MiFID Tied Agents. Weighing Your Options to Access the EU Single Market

MiFID Tied Agents. Weighing Your Options to Access the EU Single Market

2021 started on a better note for many. Some of the old issues, like the uncertainty surrounding Brexit, was left behind in 2020 for good. A long-awaited trade deal was struck between the UK and the EU just by the end of the year, making of hard Brexit just a phantom from the past. The regained sovereignty of the UK over its lands, waters, courts and laws, doesn’t come without a price and terminating the membership to the EU club will have consequences. These will be felt particularly hard in the sector of financial services, which make up for the biggest exporting service sector in the UK.

The loss of passporting rights in Europe for UK investment firms and financial service providers does not mean tout court though that Europe is closed to international business and that no other avenues for cross border access to the single market in Europe are available. Limiting the scope to the provision of investment and financial services, we will briefly look at the alternatives to the passport for UK providers willing to maintain exposure to EU domiciled clients

Get in touch here with your contacts at Veneziano & Partners to see how we can help with MiFID Tied Agents and Weighing Your Options to Access the EU Single Market.

The Scope of Equivalence

It is common knowledge – or at least it should be now – that with Brexit, UK investment firms and financial service providers will be considered in Europe as third country entities. Access to EU single market will no longer be granted under the passport because of that. One of the options available is equivalence. However, equivalence is more of a long shot and for two reasons. One is related to the type of EU domiciled clients accessible via equivalence regimes and the other to timing of related market access. None of those variables are in control of any financial service providers, making equivalence less than a viable alternative for all UK investment firms and financial service providers currently grappling with the issue of retaining immediate access to existing EU domiciled clients post Brexit.

A recent analysis of the European parliament on the third country equivalence regime in Europe helps identifying the objective limits of equivalence. Cross border access to the EU single market for core financial activities is not envisaged to exist under an equivalence regime and the set of core activities also includes investment services provided to retail clients. This is by and large due to the existence of stricter investor protection rules in Europe for retail clients. Absent an equivalence regime, it will be most appropriate for UK investment firms and financial service providers engaged with retail clients to establish a legal entity in Europe. Setting up a subsidiary and obtaining an EU license, especially where there are existing clients across multiple domiciles within Europe, seems to be the way to go. However, the issue is finding a suitable EU domicile and get accustomed to local practices and business environment. Not very easy, especially where the upfront capital and substance commitment is considerable.

The EU regulatory framework for financial services includes equivalence regimes instead for investment services to professional clients. These equivalence regimes however have not been activated so far. An equivalence assessment from the EU Commission in this space would unlock all the related provisions under MiFIR for investment firms established in a third country and willing to offer investment services to professional clients in Europe. Under MiFIR provisions, third country firms would have the ability to access the internal market without having to establish a legal entity or a branch in the European Union.

Of course, the equivalence approach seems to be more viable for third country investment firms not currently and systematically active towards EU domiciled clients. If equivalence determinations are introduced, firms from third countries, whose regulatory framework and supervision is deemed equivalent to the EU, will be able to offer their investment services by registering with a register to be held by ESMA.  The benefit of the equivalence approach in this case will be seen for UK as well as US domiciled investment firms, for instance. This being said, we cannot speculate on the timing of such equivalence determination from the European Commission, nor that when these will commence, if ever, the UK will be at the front of the line or not.

MiFID Tied Agents

If you are an UK investment firm and you can be deemed to be of sufficiently good repute and possess appropriate general, commercial and professional knowledge as well as competence to deliver investment or ancillary services, then there might be other options for you to be able to obtain access to the EU single market. We are referring to the concept of MiFID Tied Agents. When a licensed investment firm decides to appoint a MiFID Tied Agent, such investment firm will remain fully and unconditionally responsible for any actions or omissions on the part of the MiFID tied agent acting on behalf of the investment firm.

The reason why UK investment firms might want to consider to entertain such an arrangement lies in the freedom to provide investment services and activities across Europe, granted to EU investment firms and their MiFID Tied Agents. Historically, the concept of MiFID Tied Agents was already well known in the UK, where MiFID Tied Agents were also referred to as appointed representatives. The boom of the appointed representative business in the UK was mainly due to the highly pragmatic approach of local regulator and general climate in the capital. Indeed, the openness to this type of arrangements made possible for firms to bridge the regulatory gap and start a regulated business without having to fully commit from the outset to having an own license. However, already in the years preceding Brexit, the UK regulatory authority did commence a scrutiny of these arrangements and the providers, curbing somehow the enthusiasm that did characterize the sector.

Conclusions

The success of opting for a Tied Agent under MiFID solution lies in approaching this solution with pragmatism, without forcing the limits and spirit of the provisions. For all UK investment firms lacking a strong connection with the market of a particular EU member state where to set up an EU MiFID licensed entity – which remains the optimal scenario for firms dealing systematically with clients on a pan-European basis – the Tied Agent under MiFID solution clearly represents an opportunity for various reasons.

Getting acquainted with the customs and regulations of a specific domicile without having a huge upfront commitment and retain access to European clients, before taking a decision whether the specific EU domicile chosen can be considered as its new EU base.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with MiFID Tied Agents and Weighing Your Options to Access the EU Single Market.