Tied agent solution vs. own licence: Which is right for your investment firm?

Companies that want to offer investment services requiring authorisation in the European Union (EU) usually have a choice between obtaining their own licence or using a tied agent solution. When weighing up these options, you should consider various factors such as time, cost and complexity. Here, we examine the pros and cons of each approach to help you decide which is best for you.

What investment services require authorisation?

Investment services requiring authorisation in the EU are financial activities that fall under the regulatory framework of the Markets in Financial Instruments Directive (MiFID II). These services include, for example, asset management, investment advice, investment brokerage, trading in various financial instruments, and the provision of investment-related activities for clients. Financial regulation exists to ensure transparency, investor protection and the efficient functioning of financial markets in the EU.

Own licence

The first option for firms intending to provide investment services is to obtain their own licence or authorisation from the supervisory authority of the European Economic Area (EEA) country in which they wish to operate. We asked our Head of Compliance and Risk at Huddlestock GmbH to give us an example of how this works in Germany.

“Anyone wishing to provide investment services in Germany on a commercial basis or on a commercial scale, either alone or together with ancillary investment services or ancillary transactions, requires written authorisation from the Federal Financial Supervisory Authority (BaFin) in accordance with Section 15 (1) of the German Securities Institutions Act (WpIG) before commencing business activities.”

Roman Endele

Head of Compliance and Risk, Huddlestock GmbH

Companies that are authorised in an EEA country can make use of the EU passporting system, which enables them to operate in any other EU state with minimal additional authorisation.

Advantages of having your own licence

A company that is directly authorised by a supervisory authority is not tied to another financial institution and benefits from greater control over its business. It has the freedom to offer a wide range of financial products and services, including products from different providers.

The company also gains greater independence in its activities and can more easily customise its offerings, systems, and processes.

Disadvantages of having your own licence

Applying for and operating under your own licence is a big responsibility that requires appropriate resources to manage.

Even before submitting an application for authorisation, a company must ensure that its business model, compliance procedures, staff qualifications, and infrastructure meet regulatory requirements. Once preparations are complete, the application process can begin. This process timeline varies based on the workload of the supervisory authority, the complexity of the application, and any additional information requests or remedial measures. Overall, the process can take several months and in some cases more than a year.

Obtaining a licence typically involves high upfront and ongoing costs, including expenses for establishing and maintaining compliance infrastructure, technology, staff training, legal and advisory services, and regulatory reporting. These costs, along with the time to market, should be carefully considered, as a company may be unable to generate revenue until authorised to offer investment services. Capital requirements, especially for smaller firms and startups, should also not be underestimated.

Companies with their own licence face more complex regulatory obligations, including the need to comply with a wider range of regulations and ongoing reporting requirements. This complexity can be challenging, particularly for organisations with limited resources. Additionally, firms should assess their capacity to manage these complex processes, especially as they experience customer growth or launch new products and services.

Tied agent solution

A tied agent solution provides a liability umbrella, fulfilling the legal requirement for offering financial advisory and brokerage services. It is a practical alternative to obtaining your own licence or authorisation. In this arrangement, a company becomes a tied agent of the licenced entity providing the liability umbrella. Under this umbrella, the tied agent can then offer agreed-upon investment services that require a licence. The licenced company must verify the professional suitability and reliability of the tied agent and conduct supervision and monitoring. A good liability umbrella supports the business activities of the tied agent by providing comprehensive services, a high level of expertise, and access to a wide range of financial instruments.

What is a tied agent?

A tied agent is a natural or legal person who conducts transactions requiring authorisation in the name and on behalf of a specific financial institution (e.g. a bank or investment firm) and promotes or sells its financial products or services. The term “tied” refers to the exclusive relationship that the agent has with the financial institution, meaning the agent may not offer products from other providers.

Tied agents are typically authorised by a supervisory authority to act as representatives of the financial institution. This means the tied agent does not need their own licence to operate but must still meet certain standards and comply with regulations.

The tied agent is not employed by the licenced company but works on a self-employed basis and must be listed in a publicly accessible register of intermediaries maintained by the relevant supervisory authority, such as BaFin. (BaFin – (KWG / WpIG))

Advantages of a tied agent solution

Working with a liability umbrella and incorporating a tied agent into a financial institution with its own licence can be a much faster process than applying for your own licence. Since the liability umbrella assumes full responsibility for all actions of the tied agent and operates with an established business model, the authorised representative has less to set up from scratch. 

The costs associated with being authorised as a tied agent are often much lower than those of applying for your own licence, making this approach particularly attractive for smaller companies and startups. A shorter time to market also allows the company to capture market share and generate revenue more quickly.

The liability umbrella facilitates access to training and networking by promoting active exchanges among various parties involved, such as product providers, investment brokers, representatives of the liability umbrella, and participating custodian banks.

The processing of transactions and the safekeeping of financial instruments are managed by carefully selected brokers and custodian banks.

Depending on the type of firm providing a liability umbrella, a tied agent may also benefit from an established compliance infrastructure, processes and IT technologies. Obtaining regulatory authorisation to provide investment services is just one piece of the puzzle; the ability to leverage other capabilities—such as operational software, investment apps, and outsourced solutions—can simplify the route to market even further.

Disadvantages of a tied agent solution

Tied agents must still comply with regulations and demonstrate the necessary knowledge, skills and reliability to work with clients. 

The liability umbrella providing regulatory support must assess potential tied agents against these requirements and evaluate the reliability of all persons involved in providing the investment service.

Because an intermediary is “tied” to the liability umbrella, it cannot offer products or services from another provider. Companies should ensure that the liability umbrella offers the financial instruments, products and services that they themselves want to market now and potentially in the future.

Overall, it is important for companies to carefully consider their business objectives, resources and risk tolerance when deciding between obtaining their own licence or operating under a liability umbrella. Professional advice from legal, regulatory and financial experts can help companies make an informed decision based on their specific circumstances.

If you would like to speak to a Huddlestock expert about your investment management project, please don’t hesitate to get in touch here.