of clients in relation to which the activities can be carried on. The Directive introduces new categories of clients for investment firms (retail clients, professional clients and eligible counterparties) which differ slightly from the categories currently used in relation to investment and other firms in the United Kingdom. Regulation 2(5) and (7) contain transitional provision to amend the permissions under Part 4 of the Act of investment firms and certain other types of firms so that “client category” limitations or requirements refer to the categories specified in the Directive, without the need for the firm to make an application or for the FSA to amend the permission. There is provision for a firm to opt out of the amendment to its permission by giving notice to the FSA.

The Regulations also make minor amendments to regulation 7 of the principal Regulations (transitional provision in relation to United Kingdom investment firms exercising passport rights under the investment services directive) and to Schedule 7 to the principal Regulations (exercise of passport rights under the investment services directive).

A transposition note has been prepared which sets out how the main elements of the Directive are transposed into United Kingdom 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.