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ESMA seeks to tighten scrutiny of firms’ use of tied agents under MiFID II framework

  • United Kingdom
  • Financial services and markets regulation
  • Investment funds and asset management

15-02-2022

On 2 February 2022, the European Securities and Markets Authority published a supervisory briefing setting out expectations for firms that use tied agents.  Following Brexit, ESMA monitored firms' behaviour to check whether their interactions with EU-based clients comply with MiFID II (2014/65/EU). 

The supervisory briefing sets out ESMA’s expectations of investment firms that:

  • appoint tied agents
  • use tied agents in their on-going activities

ESMA has particular concerns about tied agents with close ties to non-EEA financial services firms, and wants EU member state regulators, known as National Competent Authorities (“NCAs”), to look closely at whether their use is appropriate.

ESMA does not set out precisely how it thinks that tied agents “may be used be used to access EU markets without the relevant MiFID authorisations”.  However, it does identify as a matter of concern circumstances where an EU firm appoints a tied agent and that tied agent delivers its services to its appointor with the use of staff who are also at the disposal or control of other firms, including non-EEA firms.  Such staff are often referred to as “double-hatted”.  In those circumstances, ESMA believes that the other firms, including non-EEA firms, “could exercise inappropriate influence over the way in which a tied agent carries out the activities on behalf of the firm or may prevent the firm from effectively monitoring the activities of their tied agent.”

The supervisory briefing is consistent with other EU developments which are taking a critical look at the ability of EU financial services firms to interact with non-EEA firms, including current proposals to reform the AIFMD in relation to EU firms’ delegation of asset management and other functions to non-EEA firms.

Supervisory expectations when firms appoint tied agents

ESMA expects National Competent Authorities (“NCAs”) to ensure that the firms they regulate meet their supervisory expectations and that the NCAs carefully scrutinise those firms which mainly  appoint tied agents with close links to non-EU firms.  ESMA believes such business models may facilitate access EU markets without appropriate MiFID authorisations.

Strategy

A firm should have a clear understanding of how a tied agent will contribute to the firm’s strategy before appointing one.  This includes knowing what type of clients the tied agent will deal with and how these clients will be obtained and managed by the firm.

Suitability

ESMA expects NCAs to ensure firms appropriately assess the suitability of tied agents to provide services.  

Firms should check:

  • the national public register of tied agents or verify the tied agents credentials
  • the tied agent will afford clients and potential clients the same level of protection as if they were dealing with the appointing firm
  • where the tied agent’s employees and service providers are based.  It is not acceptable to appoint a tied agent with insufficient substance in the EU or which mainly relies on resources based outside the EU
  • whether the tied agent poses a risk to client assets (if it will hold them)
  • that the tied agent complies with MiFID II
  • whether the legal form of the tied agent prevents the firm from effectively supervising it

Contractual relations

ESMA expects NCAs to ensure that firms properly document their relationships with tied agents and that contractual arrangements provide for effective oversight and monitoring of tied agents.

Supervisory expectations on firms using tied agents in their on-going activities

MiFID II requirements

Article 29(2) of MiFID II requires firms to monitor the activities of their tied agents to ensure they comply with MiFID II.  Firms must have internal measures and processes to adequately oversee activities carried out on their behalf by their tied agents.

Internal arrangements and mechanisms

ESMA expects NCAs to ensure firms’ governance arrangements are proportionate to the number of tied agents appointed, their legal nature and organisational and ownership structure.  Firms should have appropriately skilled and experienced staff to oversee their tied agents and their governance arrangements should address:

  • reporting
  • assessing the tied agent’s services, policies and procedures and compliance with EU regulation
  • conflicts of interest
  • regular monitoring
  • termination of the agency

What this means for investment firms

ESMA expects NCAs to implement the supervisory briefing “within a reasonable timeframe”.  EU investment firms (including host providers) and affected non-EU asset managers should re-examine their tied agent arrangements and, to the extent necessary, revise their models and strategies to ensure compliance with the expected standards.  EU firms should be prepared to justify any ongoing use of tied agents linked to third country firms to their NCAs.

How Eversheds Sutherland can help

Since June 2016, our lawyers, consultants and International Funds Net (FundsNet) team have advised various institutions passporting into the UK from EU Member States and passporting from the UK into the EU on Brexit planning and Brexit related issues, including the tied agent model.