European Union: Changing Status Of EU Local Authorities Under MiFID II

Asset managers located inside and outside the European Union ("EU") should be aware of the changing regulatory status of EU local authorities, and their pension funds, under the next iteration of the Markets in Financial Instruments Directive ("MiFID II"), that applies on 3 January 2018.

EU local authorities are active users of wholesale financial services, whilst their pension funds frequently invest in funds or engage investment managers to manage their assets. Any EU or non-EU firm that trades with or that is engaged directly by the local authority, or that is marketing a fund or other financial product to a local authority, will be affected.

Change under MiFID II

MiFID requires investment firms to classify their clients as retail clients, professional clients or eligible counterparties, with the level of classification determining the degree of protection afforded to the client. Under the current rules, investment firms within the scope of MiFID may classify local authorities and their pension schemes as per se professional clients if they meet any of the categories of clients that are considered per se professional clients, such as pension funds or large undertakings.

From January next year, MiFID II will exclude "public sector bodies, municipalities and local public authorities" from the list of per se professional clients. These terms are not defined in MiFID II, given the many different types of these bodies across the EU, but generally mean public institutions below state level, from large regional or city authorities to small town or village councils.

These types of clients will be treated under MiFID II as per se retail clients and given the same protections as individual investors. Asset managers and other investments firms will need to obtain the agreement of any such client to be treated as an "opted up" professional client, with an assessment by the firm of the client's expertise and knowledge. The change in MiFID II reflects a view that local authorities (and, in particular, their treasury functions) may not be as sophisticated as the per se professional client definition requires – the Directive stating that "the financial crisis has shown limits in the ability of non-retail clients to appreciate the risk of their investments".

Treatment of local authority pension funds

Local authority pension funds typically invest in many types of funds. The pension fund may be held within the local authority (where the pension fund is an asset of the local authority) or may be held by another person, such as a trustee. Whether or not the pension fund will be treated as a per se retail client may depend on whether or not the fund is legally segregated from the authority. In the UK, a common arrangement is for the local authority itself to hold and administer the assets, although local authorities have moved recently to pool their assets for greater efficiencies of scale. Given the relative sophistication of these funds and the size of their assets under management, it may seem incongruous to treat them as retail clients.

MiFID II includes criteria to opt up a client to professional client status. These are largely unchanged from the original MiFID, and require firms to apply a qualitative test (that, on an assessment of the expertise, experience and knowledge of the client, the client is capable of making investment decisions and understanding the risks involved) and a quantitative test (that the client meets two of three criteria, namely (i) that the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters; (ii) that the size of the client's financial instrument portfolio exceeds 500,000 euros; and (iii) that the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged). Under MiFID II, Member States may adopt additional or alternative criteria for the assessment of the expertise and knowledge of local authorities when they ask to be treated as professional clients.

These tests have largely been applied to date to individual investors. As such, questions arise in applying these tests to local authorities – for instance, when assessing whether the client has prior experience of working in the financial sector. In its work implementing MiFID II into UK law, the UK Financial Conduct Authority ("FCA") set its own criteria for the opt-up for UK local authorities, and provided guidance on application of the client's expertise, experience and knowledge, such as where investment decisions are made by a committee – in that circumstance, the firm may take a collective view of the expertise, experience and knowledge of committee members. Also, in light of the difficulties associated with applying some of the quantitative criteria to local authorities, the FCA added a fourth criterion to this test, that the client is subject to the Local Government Pension Scheme Regulation for its pension administration business. This will assist local authority pension fund administrators that wish to opt up to meet the quantitative test. The FCA also changed the portfolio size threshold from 500,000 euros (more suitable for an individual investor) to £10m, to reflect its policy goal of restricting the ability of the smallest and less sophisticated investor to opt up. The tests apply separately when dealing with a local authority for the administration of a pension scheme as opposed to the local authority's treasury function.

Firms will need to have regard to the local implementation of the test in other EU jurisdictions in which their local authority clients may be located.

Impact on asset managers

Asset managers that are engaged directly by a local authority or its pension fund – in particular, in the context of a segregated account mandate – should take steps to opt up the local authority. Although MiFID II has granted many of the pre-existing client protections for retail clients to professional clients, the implications of performing an investment service for a retail investor include stricter application of the "suitability" check when giving investment advice or performing portfolio management and the "appropriateness" check for execution only business.

To the extent they have the power to do so, asset managers are well advised to take steps to opt up local authority pension schemes that invest in their funds under management. The Alternative Investment Fund Managers Directive ("AIFMD") does not confer any particular protections on retail investors in alternative investment funds, although local law may do so. However, AIFMD allows marketing of alternative investment funds to retail investors only at the discretion of individual Member States, and managers are advised to opt up existing investors that are local authority pension funds or find that their future ability to market to such investors is limited. Additionally, the new EU Packaged Retail Investment and Insurance Products Regulation (applying from 31 December 2017) requires production of the "key information document" ("KID") for distribution of any fund to any retail investor in the EU – the time and expense of producing the KID to admit a single or small number of retail investors into a fund may be disproportionate.

Impact on non-EU firms

Where a non-EU asset manager has been engaged directly by the local authority (in particular, for a segregated account mandate), the asset manager should take steps to opt-up the local authority – although there are unresolved questions on the power of non-EU managers to perform the opt up. Whilst the non-EU manager will not be subject to the substantive requirements in MiFID that apply to EU firms that face retail clients, it may be prudent to perform the opt-up for the following reasons. Firstly, it may find its ability to market other services or products (such as interests in successor funds) to retail investors curtailed in the future. Secondly, where a non-EU manager is performing an investment service governed by MiFID directly to a local authority (such as a segregated mandate), the manager will need to have regard to the new rules in MiFID II on "third country" (non-EU) firms that provide such services to retail clients. Under current rules, the ability of a non-EU firm to market a service to, and provide a service to, retail clients in an EU state is a matter of local law. Under MiFID II, a Member State may require a third country firm that is providing services (with or without any ancillary services) to retail clients and opted-up professional clients to establish a branch in that state. Although current indications are that few Member States are imposing this new requirement, non-EU managers are well advised to opt up their local authority clients to avoid the application of local restrictions that apply performing investment services to retail clients in a jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions