If you’re thinking about launching an investment platform in the European Economic Area (EEA), getting the right permissions under the Markets in Financial Instruments Directive (MiFID) is crucial. Whether you’re a fintech startup aiming to create an innovative new investment experience, or a financial advisor planning to introduce your own platform, regulatory permissions should be at the top of your list.
There’s a lot to think about. From figuring out the specific permissions you need to deciding whether to partner up with third-party firms to offer specific services, there are several steps involved. Here’s some essential guidance to help you get started.
What MiFID permissions do I need?
The permissions you need depend on the services you plan to offer. For instance, a financial advisor would need permissions for giving investment advice, while a company launching an automated investment platform might not. You might already have some of the required permissions based on your current activities. Here are some key MiFID permissions to consider:
- Reception and transmission of orders: Allows you to place customer orders for buying or selling financial instruments.
- Execution of orders on behalf of clients: Lets you directly execute orders in financial instruments for customers.
- Dealing on own account: Authorises trading financial instruments for your own account, which might not be necessary for standard digital investment platforms focused on customer trades.
- Portfolio management: Gives you permission to manage customer portfolios and make investment decisions on their behalf.
- Investment advice: Allows you to provide personal investment recommendations to customers.
- Safekeeping and administration of financial instruments: Lets you provide custodial services and handle related administrative tasks.
- Operation of a multilateral trading facility (MTF): Permits you to operate a system where multiple third-party buying and selling interests in financial instruments can trade with each other.
Besides these, there are additional services you might need authorisation for, depending on your exact plans. These can include granting loans to investors, advising on mergers and acquisitions, underwriting services, or providing foreign exchange services related to investments.
Can I work with partners to offer regulated services?
Yes, a firm can utilise the services of a third-party provider for certain MiFID investment services and activities instead of obtaining authorisation themselves. This approach can be practical and efficient, especially for firms that want to offer specific services without the burden of full regulatory compliance for those activities.
It’s important to remember that your customers must be informed about the use of third-party providers and how their assets and orders will be handled. Deciding whether you want to enlist the services of a partner, and for which regulated activities, can therefore affect the overall customer experience. Since you will likely want your own brand to take centre stage when launching a new investment platform, it may be more suitable to consider third-party providers for regulated back-office operations.
Safekeeping and administration of financial instruments
Regulators will scrutinise all the permissions you apply for, but one area that involves significant responsibility is the safekeeping and administration of financial instruments. Under this permission, firms must ensure the proper handling and protection of client assets, including custody, record-keeping, account administration, reconciliation, reporting, and risk management.
Since this is such a critical part of running an investment platform, many firms choose to partner with a third party like Huddlestock to provide these services. The authorised third-party custodian acts as an extension of your operations team, so you can offer these services without holding the direct regulatory permission yourself.
“Many firms opt for a third-party partnership for safekeeping and administration because it requires significant resources. However, it’s important to thoroughly research your options before making a decision. Ask potential partners about their existing clients, the value of assets they manage, and their experience in the field.”
Inger Sofie Korbøl
Chief Investor Services, Huddlestock
There are some key points to consider when investigating potential partnerships:
- Due diligence: You should conduct thorough due diligence on third-party providers to ensure they have the necessary MiFID permissions and adhere to regulatory standards.
- Contractual agreements: Clear and comprehensive agreements outlining the responsibilities, compliance obligations, and service levels between your firm and the third-party provider.
- Regulatory compliance: Your firm remains ultimately responsible for ensuring compliance with MiFID requirements, even when partnering with third-parties for certain functions. You should implement oversight mechanisms and ensure that third-party providers meet all regulatory obligations.