Rozhodnuti SDEU Fondee vs CNB hranice prilezitosti

CJEU decision Fondee vs. CNB - the limits of the opportunity

The Court of Justice of the European Union (CJEU) in the case of Fondee a.s. vs. Czech National Bank examined the question whether the restriction contained in Section 29(4) of the Capital Market Undertakings Act[1] that investment intermediaries also transmit instructions concerning investment instruments to EU investment firms is contrary to EU law. In its judgment[2] of 16 May 2024, the CJEU ruled that this restriction is contrary to the MiFID II[3] Directive. As a result, the decision opens the possibility for 111 investment intermediaries registered with the Czech National Bank to transmit instructions not only to banks, investment firms, management companies or investment companies from the Czech Republic, but also to those from another EU Member State.

The use of the space defined by the CJEU in its judgment may be rather limited. If the initiative to offer investment instruments comes from a foreign investment firm, it is likely that cooperation with an investment intermediary cannot be established at all.  It may cooperate with a tied agent, but if that agent is based in the Czech Republic, its status is at the level of a branch, with all the consequences, including tax consequences.

Circumstances of the preliminary question before the CJEU

The preliminary question concerned the interpretation of the MiFID II Directive, which regulates a significant part of capital market business and, among other things, focuses on the conditions for the provision of investment services, including the offering and arranging of investments in investment instruments, the provision of investment advice and the management of client portfolios. 

The MiFID II Directive is mainly transposed into the Czech law by the Act on Capital Market Undertakings. Under MiFID II rules, the Act on Capital Market Undertakings entrusts the provision of investment services in the Czech Republic to banks and securities dealers and opens the domestic market to similar financial institutions from the EU. In 2004, the Czech Republic already took advantage of the option introduced by the original MiFID I[4] Directive to allow a limited range of investment services (distribution of investment and collective investment securities and related investment advice) to be provided by a local type of entity - an investment intermediary - which can operate locally under significantly lighter regulatory conditions than banks and investment firms have to meet.

MiFID aims to protect confidence in the capital market. It focuses in detail on investor protection and mutual trust between financial market professionals. Ensuring their high quality, integrity and ability to contribute to the overall efficiency of the financial system[5] is key. It is understandable, therefore, that the Czech Republic has taken a conservative approach to the possibility of using a local investment intermediary, which complies with only a limited range of MiFID rules, to distribute investment instruments, and has allowed it to work only with domestic entities which, like the investment intermediary, are supervised by the Czech National Bank. It can be understood that this approach was also intended to manage the risk of potential objections from the EU that the Czech Republic was not sufficiently protecting the high quality of cooperation between financial market professionals by allowing cooperation with intermediaries that do not fully comply with the high MiFID standards. In any case, we understand that the restrictive rules of the Capital Market Undertakings Act for investment intermediaries were not intended to threaten EU values, but rather to contribute to their protection. We understand that the Czech National Bank had a similar view of the issue when considering the Fondee case.

In its decision, the CJEU focused on the impact of the Czech measure on EU investment firms, providing a new and authentic perspective on the possible approach to the implementation of the MiFID exemption.

Right of establishment risk in selected business models

The CJEU's task was to help the Municipal Court in Prague clarify whether an investment intermediary can also transmit instructions to EU investment firms. For obvious reasons, it did not deal with other conditions of such cooperation and the decision may thus raise high expectations on the domestic market.

In our view, the CJEU's decision may benefit an independent investment intermediary, i.e. one that acts solely on the instructions of its client or that transmits instructions/ provide advises in relation to investment instruments that it has included in its offering on its own initiative. However, if it includes investment instruments / investment services in its offering at the initiative of a foreign distributor or product factory (by product factory we mean EU investment companies and self managed investment funds), consideration should be given as to whether the foreign financial institution / investment firm will be seen as exercising its right to provide services within the EU.

An EU investment firm is allowed to provide its services either directly or through another investment firm (or bank) or tied agent[6]. The CJEU[7] bases its decision on the fact that Article 3(1)(c)(i) of MiFID II explicitly grants persons who are exempted by a Member State from the scope of the Directive (in the Czech Republic, investment intermediaries) the possibility to transmit the instructions they receive to authorised investment firms. In the opposite direction (which the CJEU has not addressed), however, it is clear that MiFID II does not give investment firms the ability to enter the market of another Member State other than in the ways defined by MiFID II and therefore does not give them the right to entry the market trough persons whom the Member State has exempted from MiFID II.

MiFID II implies that an investment firm may provide investment services in the territory of another EU Member State, either in the form of cross-border provision of services or under the right of establishment (branch)[8]. In the first case, it may use a tied agent established in its home Member State. If it uses a tied agent from the host Member State, the tied agent is placed at the level of a branch or the right of establishment is deemed to be exercised by the investment firm using a tied agent[9].

In the Czech Republic, it is not possible for an investment intermediary to be a tied agent[10] at the same time and therefore for an EUinvestment firm to seek this form of cooperation. There is a fundamental difference and potential conflict of interest between a tied agent and an investment intermediary. While a tied agent engages in distribution and advice on behalf of and for the account (and with the responsibility) of the single investment firm represented, an investment intermediary uses multiple investment firms and the responsibility does not rest solely with the investment firm represented.

If our conclusion is correct, it is unnecessary to point out the potential tax consequences for a foreign investment firm of using a tied agent that is built to the level of a branch.

In the case of investments in foreign investment funds, investment intermediaries have a wider range of opportunities to work directly with foreign EU product factories (EU management companies and investment company), as the distribution of investment funds in the territory of another Member State[11] is not considered, from the product factory's perspective, to be the exercise of the activity of a foreign management company or investment company  in the territory of another Member State. In the case of the common distribution models of foreign funds, it will be significant that a side effect of the CJEU's decision will be the need to apply it analogously to foreign investment funds and to allow investment intermediaries to pass on instructions directly to these product factories or, as instructed, to their so-called transfer agents.

If you have any questions, please contact the authors of the article or members of the EY team with whom you are working.

Authors:

Alena Šebestová

Radek Matuštík

Vladimír Petráček

Petr Janeček

[1] Act 256/2004 Coll.

[2] CJEU decision: CURIA - Documents (europa.eu) Opinion of the Advocate General CURIA - Documents (europa.eu).

[3] MiFID II EUR-Lex - 02014L0065-20240328 - EN - EUR-Lex (europa.eu).

[4] MiFID I Directive - 2004/39 - EN - EUR-Lex (europa.eu).

[5] Cf. recitals 5, 31 of MiFID I.

[6] Cf. Article 5 (1) of MiFID II, according to which no one may provide investment services without authorisation; this may be granted to a securities dealer or a bank.

[7] Cf. paragraph 29 of the judgment.

[8] Similarly, the CRD for banks or UCITS and AIFMD for investment firms.

[9] Article 35 (2) MiFID.

[10] § Section 32c(1)(a) of the Capital Market Undertakings Act.

[11] Cf. e.g. Article 16 (1) second sub-paragraph of UCITS