Investment services or investment activities
Requirement for authorisation to provide investment services and perform investment activities
As a rule, providing investment services and/or performing investment activities related to financial instruments require authorisation. Whether authorisation is required does not depend on the extent and frequency of the provision of service.
However, the Act on Investment Services (747/2012) provides certain exemptions from the application of the Act. For example, the Act on Investment Services does not apply to the following circumstances:
- Provision of service to another undertaking within the same group of companies
- Operations carried out in an incidental manner in the course of other business or professional activity in accordance with legal or regulatory provisions governing the primary activity (for example law firms and audit firms)
- Dealing on own account, where no other investment services are provided and no other investment activities are pursued. This exemption does not apply to trading in commodity derivatives, emission allowances or derivatives on emission allowances.
Other activities of an investment firm
An investment firm may not carry on other activities than those covered by its authorisation. However, an investment firm may pursue other activities allowed for it under other EU or national legislation. Such other activities may require a separate authorisation or registration.
Under other legislation, an investment firm may, for example:
- function as an insurance agent and provide, among other things, unit-linked insurance policies on behalf and at the responsibility of an insurance company in accordance with the Act on Insurance Distribution (for more detailed information, see here)
- provide a crowdfunding service in accordance with the Act on the Provision of Crowdfunding Services
- function as a bondholders’ representative in accordance with the Act on Bondholders’ Representatives
- pursue premarketing of an alternative investment fund (AIF) on behalf and at the responsibility of an AIF in accordance with the Act on Alternative Investment Fund Managers
- function as a custodian, account operator or clearing party in accordance with the Acts governing these activities.
Right of a credit institution, a fund management company and an alternative investment fund manager to provide investment service
Investment services may be provided by investment firms, and also by fund management companies and alternative investment fund manager whose authorisation grants the right to do so. In addition, investment services may be provided by a credit institution in accordance with its articles of association and decisions of its board of directors.
Sales and marketing of investment services
Regulation related to the provision of investment services must be complied with in the sales and promotion (marketing) of investment service. Therefore, an investment service may only be marketed, in addition to the investment firm itself, by tied agents appointed by it. Examples of allowed marketing on behalf of any other party could include the mere distribution of prospectuses or brochures, or handing out key investor information documents at the client’s request, without providing further information on the content or on any investment services.
When a social media influencer cooperates with an investment firm, this may lead to circumstances where the influencer promotes, with the content produced, the investment services in a way only allowed for a tied agent.
Descriptions of investment services
The following descriptions of investment services are of a general nature. The requirement for authorisation for an activity must always be considered case by case. The assessment shall be based on the actual operations. Questions of interpretation concerning the requirement for authorisation may be submitted to sipa-ilmoitukset(at)finanssivalvonta.fi.
The reception and transmission of orders refers to circumstances where buy, sell or other orders for financial instruments are received and transmitted to another party for execution. The reception and transmission of orders takes place in the clients’ name and on their behalf.
Typically, orders are transmitted to another securities intermediary (investment service provider). The chain of orders may include even more intermediaries.
The reception and transmission of orders also includes functioning as the place of subscription in the issue of a financial instrument and transmitting a subscription order to the issuer or receiving subscription and redemption orders for fund units and transmitting them to the management company.
Furthermore, the reception and transmission of orders covers arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. Even if the role of the service provider would be limited, for example, to the presentation of investment opportunities to the client, this activity alone could be considered the reception and transmission of orders. It is irrelevant who has prepared the marketing material for a financial instrument and whether the service provider participates in the execution of the trade as well as whether the service provider receives or transmits payments related to the transaction. Hence, the reception and transmission of orders may include circumstances where the terms and conditions of the trade are agreed between the parties. On the other hand, the intermediary may participate in establishing the terms and conditions or otherwise contribute to the bringing about the trade or take care of related practical arrangements.
The marketing of fund units (both UCITS and AIF) is also considered reception and transmission of orders when it takes place by a party other than the fund management company or the alternative investment fund manager.
The execution of orders means buying, selling, switching or subscribing for financial instruments on behalf of a client. In these circumstances, the intermediary arranges the transaction in its own name on the client’s behalf.
Transactions are typically executed on regulated markets or other trading venues. A single transaction executed on a regulated market may consist of the execution of orders by several clients.
If the intermediary itself is a party to the transaction, it is also dealing on its own account in addition to execution of orders (the service provided to the client is execution of orders and dealing on own account is the investment firm’s own investment activity). The acting as a systematic internaliser is also considered order execution.
Orders may also be executed outside trading venues as so-called OTC transactions (over-the-counter), but transactions in listed shares must always be executed on trading venues.
Dealing on own account as referred to in the Act on Investment Services covers all kinds of proprietary trading where an investment firm buys or sells financial instruments to and from its own investment portfolio.
Dealing on own account also requires a permit whenever an investment firm takes the position of counterparty in a client’s transaction. However, dealing on own account is not primarily an investment service provided to a client, but the investment firm’s own activity. The service provided to an investor in such circumstances is execution of orders.
Examples of dealing on own account requiring authorisation also include the following:
- market making and acting as a systematic internaliser
- supporting brokerage activities by proprietary trading with a view to facilitating and supporting the execution of client orders (small transactions or an illiquid market)
- submission of subscription commitments in connection with an issue, in accordance with the terms and conditions of the issue
- active trading at own risk
- investment of liquid assets with an intent to seek higher return at a higher risk and taking advantage of market movements.
However, dealing on own account as referred to in the Act on Investment Services does not cover all possible types of dealing by an investment firm on its own account.
Examples of situations which do not require authorisation for dealing on own account include:
- strategic investments intended for long-term holding which are not, as a rule, held for sale
- investment activities which can be explained as passive and long-term investment by their purpose, the instruments used, the investment horizon and the extent of the activity
- minor positions resulting from erroneous trades which are closed, where possible, within the same day
- investment of liquid assets, where the purpose is to invest the assets in a prudential manner with limited risk while ensuring that the assets can, however, be liquidated swiftly as necessary. The purpose of the investment can be explained, for example, by the investment instruments used, such as deposits, money market instruments or fixed-income funds.
Portfolio management means the management of a client’s portfolio based on an assignment given by the client (portfolio management contract) so that the portfolio manager trades in financial instruments or other assets or otherwise executes orders concerning assets subject to the portfolio management agreement on the client’s behalf and authorised by the client. Hence, an authorisation for portfolio management also includes a permission to execute investment decisions within the scope of the portfolio management contract or to transmit such orders to another investment service provider.
In a portfolio management contract, the discretion on investments has been given either entirely or partly to the portfolio manager. Thereby the portfolio manager has the client’s authorisation to make investment decisions and perform related actions (buy, sell, switch, subscribe) on behalf of the client and in the client’s name. The nature of the service is the management of an investment portfolio with a focus on investment decisions, and not other kinds of management of individual investments in the portfolio. For example, as regards equity holdings, the service could include, at the maximum, a proxy appointment to participate in general meetings of a company on behalf of the client.
Portfolio management also refers to a service where the client gives an order to the service provider to execute transactions in the client’s own portfolio for example on an automatic basis triggered by specific signals. Such signals could include, for example, investment decisions by the service provider’s other client, which are offered by the service provider to be copied at the other client’s permission. An activity may be considered portfolio management regardless of whether the portfolio is managed by an asset manager/employee or a system/algorithm offered by the service provider for its clients to use. The European Securities Markets Authority ESMA has published a supervisory briefing on copy trading services, for more information see here.
Real estate asset management in comparison with portfolio management under the Act on Investment Services
The MiFID II Directive, like its predecessor, only addresses the provision of investment service and ancillary service related to financial instruments. It has been possible to provide more stringent national regulation than the Directive, and therefore there may be different regulation in the member states on the provision of service in other investments than financial instruments. In Finland, an investment firm may not pursue other activities than those covered by its authorisation. However, in connection with the implementation of the first MiFID Directive, national legislators wanted to allow the provision of certain investment services (including asset management) and custodial and administrative services for other investment assets than financial instruments. The rationale of the Act (government proposal 43/2007) mentions real estate as an example of such investments. However, no special provisions have been issued in this regard, and therefore the content of the service concerning these investments, as a rule, is the same as in the context of financial instruments. Hence, the Act on Investment Service allows the provision of portfolio management service where real estate is used as a component of an investment portfolio consisting of financial instruments. However, this as such does not constitute real estate management, and various building management activities, extensive technical management, real estate development, contracting etc. are not deemed comparable to custodial and administrative services for financial instruments.
Portfolio management service provided by an AIFM also constitutes portfolio management as referred to in the Act on Investment Services, and therefore the above provisions on the contents of portfolio management are applicable to portfolio management service provided by an AIFM.
Investment advice is the provision of individual recommendation to a client to make a transaction in a certain financial instrument.
Advice is considered individual if it is based on the client’s circumstances or the client gets the impression that their circumstances have been considered in providing the advice. Circumstances to be considered include for example the client’s risk appetite, investment objectives and financial position.
Where advice concerns a specific investment product, such as a specific listed share or investment fund, it is considered advice on a financial instrument in accordance with the definition of investment advice. In contrast, a general advice to save on a monthly basis in investment funds (without naming any specific fund) or to diversify equity investments geographically (without naming any specific shares) does not meet the definition of investment advice.
An opportunity given to a client to track a specific model portfolio, another investor’s investment decisions or an algorithm enabling the client to make investment decisions could also be considered investment advice. The service provider must ensure in advance that a portfolio or strategy offered to a client for tracking, as well as any other investment advice given, is suitable for the client. The European Securities Markets Authority ESMA has published a supervisory briefing on copy trading services, for more information see here.
Content concerning investments, such as articles and videos, often includes a remark that it is not investment advice. However, such a warning does not affect the assessment whether it is investment advice or not. The assessment whether investment advice or an investment recommendation has been given or not is based on the textual content and the impression received by the client.
If a recommendation is not individual and therefore does not meet the definition of investment advice, it may be an investment recommendation. In accordance with the Market Abuse Regulation, an investment recommendation means information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers, including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public.
Investment recommendations include, for example, all buy/sell/hold recommendations on equities. The distribution channel may be an analyst report, article, traditional media or even social media.
The production and dissemination of investment recommendations as a stand-alone activity does not require authorisation. However, a person producing investment recommendations must comply with certain rules in pursuing the activity (for more details, see Commission Delegated Regulation (EU) 2016/958). The rules require that the producers of an investment recommendation publish their identity, present recommendations in an impartial manner and report any relationships or circumstances impairing the objectivity of the information. Experts are subject to additional rules.
Financial advice without specifying individual financial instruments does not require an authorisation granted by the FIN-FSA. Such advice must not be misleadingly marketed as investment advice.
The underwriting and placing of an issue of financial instruments on a firm commitment basis or without a firm commitment basis both refer to a service provided to an issuer (who needs financing) in order to obtain investors. The difference between these services is whether they involve a commitment by the service provider.
Therefore, the service provided to an issuer to obtain investors may comprise the arrangement of an issue or sale of financial instruments without giving a subscription or purchase commitment or the arrangement of an issue or sale of financial instruments so that the service provider gives a commitment to subscribe for the issue to the extent that would otherwise remain unsubscribed.
The provider of the service may be assigned to function on behalf of the issuer in arranging the issue. The assignment received involves independent responsibility, and it is not merely an advisory role. The service may include the active search for subscribers or other service to reach investors.
In contrast, if an investment firm decides under its own investment policy to subscribe to a certain amount in an issue and provides a subscription commitment in accordance with the terms and conditions of the issue, it does not constitute firm commitment placing of an issue as referred to above, but it is dealing on own account.
Functioning as a place of subscription in an issue is reception and transmission service provided to investors.
Advisory services related to the issues (so-called corporate finance advice) are discussed under Ancillary services.
In the Act on Investment Services, ancillary services refer to services which do not, as such, require authorisation but which are provided by an investment firm in addition to or in the course of its primary investment services. An investment firm may only provide such ancillary services that are covered by its authorisation.
For example, foreign exchange services as an ancillary service means that the investment firm may execute a foreign exchange transaction necessary to carry out a securities transaction.
In the course of investment services, it is possible to provide for example securities custody and administrative services and grant credits or other finance related to the investment service as well as to produce investment research and general recommendations relating to transactions in financial instruments.
Allowed ancillary services also include advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings. This type of corporate finance advisory services include, for example, advising the issuer in connection with an initial public offering or an M&A transaction and assisting it in pricing, legal issues, drafting the prospectus and the terms and conditions of the issue, arranging investor events and comparable matters.
An investment firm may also be granted the right to pursue other activities comparable or closely related to the ancillary services listed in the Directive on Investment Services. Such activities may include, for example, legal advice or tax advice pertaining to investment activities.