The European Securities and Markets Authority (‘ESMA’) is a European supervisory authority that contributes to the safeguarding of a stable and orderly European Union (‘EU‘) financial market by enhancing investor protection. Following Brexit, ESMA has been monitoring the behaviour of EU firms with the aim of understanding if their interaction with clients based in the EU is being conducted in a way that complies with the current legislation.
The current legislation that governs the European financial markets aims to make them more efficient, resilient and transparent and includes the Markets in Financial Instruments Regulation (‘MiFIR’) which sets out rules that all EU member states must comply with, and the Markets in Financial Instruments Directive (‘MiFID’) which sets out useful guidelines and goals which EU Member States have to try to achieve. During its observations, ESMA found a potential circumvention of the legal framework emerged from the practice of firms which provide investment services and/or perform investment activities using tied agents. Tied agents are legal persons with employees who are at the disposal of or under the control of other entities, including entities based in third countries. ESMA found that the firms breaching the framework were appointing tied agents and as a result, they were not effectively monitoring the agent’s activities further impeding their duty to monitor the tied agent’s activities under Article 29(2) of MiFID II.
MiFID II supervisory briefing
On 2 February 2022, ESMA published a supervisory briefing (the “Supervisory Briefing”) with the aim of minimising the cases where a circumvention of legislation was occurring in respect of MiFIR and MiFID and a convergent EU supervisory culture. The Supervisory Briefing sets out the supervisory expectations of ESMA and National Competent Authorities (“NCAs”) when EU investment firms and credit institutions (together the “firms”) use tied agents. Under Article 4(29) of MiFID II, a tied agent is defined as a natural or legal person who has a duty of exclusivity to act on behalf of only one firm under its full and unconditional responsibility, in order to promote investment and ancillary services to the clients and receive or provide orders from and to the clients in respect to investment services or financial instruments. It is important to note that the Supervisory Briefing is a useful guide for mangers of UK investment firms looking to access EU investors, as the activities of UK firms are indirectly impacted by the expectations of MiFID II.
The Supervisory Briefing covers the supervisory expectations when firms: (a) appoint tied agents, and (b) when these firms use tied agents in their on-going activities, as follows:
1. Supervisory expectations when firms appoint tied agents
As noted above, the firms appointing a tied agent become fully and unconditionally responsible for any tied agent’s act or omission when acting on their behalf. Therefore, the Supervisory Briefing sets out guidelines which will help such firms to avoid the appointment of incompetent tied agents and also meet ESMA’s expectations. According to the guidelines, the firms appointing a tied agent:
- are expected to have a clear understanding of the tied agent’s contribution to the firm’s strategy and of the clients’ type with who the tied agent will be dealing with;
- may consider the development of a business plan prior to appointment depending on the tied agents’ legal nature and complexity structure;
- ensure the tied agent has a sufficiently good reputation;
- must carry out appropriate assessments primarily on the tied agent’s suitability to promote or provide services on the firm’s behalf, on its appropriateness, capacity, and its ability to comply with MiFID II requirements, especially in cases where the tied agent is a legal person and on its financial situation where the tied agent is allowed to hold money and/or instruments of clients; and
- must make a written agreement with the tied agent regarding their rights and obligations.
Importantly, NCAs also expect that:
- the firms are effectively equipped to monitor the activities of the tied agent;
- the tied agent’s organisational settings are not considered to be a barrier for the firms to supervise its activities; and
- the firms are assured that the work to be carried out by the tied agent is adequate.
Additionally, ESMA suggested that the tied agents must have sufficient substance in the EU and do not mainly rely on resources based outside of the EU in order for the firms to be able to comply with their duty to monitor the tied agent’s activities.
2. Supervisory expectations when firms use tied agents in their on-going activities
The Supervisory Briefing also covers the cases where the firms having appointed a tied agent to act on their behalf, are using the tied agent in their on-going activities. The firms will remain responsible for the tied agent’s activities throughout the time the tied agent acts on the firm’s behalf. Thus, such firms must effectively monitor the tied agent’s activities and ensure its compliance with the guidelines. Accordingly, ESMA expects firms to:
- monitor the tied agent’s activities to assure their compliance with MiFID II;
- ensure that adequate internal procedures and measures (for instance, organisational arrangements, reporting mechanisms and mechanisms assessing quality) are in place to effectively monitor and supervise the activities carried out by the tied agent;
- adapt appropriate governance arrangements to monitor the tied agent’s activities;
- regularly monitor the financial situation of the tied agent;
- ensure that it has the ability to terminate its relationship with the tied agent when necessary; and
- specify to the NCA of its home Member State, where the relationship between the firm and the tied agent is terminated, whether the termination has occurred due to a breach of a MiFID requirement; and
- inform its clients of the termination to avoid any client interactions with the tied agent after their relationship has been terminated.
This Supervisory Briefing considers all the cases where an EU firm uses tied agents. In light of the above expectations, the firms must make sure that their employees are aware of the guidelines and the procedures they need to follow in order to properly discharge their responsibilities to both ESMA and NCAs. Most importantly, firms appointing tied agents must ensure that the tied agents acting on their behalf have a substantial base in the EU in order to be in the position to monitor their activities and ensure their compliance with the guidelines. Considering that the Supervisory Briefing does not constitute a new policy and it has been designed to be used in the way that will best fit firms, firms may comply with the supervisory expectations in a manner that is proportionate to their size, risk profile, nature, scale and complexity. Lastly, the managers of UK investment firms must take into consideration the supervisory expectations mentioned above in cases where they aim to access EU investors.
To review the Supervisory Briefing please click here.
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