Getting authorised to offer most types of financial services is a lengthy process at the best of times. But there's now zero chance of getting a new application approved by an EU27 regulator in time for a "hard Brexit" on 29 March 2019. While there's a short deadline for some types of application (e.g. 3 months for payment institutions), these relate to complete applications. Regulators usually ask a few basic questions as the basis for declaring the application 'incomplete' so they can take at least 12 months to consider the application.
So, as the likelihood of a 'hard Brexit' increases, firms are suddenly interested in alternative ways to establish a new presence to trade in and from the EU27...
Start-ups have always faced this type of problem, and very often get themselves appointed as some form of agent or representative of a firm with an existing authorisation while they apply for their own.
It's tempting to think that a merger or acquisition is an option, but regulatory approval is required for changes in control of regulated firms and the corporate process itself adds fresh complications, risk and time. And even where M&A activity is on the cards, an interim agency arrangement provides the perfect opportunity for the parties to get to know each other and the market opportunity while the corporate aspects are negotiated - without the added pressure of a looming Brexit.
Firms with existing authorisations for many types of regulated activities are entitled to appoint and register other firms as their agents to carry out regulated activities on their behalf (some of which are known as "tied agents" or (in the UK, for example) "appointed representatives").
There are some
activities that cannot be done through an agent, and even where that is
possible, the agent can only do what the principal is authorised to do. So it's important to consider the nature of the authorisation and
permissions required, and how quickly the principal might be able to
vary or add to its permissions to accommodate the agent.
It's also possible for a firm that is authorised in one EEA member state
to appoint an agent that is based in another EEA state, using any
applicable "passport" rights, and for the agent to provide its services under the principal's passports. This would involve a three month passport
notification process, as well as the agency registration. Indeed, it would be possible to actually contract with customers under the law of a third EEA state,
e.g. using Irish law as the basis for contracts that are currently written under English law.
The authorised firm (principal) must register each agent with its regulator and provide certain information about the agent, including a description of the governance arrangements that will enable the firm to effectively supervise the agent's activities. This is an important 'hygiene' factor in any event, however, since the principal is responsible - and accountable to the regulator - for the agent's activities.
The nature of agency also means that customers have their ultimate contractual relationship with the principal, and can avail themselves of the principal's complaints procedure if dissatisfied with the agent's conduct. But it's usual for the agent to trade under its own name and brand, using a 'white label' approach where the principal's details are disclosed in the service terms and website/email footer and/or on a 'powered by' basis for marketing purposes.
Of course, there are the downsides of fees payable to the principal to cover the additional administration and use of the authorisation (a potentially signficant revenue opportunity for a small principal with a larger agent), the exchange of confidential information between the parties, the need to consider whether the firms are in direct competition (actually quite rare), the need to carefully manage the relationship and the regulatory risks and so on. But such concerns are generally manageable in the short term - and worthwhile in light of the upsides - and most of the work required is useful in the context of the agent getting its own authorisation in the medium term...
And, hey, any port in a storm!
