ESMA publishes Supervisory Briefing on tied agents

The European Securities and Markets Authority (ESMA) has published a Supervisory Briefing on the use of tied agents by investment firms to promote further supervisory harmonisation in the European Union.

In the Supervisory Briefing, ESMA sets out its supervisory expectations (i) for the appointment of a tied agent (vgV) by a credit institution or investment firms (institution) and (ii) for institutions that use tied agents in their ongoing activities.

The Supervisory Briefing is not binding on the national supervisory authorities.

Background: Tied Agent

Tied agents of investment firms are companies that provide investment brokerage, investment advice or placement business for the account and under the liability of a credit institution or investment firm. These companies do not need their own licence, but slip under the "liability umbrella" of the institution, so to speak. Nevertheless, the fulfilment of the supervisory duties must remain guaranteed. ESMA has now formulated its expectations for this.

Supervisory expectations for the appointment of a tied agent

ESMA's expectations when appointing a tied agent include, for example, that the institution understands how the tied agent will contribute to the institution's strategy, which clients the tied agent will deal with and how the institution will deal with that client. As part of the so-called on-boarding, the institution must analyse and assess the following points:

  • What is the organisational structure of the tied agent?
  • What knowledge, skills and experience do the tied agent’s management have? How much time do they spend on the tied agent’s activities?
  • Do the management of the tied agent have sufficient reliability and suitability to perform the activities on behalf of the institute?
  • Are there appropriate mechanisms in place for the tied agent to report to the institution?

To the extent that the tied agent is authorised to hold client funds or assets, the institution must also investigate whether

  • the financial situation of the tied agent does not entail any risk to the security of client assets,
  • the tied agent has taken the necessary precautions to meet the MiFID II requirements for safeguarding client assets.

ESMA imposes further requirements on the contract between the institution and the tied agent. This should contain:

  • Information on registration in the register of tied agents (e.g. with BaFin);
  • a description of the activities that the tied agent will carry out on behalf of the institution;
  • the prohibition on the tied agent also acting for other institutions as tied agent;
  • the obligation of the tied agent to disclose its position as tied agent to clients and to name the institution. It is intended to prohibit the tied agent from using references, email accounts or telephone numbers that can be associated with an entity other than the liable institution, a third country or a third country entity.

This is of particular concern to ESMA if the tied agent is a legal entity whose parent company is located in a third country or if the tied agent is closely linked to an entity in a third country involved in the manufacture or distribution of financial instruments;

  • an explanation of the mechanisms by which the institution will monitor the activities of the tied agent (such as regular reporting requirements, regular meetings);
  • agreeing that the institution and its auditors shall have access to the data relating to the activities carried out by the tied agent on behalf of the institution, as well as to the premises concerned, to the extent necessary for the purposes of effective supervision; and
  • the tied agent’s obligation to keep all confidential information about the institution and the clients secret.

Supervisory expectations in current operations

ESMA expects institutions working with tied agents to undertake certain measures and comply with standards in their ongoing activities. These include tied agent monitoring measures.

As required organisational measures, ESMA states that:

  • the compliance function of the institution advises and assists the tied agent’s persons responsible for the provision of investment services and activities in complying with the institution's obligations;
  • risk management monitors the institution's compliance with the regulations, procedures and mechanisms of the tied agent;
  • the institution ensures that the remuneration policy and practices apply to tied agent’s staff to the extent that they have an influence (direct or indirect) on the investment services provided;
  • the institution's conflict of interest policy also applies sufficiently in relation to the tied agent.

In addition, ESMA requires that the national supervisory authorities (such as BaFin) satisfy themselves that the institution is

  • has set up appropriate organisational arrangements to monitor the tied agent;
  • appropriate reporting mechanisms exist and are discussed in face-to-face or virtual meetings - the institution should not rely too much on the tied agent alone;
  • adequate mechanisms are in place to assess the quality of the tied agent's activities;
  • adequate mechanisms are in place to identify conflicts of interest.

In conclusion, ESMA requires action on the termination of cooperation with the tied agent.

Evaluation

The measures demanded by ESMA are not new in many places. They repeat or concretise regulations of MiFID II that are already standard in practice. It is striking that ESMA addresses cooperation with subsidiaries of companies in third countries at various points and wants to subject their role as tied agents to special rules. ESMA apparently sees a danger in the fact that access to the European financial market takes place via tied agents that are under the control of third-country companies. In this respect, it seems to particularly urge institutions to take such circumstances into account.

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