by Andria PapageorgiouESMA’s Opinion on Ensuring Consistent Application of MiCA for Crypto-Asset Brokers
The European Securities and Markets Authority (ESMA) issued an opinion on 31/7/2024, to support the consistent application of the Markets in Crypto-Assets Regulation (MiCA) across the European Union.
Here are the key points from the opinion, useful for a blog post:
1. Legal Framework and Background:
- MiCA Overview: MiCA, published in June 2023, establishes obligations for crypto-asset issuers and service providers, aiming to enhance investor protection, market integrity, and financial stability.
- Importance of Trading Platforms: Trading platforms, particularly Multifunction Crypto-asset Intermediaries (MCIs), are pivotal in the crypto ecosystem. The collapse of FTX highlighted the potential risks posed by these platforms.
2. Regulatory Arbitrage Concerns:
- MCIs and EU Market Access: Some MCIs may try to bypass EU regulations by structuring their businesses to maintain access to EU clients without fully adhering to MiCA, leading to regulatory arbitrage and an unlevel playing field.
- Reverse Solicitation: MiCA allows third-country firms to provide services to EU clients only if initiated by the client, known as “reverse solicitation.” ESMA stresses this should be narrowly applied to prevent circumvention of MiCA regulations.
3. Supervisory Guidance and Practices:
- Assessment of Business Models: ESMA advises national competent authorities (NCAs) to scrutinize the business models of crypto firms, ensuring they comply with MiCA and do not exploit regulatory loopholes.
- Conflict of Interest: MCIs must manage conflicts of interest, especially when offering both brokerage and trading platform services. NCAs should ensure these conflicts are adequately managed to protect clients’ interests.
- Best Execution: EU brokers must ensure the best possible execution of client orders, considering various factors like price, costs, and execution speed. Reliance on a single non-EU execution venue without proper justification is discouraged.
4. Custody and Administration of Assets:
- Custody Rules: EU brokers must ensure that non-EU execution venues do not take custody of EU clients’ assets, complying with MiCA’s stringent custody requirements.
ESMA is committed to promoting common supervisory approaches across the EU, and developing new tools and forums to ensure the effective application of MiCA. This proactive stance aims to foster a secure and transparent crypto-asset market, benefitting both investors and market participants.
At Andria Papageorgiou Law Firm, we specialize in navigating the complex regulatory landscape of the crypto-asset market. Our experienced legal team can provide comprehensive guidance on MiCA compliance, helping your organisation adapt to the new regulations effectively. Whether you need assistance with authorization processes, managing conflicts of interest, or ensuring best execution practices, we are here to support you.
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouThe Future of Prop Trading Regulation: An Industry in Transition
The rising popularity of proprietary trading firms, where traders use the firm’s capital to trade, has drawn the scrutiny of global regulators. Recent reports indicate that the European Securities and Markets Authority (ESMA) and other regulatory bodies are conducting preliminary reviews and consultations to understand the implications of prop trading and potentially introduce regulations. This move aims to enhance transparency and investor protection within the industry. While some jurisdictions, like Belgium, have taken a firm stance, the overall regulatory landscape remains uncertain, with further clarity expected by the end of the year.
In Europe, proposed regulations may require prop trading firms to be authorized under the Markets in Financial Instruments Directive (MiFID), aligning their operations with broader financial regulatory frameworks. Industry experts anticipate that new rules could enforce stricter operational requirements and transparency, potentially treating some aspects of prop trading similarly to financial services.
The regulatory drive is partly fueled by high-profile enforcement actions and growing concerns over the unregulated nature of many prop trading activities, which often operate on demo accounts. The lack of regulation has led to numerous firms entering the market, some of which have faced allegations of unethical practices, such as denying payouts.
As the industry evolves, it remains to be seen how regulators will balance the need for oversight with the innovative nature of prop trading. Stakeholders are advised to stay informed and prepared for impending regulatory changes.
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
For further details, please refer to the original articles on Finance Magnates.
by Andria PapageorgiouA practical guide on CySEC Regulatory Sandbox
The Cyprus Securities and Exchange Commission (CySEC) has taken a significant leap forward with the launch of its Regulatory Sandbox. This initiative builds upon CySEC’s ongoing dialogue with market participants and experts since the inception of the Innovation Hub. The Regulatory Sandbox aims to strike a balance between fostering technological innovation, ensuring investor protection, and maintaining market integrity.
Overview & Objectives
CySEC’s Regulatory Sandbox is designed to provide a controlled testing environment where both regulated and unregulated firms can trial their technologically innovative solutions. The primary objectives are to build a transparent channel of cooperation between entities developing tech-based solutions in the financial services sector and to ensure that the regulatory landscape evolves with technological advancements. This initiative is poised to enhance CySEC’s understanding of innovative technologies and facilitate continuous regulatory adaptation to new market developments.
Why Join the CySEC Regulatory Sandbox?
Participation in the Sandbox offers an unparalleled opportunity for firms to test their innovative products and services on a small scale within a controlled environment. Under CySEC’s close monitoring and guidance, participants will receive constructive feedback on how the regulatory framework applies to their innovations. This guidance can prove invaluable in refining products to meet regulatory standards and achieving successful market entry.
Eligibility Criteria
The CySEC Regulatory Sandbox is open to regulated and unregulated entities engaging in financial innovation through technology. To participate, unregulated entities must:
- Obtain prior CySEC authorization for the regulated services they intend to engage in.
- Test innovative solutions solely within their corporate group or use any other exemption provided under the applicable framework.
- Perform demo services.
- Enter into a collaboration agreement with a CySEC-regulated entity.
It is important to note that the Sandbox is not a space for “light touch” regulation. Any unregulated entities providing regulated services must secure CySEC authorization before participating.
Additionally, applicants must ensure their proposed innovative solution:
- Directly or indirectly facilitates activities within CySEC’s supervisory scope.
- Introduces authentic innovation in terms of product, service, or business model.
- Is ready for testing in a production environment.
- Benefits the financial services industry.
The Four Phases of the Sandbox
- Application Phase: Interested firms must complete and submit the application form available on CySEC’s website. CySEC will assess applications based on the eligibility criteria and inform applicants of the results within 6-8 weeks.
- Preparation Phase: Successful applicants will collaborate with CySEC to agree on specific testing parameters, which will be documented in a testing agreement. A dedicated case officer will be assigned to guide the participant through the testing phase, with a communication and reporting plan established.
- Testing Phase: Lasting typically six months, this phase allows participants to conduct small-scale testing of their innovative solutions within a controlled environment. CySEC will monitor progress and compliance through interim reports submitted by participants.
- Evaluation/Exit Phase: After testing, participants must prepare a comprehensive exit report analyzing the test’s milestones and key performance indicators. These reports, which reflect participants’ views on the testing process, will be used by CySEC for internal assessment and feedback.
Conclusion
The CySEC Regulatory Sandbox represents a significant advancement in fostering financial innovation while ensuring regulatory compliance and market integrity. By providing a structured and supportive environment, CySEC is enabling firms to develop and refine innovative financial solutions that can meet the challenges of tomorrow’s financial landscape.
For any professional assisstance, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouCySEC launches its regulatory sandbox
The Cyprus Securities and Exchange Commission (CySEC) has successfully launched its Regulatory Sandbox during an online event held on the 11th of June 2024. This initiative marks a significant milestone in the advancement of financial, regulatory, and supervisory technologies (FinTech, RegTech, and SupTech) in Cyprus.
The Regulatory Sandbox is a crucial step in promoting responsible innovation in the financial services sector. Dr. George Theocharides, Chairman of CySEC, highlighted the importance of this initiative: “With the introduction of the Regulatory Sandbox, we are taking another major step in fostering responsible innovation in the financial services sector. Our goal is to support the development of cutting-edge solutions that meet technological advancements, without compromising market integrity and investor protection.”
Event Highlights
The virtual launch event attracted over 500 stakeholders from the financial sector, including representatives from regulatory bodies, financial institutions, and technologically innovative firms. Attendees were briefed on the Sandbox’s operational framework and the potential benefits for market participants.
The event underscored CySEC’s commitment to striking a balance between technological innovation, investor protection, and market integrity. Building upon CySEC’s ongoing dialogue with market participants and experts since the launch of the Innovation Hub, CySEC has established the Regulatory Sandbox to support this balanced approach.
Objectives of the Regulatory Sandbox
The Regulatory Sandbox aims to:
- Build a transparent channel of cooperation between entities developing technology-based solutions in the financial services falling within CySEC’s supervisory mandate and CySEC.
- Ensure that the regulatory landscape evolves in line with technological developments in the financial services sector.
Designed for both regulated and unregulated firms, the CySEC Regulatory Sandbox allows companies to test their technologically innovative solutions and/or products related to financial activities subject to CySEC’s supervision. This controlled, time-bound testing environment will enhance CySEC’s understanding of innovative technologies and facilitate continuous regulatory adaptation to new market developments.
Participation and Benefits
For firms interested in participating, the Regulatory Sandbox offers a unique opportunity to develop and refine their products while ensuring compliance with regulatory standards. This initiative not only supports innovation but also helps maintain the integrity and safety of the financial market.
Participants in the Sandbox will benefit from:
- Direct engagement with CySEC to ensure their solutions meet regulatory requirements.
- A structured environment to test and validate new technologies and business models.
- Insights and feedback from CySEC to improve their products and services.
For more information on the Regulatory Sandbox and how to participate, please visit the Cyprus Securities and Exchange Commission’s website.
Conclusion
The launch of CySEC’s Regulatory Sandbox is a pivotal development for the financial services sector in Cyprus. By providing a supportive environment for innovation, CySEC is helping to drive technological advancement while safeguarding market integrity and investor protection. This initiative is set to position Cyprus as a leader in financial innovation and regulatory excellence.
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouESMA’s Final Report on Greenwashing
The Final Report on Greenwashing by ESMA was published on 4/6/2024, in response to the European Commission’s request, outlines the risks associated with greenwashing and the role of supervision in mitigating these risks. Here is a summary of the report:
- Introduction and Background:
- Greenwashing refers to the practice of making misleading claims about the environmental benefits of a product, service, or company practices.
- The European Commission (EC) requested input from the European Supervisory Authorities (ESAs) to address greenwashing risks and supervise sustainable finance policies.
- The report builds on the findings from the Progress Report and explores how supervision can mitigate greenwashing risks.
- Key Findings:
- National Competent Authorities (NCAs) are prioritizing the supervision of sustainability-related claims.
- A risk-based approach is being implemented, focusing resources on significant risks.
- Greenwashing can occur at various levels: entity level (sustainability strategy), product level (sustainability performance), and service level (financial advice).
- Supervision Enhancement:
- The report identifies actions for NCAs, ESMA, and the EC to enhance supervision across key sectors of the Sustainable Investment Value Chain (SIVC), including issuers, investment managers, investment service providers, and benchmark administrators.
- A pathway for enhancing supervision is suggested, emphasizing the importance of building supervisory capacities and tools.
- Recommendations:
- Market participants should ensure substantiated sustainability claims and clear, non-misleading communication of sustainability information.
- Recommendations include adapting governance and processes, building expertise, upgrading data infrastructure, and ensuring comprehensibility for consumers.
- Regulatory Framework:
- The report recommends improvements to the EU regulatory framework to better address greenwashing risks.
- Supervisors should leverage their mandate to protect investors and ensure the proper application of sustainability-related requirements.
- Conclusion:
- Addressing greenwashing is crucial for maintaining trust in sustainable finance markets.
- The report outlines a forward-looking view on enhancing supervision to ensure that sustainability-related claims are credible and trustworthy.
The Final Report emphasizes the need for robust supervision and regulatory measures to prevent greenwashing and ensure transparency in sustainability-related claims
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouDORA: Why it is relevant & why is it relevant to you?
The Digital Operational Resilience Act (DORA) is a significant development in EU regulation, compelling financial entities to ensure consistent cybersecurity and operational resilience maturity levels across all their operations within the EU. With a two-year preparatory phase, organizations face a significant task of implementation and demonstration of compliance.
To navigate this transition effectively, financial institutions must conduct comprehensive gap assessments to gauge their readiness vis-à-vis DORA, identifying areas necessitating further investment and prioritization. Proactively addressing these gaps positions businesses to meet more complex requirements such as supply risk management, threat intelligence, and advanced security testing, thus gaining a competitive edge in the market.
DORA marks a substantial shift for entities under ESMA or EIOPA supervision and banks already subject to existing EBA guidelines on banking supervision. Moreover, it extends its scope to encompass previously less regulated stakeholders in the financial sector, including crypto-asset service providers, intermediaries managing alternative investment funds, crowdfunding service providers, cloud-service providers, and ICT third-party service providers.
One of DORA’s key focuses is on third-party risk management, necessitating entities to ensure the resilience of their critical ICT third-party service providers. This requires close collaboration and joint efforts to satisfy regulatory expectations, particularly in supporting the delivery of essential business services.
DORA officially entered into force at the beginning of 2023, initiating a two-year implementation period. Financial entities are thus expected to achieve compliance with the regulation by early 2025. As this deadline approaches, proactive engagement with DORA compliance becomes essential to avoid penalties and maintain operational continuity.
In light of these developments, Andria Papageorgiou Law Firm is committed to assisting organizations in navigating the complexities of DORA compliance. With our outsourced DPO services and regulatory compliance consulting, tailored to address the specific requirements of DORA, we ensure that businesses are well-equipped to meet regulatory obligations and uphold operational resilience in an evolving digital landscape.
Contact us today at info@apapageorgiou.com to learn more about how we can support your journey toward DORA compliance.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as financial or investment or legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouSupervisory priorities for 2024, targets CIFs providing services on a cross border basis
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as financial or investment or legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouOpinion on the product intervention measures on CFDs and other high-risk products proposed by the Spanish CNMV
This article is about the Opinion of the European Securities and Markets Authority (“ESMA”) on the adoption of additional product intervention measures on Financial Contracts for Difference (“CFDs”) and other high-risk products by the Spanish Comisión Nacional del Mercado de Valores (the “CNMV”) issued on the 11th of July 2023 (the “ESMA’s Opinion”).
- Background and Rationale:
After the completion of the consultation process that the CNMV launched in November 2022 with respect to its intention to introduce additional restrictive measures on the trading of CFDs, the CNMV notified ESMA in May 2023 of its decision to ultimately proceed with the adoption of additional restrictive measures on the trading of both CFDs and certain futures and options (the “High-Risk Products”) in pursuance to its mandate under the Regulation (EU) 600/214 on markets in financial instruments (the “MiFIR”).
The CNMV’s decision, as summarised in ESMA’s Opinion has been based on a multi-faced spectrum of considerations, as outlined below:
- Significant investor protection concerns;
- Degree of complexity, transparency, and the specific features of CFDs and other High-Risk Products;
- Size of potential detrimental consequences and the degree of disparity between the expected return and the risk of loss;
- Selling practices associated with CFDs and other High-Risk Products; and
- Existing EU regulatory requirements did not sufficiently address the risks.
A. Restrictions applying to CFDs:
As far as concerns CFDs, the additional restrictive measures will prohibit their marketing, distribution, sale, and related services by means of advertising communications aimed at retail investors in Spain. More specifically:
I. Prohibition of certain marketing communications, including, inter alia, the following:
- Redirecting to a website that offers CFDs or related services;
- Sending of a contact form, an application download, or any other kind of tool intended to put the client in touch with investment service providers that offer CFDs or related services; and
- Offering of training, technical seminars, courses or sessions whenever such offers are related to CFDs or related services, including training demo accounts or tools for retail investors or which encourage using these, whenever such offers are free or have a token charge, either if they are promoted or held by the regulated entities or by related or affiliated parties.
Exclusions to the prohibition on marketing communications will be applicable when:
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- The provision of information related to CFDs is made in response to a request made upon the sole initiative of the client; and
- The provision of the following kind of information:
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- the one required to contract CFDs or related services that are subject to the measures;
- to perform a transaction regarding CFDs, such as the precontractual and contractual information; and
- the information or warnings regarding the characteristics and risks of CFDs or related services offered that are provided to investors.
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II. Prohibition of any event or organisation sponsorship operation and brand advertising, including:
- the use of public figures, whenever their purpose or effect is to directly or indirectly advertise CFDs or related services; and
- the cases where such sponsorship or brand advertising does not intend to offer such products or services, in particular, when such products or services only account for a small part of the offers on the website of the firm when compared with its general activity.
III. Prohibition of certain marketing practices, including:
- Rewards to customers who provide new retail customers;
- Remuneration to marketing networks or to third parties of which their remuneration is determined based on the number of clients acquired, the cash deposits by clients, the deposits by the entity providing the investment service, or the losses by clients and, in general, any type of remuneration that may come into conflict with the interests of the clients;
- The use and remuneration of collaborators to train new potential clients without these clients having accredited knowledge and experience;
- The use of call centers which contact clients or possible clients to promote the provision of investment services regarding the instruments that are subject to the restriction;
- The use of software in which the remuneration of the software providers is determined based on the cash deposits of clients, or deposits of the distributor or losses of clients;
- The acceptance of credit card payments for cash deposits.
C. Restrictions applying to other High-Risk Products:
As far as concerns other High-Risk Products, the additional restrictive measures subject the marketing, distribution and sale to Retail Clients of other High-Risk Products to the following conditions:
- The provider of the instrument provides initial margin protection by requiring the customer to pay the initial margin; and
- The provider of the instrument will provide margin close-out protection to the Retail Client.
D. ESMA’s conclusions:
ESMA concluded that the CNMV’s proposed national measures are justified and proportionate and encourage national competent authorities (the “NCAs”) to monitor the marketing, sale, and distribution of CFDs and the impact of other High-Risk Products in their national markets to assess whether similar risks for retail investors as those identified by the CNMV exist.
E. CySEC Circular C602:
Further to all of the above, CySEC issued Circular C602 on the 12th of October 2023, for the purposes of informing Cyprus Investment Firms (the “CIFs”) in relation to the Resolution of the CNMV on product intervention measures relating to CFDs and other leveraged products to retail investors in Spain and the corresponding Press Release that were issued during July 2023.
As already mentioned above, the said Resolution forbids the advertisement of CFDs and other leveraged instruments to retail investors as well as certain remuneration policies and sales techniques and establishes intervention measures for the marketing, sale, and distribution to retailers of other leveraged instruments. It is noted that the relevant measures are applicable from the 3rd of August 2023 to all entities authorized to provide investment services in Spain regardless of the origin of the investment firm marketing and distributing such products, or whether there is not a branch in Spain (i.e. including entities under the freedom to provide services without an establishment).
In view of the above, all CIFs that are marketing, distributing, and selling CFDs and other leveraged products to retail investors in Spain are urged by CySEC to take all the appropriate steps and measures in order to ensure their adherence to the CNMV’s Resolution.
In case you have any questions, please do not hesitate to contact us for further professional assistance.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouESAs public consultation on DORA
We would like to draw your attention that the European Supervisory Authorities (EBA, EIOPA, and ESMA – the ESAs) launched yesterday, 19th of June 2023, a public consultation on the first batch of policy products under the DORA.
This includes four draft regulatory technical standards (RTS) and one set of draft implementing technical standards (ITS). These technical standards aim to ensure a consistent and harmonized legal framework in the areas of ICT risk management, major ICT-related incident reporting, and ICT third-party risk management.
DORA entered into force on the 16th of January 2023 and will apply from the 17th of January 2025 aiming to enhance the digital operational resilience of entities across the EU sector and to further harmonize key digital operational resilience requirements for all EU financial entities.
This regulatory framework covers key areas such as:
- ICT risk management,
- ICT-related incident management and reporting,
- digital operational resilience testing and
- management of ICT third-party risk.
DORA has mandated the ESAs to jointly develop altogether 13 policy instruments in two batches. The first batch of technical standards, are the following:
- RTS on ICT risk management framework and RTS on simplified ICT risk management framework;
- RTS on criteria for the classification of ICT-related incidents;
- ITS to establish the templates for the register of information;
- RTS to specify the policy on ICT services performed by ICT third-party providers.
The ESAs expect to submit these draft technical standards to the European Commission by 17 January 2024.
Comments to this consultation can be sent to the ESAS by the 11th of September 2023.
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as financial or investment or legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.
by Andria PapageorgiouSupervisory briefing in relation to firms using tied agents in the MiFID II framework
A. INTRODUCTION
In accordance with the Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC as amended by Regulation (EU) 2019/2175, one of European Securities and Markets Authority (the “ESMA“)’s objectives is to actively foster supervisory convergence across the Union with the aim of establishing a common supervisory culture.
B. OVERVIEW AND SCOPE
Following the UK withdrawal from the EU, ESMA has been monitoring the behaviour of firms in order to understand whether their interaction with EU-based clients is done in a way that is compliant with the MiFIR and MiFID legislation (including the regimes providing the conditions for third-country firms to provide investment services and activities in the Union). In this context, some practices concerning investment firms using tied agents recently emerged as a potential source of circumvention of the abovementioned legal framework.
Furthermore, ESMA believes that these issues have more general relevance, and it is thereby important to identify the supervisory expectations on firms using tied agents in a convergent manner across the Union. Therefore, this supervisory briefing takes into account all cases where an EU firm uses tied agents; a specific focus is given to cases where tied agents are legal persons that are controlled or have close ties with other entities or third-country entities.
The purpose of the Briefing is to give indications and information on supervisory expectations of ESMA and National Competent Authorities (the “NCAs”) to market participants of compliant implementation of the MiFID II provisions relating to tied agents and aims at contributing to the development of a convergent supervisory culture across the European Union (the “EU”).
The Briefing has been designed to be used in the way that best fits with supervisory methodologies. It is noted that the Briefing covers the aspects mentioned under Points [B] and [C] below.
C. SUPERVISORY EXPECTATIONS WHEN FIRMS APPOINT TIED AGENTS
Before the appointment of a tied agent, it is expected that a firm:
- Has a clear understanding of how the tied agent will contribute to the strategy of the firm, what types of clients the tied agent will be dealing with and how the firm will obtain and deal with these clients.
- Assesses, inter alia, the following:
- The tied agent is suitable to promote or provide activities on behalf of the firm, is of sufficiently good repute, and possesses the necessary knowledge and competence (e. tied agent should be included in the assessment of knowledge and competence of staff in accordance with the ESMA Guidelines);
- The tied agent has the ability, capacity, sufficient resources, appropriate organisational structure to support the performance of activities on behalf of the firm, and that the firm has a good understanding and is satisfied that the tied agent is able to ensure compliance with MiFID II requirements (e. assess the organizational structure of tied agent, assess the existence of appropriate mechanisms that the tied agent will use to report to the firm, assess the good repute and suitability of the persons responsible for the management and internal control of the tied agent, etc.);
- The tied agent (if a legal person) has anticipated the number of natural persons that will be involved in the provision of activities on behalf of the firm, the place from which those persons will provide services to the firm as well as how they will be monitored;
- In the case where under the national legislation a tied agent is allowed to hold money and/or financial instruments of clients as per Article 29(2) of MiFID II, then it is expected that the firm will assess the financial situation and the arrangements performed in regards to safeguarding of clients’ funds;
- The appointment of the tied agent does not prevent the firm from complying with the MiFID II legislative framework (e. verification that the organisational settings of tied agents do not prevent their effective supervision by firms).
- Ensures that the tied agent clearly agrees with the respective rights and obligations. Thus instructions and termination rights shall be provided by firms through an agreement between the relevant parties. The aspects that the relevant agreement is expected to cover are available under Point [22] of the Briefing.
- Avoids appointing a tied agent which is a legal person and whose employees involved in the provision of the activities on behalf of the firm (e.g. sales staff) are also at the disposal or under the control of other entities (including third-country entities) as such entities could exercise inappropriate influence over the way in which the tied agent carries out the activities on behalf of the firm or may prevent the firm from effectively monitoring the activities of their tied agent.
D. SUPERVISORY EXPECTATIONS ON FIRMS USING TIED AGENTS IN THEIR ONGOING ACTIVITIES
Pursuant to the provisions of Article 29(2) of MiFID II, firms are required to monitor the activities of their tied agents to ensure that they continue to comply with MiFID II when acting through tied agents. Thus, once a firm appoints a tied agent, it is expected to ensure the following:
- It has in place adequate internal measures and processes to appropriately oversight the activity that the tied agent carries out on its behalf, such as the following:
- The Compliance Function shall advise and assist the persons responsible to carry out investment services and activities to comply with the firm’s obligation under MiFID II.
- With respect to risk management, a firm shall monitor, inter alia:
- the level of compliance by the firm’s relevant persons with the arrangements, processes and mechanisms adopted by the firm to manage the risks relating to the firm’s activities
- the adequacy and effectiveness of measures taken to address any deficiencies in the policies, procedures, arrangements and mechanisms adopted by the firm to manage the risks, including failures by the relevant persons to comply with such arrangements, processes and mechanisms
- The remuneration policies and procedures are not incentivising relevant persons to favour their own interests to the potential detriment of any client.
- The Conflict of Interest Policy shall include procedures and measures to ensure that relevant persons carry on their activities at an appropriate level of independence.
- Adoption of appropriate and proportionate governance arrangements by firms to monitor the activities carried out by the tied agents, such as for example:
- The appointment of one or more independent or non-executive directors in charge of monitoring the activities of the tied agents;
- To carry out an independent (external) review of the internal control framework (and staff) in charge of monitoring the tied agents.
- Consequently, in order to monitor the tied agent’s activity, NCAs should be satisfied that a firm has in place, inter alia, adequate:
- Organisational arrangements in order to monitor the skills and experience of the tied agent;
- Appropriate reporting mechanisms (e.g. firms to engage in face-to-face meeting/discussions with tied agents to avoid excessive reliance when it comes to high-level attestation from the tied agent, receipt of specific information from the tied agent on a regular basis);
- Mechanisms to assess the quality of services provided by the tied agent, as well as the consistency of the tied agent with the relevant EU legislative framework;
- Mechanisms for the identification of conflicts of interest, which may arise from the relationship between the appointed tied agent and other entities or third-country entities with which the tied agent has the close link.
- Regular monitoring of the tied agents’ financial situation through experienced persons (e.g. financial accountants).
- Dealing with the complaints concerning the activities of the appointed tied agents.
- Has the ability to terminate the relationship with a tied agent, where necessary, with immediate effect (e.g. when this is in the interest of clients) without determinant the continuity and quality of the provision of activities to clients.
- When the relationship between a firm and a tied agent is terminated:
- Immediate notification of the NCA of the home Member State specifying if the said termination is due to matters having a serious regulatory impact or involving an offence or a breach of MiFID II requirements;
- Notification of all relevant clients in order to avoid any future interaction with the tied agent; and
- Completion and fulfilment of all outstanding activities and obligations to clients either by the firm itself or another tied agent.
In case you have any questions, please do not hesitate to contact us for further professional assistance.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.