MiFID II - Tied agents

ESMA has published a supervisory briefing aimed at ensuring convergence across the EU in the supervision of the use of tied agents. Many aspects of the briefing specifically focus on EU firms which use tied agents that are legal persons controlled by, or with close links to, other entities or third-country entities. This was clearly prompted by concerns about how UK firms may access EU clients post-Brexit, although the briefing is not limited to the Brexit context. Any firms relying on tied agents to access EU clients should carefully assess their arrangements against ESMA's commentary.

ESMA indicates that, especially in EU jurisdictions where the use of tied agents is common, NCAs are expected to apply the supervisory briefing “within a reasonable timeframe".

What is a tied agent?

According to Article 4(29) of MiFID II, a tied agent is a natural or legal person who, under the full and unconditional responsibility of only one firm on whose behalf the tied agent acts (the so-called “duty of exclusivity"), “promotes investment and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or financial instruments, places financial instruments or provides advice to clients or prospective clients in respect of those financial instruments or services". 

What does the briefing cover?

The briefing - which ESMA says does not constitute new policy - sets out the common understanding of ESMA and national competent authorities on the supervision of firms using tied agents to provide investment services and/or activities. It covers supervisory expectations:

• when firms appoint tied agents, and
• on firms using tied agents in their on-going activities.

The briefing indicates to market participants what compliance with the MiFID II provisions relating to tied agents looks like. Points of interest include:

• When appointing tied agents:
  • Firms need to understand how the tied agent will contribute to their strategy, and this may involve developing a relevant business plan.
  • Firms need to put in place, amongst other things, arrangements to assess any future tied agents and to monitor their activities, with particular regard to tied agents that have close links to other entities (including non-EU entities) that could “exercise inappropriate influence", e.g. where that other entity manufactures or distributes financial instruments. 
  • Firms appointing tied agents will need to assess the tied agent's suitability, including the knowledge and competence of relevant staff (in line with ESMA guidelines); relevant capacity / resource and the organisational structure of the tied agent. Additional considerations apply where a tied agent is to hold client money or assets on behalf of the firm.
  • Firms will also need to assess where (in terms of location) staff of the tied agent will operate and how they will be monitored. ESMA specifically notes that firms “should not be satisfied if the tied agent has no sufficient substance in the EU or if a tied agent mainly relies on resources based outside the EU". 
  • ESMA indicates minimum requirements for tied agency agreement. These agreements must, amongst other things, include termination rights; details of the natural persons who will be involved in providing the activities on behalf of the firm (and where those persons will be established); confirmation that the tied agent will not rely on third parties to perform its functions; and mechanisms for the monitoring of the tied agent's activities (including regular meetings between the tied agent and the appointing firm's internal control functions). It is clear that many of these requirements (and those noted below) go to ensuring that tied agents have sufficient substance in the EU. 
  • Tied agents' ownership structure and close links – and any related conflicts of interest – are specifically called out as one aspect of the pre-appointment assessment firms (and supervising NCAs) need to consider. NCAs are asked to “carefully scrutinise… firms [with] a business model that mainly consists of (and their remuneration mainly comes from) appointing tied agents which are legal persons with close links to other entities, especially to third-country entities as such schemes may be used to access EU markets without the relevant MiFID authorisations". 
  • ESMA also suggests that firms should avoid appointing tied agents whose relevant employees are “also at the disposal or under the control" of other entities (e.g. under staff sharing agreements or secondment arrangements), as those entities may exercise “inappropriate influence". Again, ESMA's concern is to ensure that tied agents do not unduly rely on resource by other entities (particularly third-country entities). 
• When using tied agents in their ongoing activities:
  • Firms need to devote sufficient resource to monitoring tied agent activity, especially where the tied agent sits within a complex organisational or ownership structure or has close links with other entities (including third-country entities). ESMA suggests that some firms may appoint one or more independent or non-executive directors to monitor tied agent activities and to carry out reviews of the appointing firm's related control framework. 
  • There should also, amongst other things, be appropriate reporting mechanisms in place, including face-to-face meetings (in person or virtually) between the appointing firm and its tied agents, rather than excessive reliance on high-level attestations from tied agents. 
  • Again, there is some focus on the place from which natural persons/employees of tied agents will operate, and on the management of potential conflicts that may arise where tied agents have close links to other entities. 

Relevant documents

The supervisory briefing dated 2 February 2022 is available here.

ESMA's press release is available here.