6th February 2008

Compliance Tip – February 2008

In our December 2007 Compliance Tip, we advised that IFA firms that fell within the scope of MiFID required a formal audit and were no longer able to benefit from the small companies exemption. This appeared to be the case for all firms at that time. However, since issuing the tip, we have investigated this matter further and have been able to establish that an exclusion to the requirement for an audit does still exist for some firms.

The ability to claim this exemption will depend upon why the firm is a MiFID firm. The majority of IFAs were not automatically categorised as MiFID scope firms on the assumption that the activities they were carrying out were not MiFID scope activities. However, many firms subsequently decided to opt-in to MiFID either because the activities they were carrying on were MiFID business, for example giving advice on Unregulated Collective Investment Schemes (“UCIS”) or because they wished to ‘passport’ into other EEA states.

The distinction between these two scenarios is important when considering whether your firm needs to appoint an auditor or not. If you opted into MiFID because you do UCIS business this was done because this particular activity is classified as MiFID business, and as such you were not able to benefit from the “Article 3” exemption for advisory IFAs. In this scenario you would be classified as a MiFID firm carrying on MiFID business and therefore you would need a formal audit.

Other firms, who were able to benefit from the “Article 3” exemption, yet chose to opt-in to MiFID merely in order to passport their services to other EEA states could still ordinarily be classified as otherwise exempt under Article 3. Therefore, although they are a MiFID firm in every other sense, they do not require an audit because their activities are not deemed to fall within the scope of the MiFID directive for audit requirement purposes.

Therefore in our opinion if your firm opted-in to MiFID only to take advantage of the ability to passport your services to another EEA state, and the firm does not undertake any other MiFID business (e.g. arranging UCIS) then you should be subject to the same audit requirements and exemptions as an identical firm who had chosen not to opt-in to MiFID. This applies provided firms are not required to undertake an audit by virtue of any other piece of legislation, and they continue to meet the definition of a “small company” under the Companies Act.

If firms need further guidance on the requirement to appoint an auditor they should speak to their usual supervisory contact or contact Phil Robson or David Abbott on 0161 486 1000.