MFID Firms' Use of Tied Agents Circumventing EU Market Access Rules
ESMA issues expectations for MiFID firms' use of tied agents in light of post-Brexit 'circumvention' of MiFID framework.

 

The tied agent model available under MiFID has featured in the options for some non-EU asset managers distributing their fund products and investment services in the EU, short of or as a stop gap to obtaining a full EU licence.  However, ESMA, through its post-Brexit market monitoring, has identified practices in the use of tied agents by non-EU firms which it considers are a "potential source of circumvention of the [MiFID] framework."  To address these concerns and further shore-up defences against unauthorised EU market access, ESMA published a supervisory briefing on 2 February 2022 which sets out regulatory expectations of firms' appointment and ongoing use of tied agents under MiFID rules (Tied Agent Briefing).  While the Tied Agent Briefing is heavily focussed on the involvement of non-EU entities in the operation of tied agents, it should be noted that it does not introduce new rules in this regard and is published on a non-binding basis to encourage supervisory convergence by national competent authorities.

Tied Agents and non-EU staff

The MiFID regime allows EU MiFID investment firms to appoint tied agents which can, on an exclusive basis only, carry out certain activities on behalf of that EU firm, including the promotion of investments and services to its clients.  Tied agents may be established in either the firm's home Member State or in another Member State subject to that agent being entered on the relevant country's register.  

In the Tied Agent Briefing, ESMA sets out its expectation that tied agents have sufficient substance and resources in the EU to allow for effective control and monitoring by the appointing firm.  Current distribution models relying on tied agent models should note ESMA comments that:

  • the appointment of tied agents whose sales staff are also at the disposal of third-country entities, including as a result of staff sharing agreements or secondment, should be avoided to guard against the exercise of inappropriate influence over the tied agent e.g., by third-country entities which are themselves manufacturers or distributors of financial instruments;
  • a tied agent which carries out activities using mainly the resources of another entity, 'especially a third-country entity, constitutes a serious impediment to the firm's compliance with [MiFID tied agent rules]' and specifically the duty to monitor tied agents' activities and ensure compliance when acting through tied agents; and
  • in their supervision of tied agent appointments, national regulators should "carefully scrutinise" firms with a business model that mainly consists of appointing tied agents with close links to other entities, especially to third-country entities as such a model could facilitate unauthorised access to EU markets.   

Clarification of firms' initial and ongoing obligations when using tied agents 

ESMA has clarified expectations around initial and ongoing obligations where investment firm principles are appointing a tied agent:

  • firms must carry out due diligence on tied agents including whether the tied agent has the appropriate level of resources in the EU to provide the proposed services; 
  • to ensure tied agents' activities comply with the MiFID regime, firms must have in place monitoring arrangements which take account of any close links the tied agent has with other entities, including non-EU entities, that may hinder the firm's compliance with its monitoring obligations; 
  • the agreement between the firm and the tied agent must ensure that:
    • the tied agent will not rely on third parties to perform its functions or tasks; and
    • it will ensure clients are aware it is acting as agent of the appointing firm e.g. the tied agent should not use references, emails or phone numbers which can be associated with another entity, in particular a third-country entity with which it has close links and that is itself involved in activities concerning manufacturing or distribution of financial instruments;
  • once appointed, the firm should monitor the tied agent including through its compliance function and risk management activities and ensure that its remuneration and conflicts of interest policies adequately address the use of tied agents; and   
  • the firm must also be satisfied that it is able to terminate the tied agent with immediate effect, where necessary in the interests of clients.

Potential further EU market access focus

The Tied Agent Briefing follows the recent ESMA response to the Commission's request for data on the use of reverse solicitation in the EU.  While ESMA confirmed, in its December 2021 response letter, that such data was not readily available due to the absence of any direct reporting obligation of reverse solicitation subscriptions, it went on to recommend that the Commission introduce new reporting requirements to facilitate the collection of such data.  Whether action on foot of such recommendation is taken remains to be seen.

Next steps

ESMA expects national regulators to apply the terms of the Tied Agent Briefing "within a reasonable timeframe".  Nonetheless, there is cause for relevant EU investment firms (including host providers) and affected non-EU asset managers to consider, and as necessary to modify, their arrangements as against the expectations articulated by ESMA. 

Contact Us

If you have any queries on the issues discussed in this article, please contact John Aherne, Patricia Taylor, any of our Asset Management & Investment Funds team or your usual William Fry contact.

 

Key Contacts

John Aherne Partner

Patricia Taylor Partner

Nessa Joyce Knowledge Lawyer

Related Practice Areas