UE single passport in financial services

The Treaty on the Functioning of the European Union (TFEU) provides for a number of freedoms, constituting the basis for the functioning of the EU internal market.

These freedoms are, among others freedom of services, freedom of movement of capital and freedom of establishment. The existence of the above-mentioned freedoms results in the functioning of the principle of a single European passport (single license principle) for investment firm. In practice, it allows investment firms that have obtained a license to operate in one EU member state to conduct this activity also in another Member State, without the need to obtain a license from the local competent authority. The relevant provisions, stipulating that Member States may not impose any additional requirements on these investment firms, provide only for the obligation to carry out the notification procedure before starting their activity.

In accordance with Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 (“Directive”) investments firm may freely provide investment services, perform investment activities as well as ancillary services. The Directive includes to this catalog, among others:

• reception and transmission of orders in relation to one or more financial instruments specified in the Directive,
• execution of orders on behalf of clients,
• dealing on own account,
• portfolio management,
• investment advisory,
• underwriting of financial instruments and placing of financial instruments,
• operation of an OTF and MTF.

Provisions of the Directive, provide that, under the principle of a single passport, investment firms can operate in two ways:

1.  by establishing a branch in the territory of another Member State;
2.  on the principle of cross-border provision of services, without the need to open a branch, including provision of services through an agent residing in the host country or another Member State.

Running a business, regardless of in which way it is carried out, can only take place within the scope of activities covered by the license obtained in the home state. In both cases, however, it is necessary to carry out the notification procedure to the body supervising the investment firm. This procedure is different for both ways of doing business in another Member State.

The investment firm wishing to establish a branch within the territory of another Member State or to use tied agents established in another Member State in which it has not established a branch, shall include in its notification to the competent authority of its home state information regarding:

• the Member States within the territory of which it plans to establish a branch or the Member States in which tied agents are established,
• a programme of operations setting out, inter alia, the scope of services to be offered
• the organisational structure of the undertaking,
• information on how tied agents will be included in the corporate structure of the investment firm,
• the firm’s address in the host Member State,
• the name of person responsible for the management of the branch or of the tied agent.

The supervisory authority shall, within three months of receiving all information, forward it to the competent authority of the host Member State together with information on the accredited compensation scheme of which the investment firm is a member. From the moment of providing these information, the company may commence its investment activity in a third country. However, it should be noted that the supervisory body of the home state, within the administrative discretion, has the right to refuse to transfer the abovementioned information. The reasons for its decision in such a situation shall be forwarded to the investment firm within three months from the date of filing the application.

In principle, the investment firm that operates on the basis of cross-border services without the establishment in the third country of its branch remains the supervision of the host State’s authority. In this situation supervision is fully exercised by the competent authorities of the home state (the principle of home country supervision). Where such form of operation and provision of investment services is chosen, each investment firm should provide the competent supervisory authorities of its home state with information on:

• the Member State in which it intends to operate;
• a programme of operations stating in particular the scope of services to be offered along with information whether it intends to do so through the use of tied agents, established in its home state
• where an investment firm intends to use tied agents, the investment firm shall communicate to the competent authority of its home Member State the identity of those tied agents.

The home state’s authority shall, within one month, transmit this notification to the competent authority of the host Member State. The investment firm may then start to provide the investment services or to perform investment activities in the host Member State.

The Directive in the case of operating on a cross-border basis of services (without establishing a branch) does not provide for the possibility to refuse to transmit the information by the authority of home state to the Member State. However, it should be noted that this issue can be regulated differently under national law. This is the case in Poland, where the domestic legislator has granted the Financial Supervisory Authority the ability to object both in the case of submitting a notification by a brokerage house that plans to open a branch in a third country and a brokerage house that intends to operate on a cross-border basis.

In conclusion, the principle of a single passport (a single license) allows the exercise of rights resulting from the freedoms of the EU internal market, guaranteed by the TFEU. All credit institutions, insurance companies or investment firms licensed to perform a specific activity or provision of specific services in their home state are entitled to cross-border services in the same scope also in the territory of other Member States and establish branches there as in the country of origin.

We invite you to contact us at the following e-mail address: pawel.osinski@oglegal.pl lub natalia.zynwala@oglegal.pl.

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