Independent financial advisers are increasingly trying to affiliate themselves with larger brands as regulatory pressures mount up.

The second Markets in Financial Instruments Directive (Mifid2) which comes into force in January 2017 will seek to regulate almost all aspects of investment service providers – with the main aim of protecting retail customers.

While no one would dispute the importance of this, the reality is that some of the rules are quite challenging for the industry – and would make smaller companies’ business model unworkable.

Julia Chatard, the executive director at forex broker FXDD, said that Mifid 2 would, for example, control the retrocession fees which investment advisers receive for providing advice to customers or doing executions on their behalf.

“Mifid 2 will increase controls on retrocession fees, saying that they should be ‘justifiable’ which is quite difficult to do, demanding disclosure about fees, charges and costs. And for independent advisers, retrocession fees will be completely banned,” she explained.

This is why the ‘tied agent’ structure – affiliating with a large, already regulated company, is becoming an interesting solution.

FXDD has been inundated by requests from small- and medium-sized operators and sees this as an opportunity to extend its footprint. The company already employs over 100 people between its headquarters in Malta and its support centre in New York, but it also wants to have a presence in most if not all of the member states of the EU.

Ultimately we will be responsible for everything the tied agent does as we are the regulated company

“The company grew very quickly over the past 14 years as it pursued various market opportunities created by the volatility of the past few years. The more volatility there is, the more activity, and therefore the more business for us. This is our lifeblood, with just as much scope to lose a lot and to win a lot as our customers do.

“But we mitigate this because apart from being an online trading platform, we also observe our clients’ behaviour and do back-to-back transactions and hedge positions where we need to,” she explained.

“We have good opportunities in the market, leveraging our expertise to help smaller operators. The tied agent mechanism has existed in Malta for some time but unfortunately it never picked up – but operators in other member states are very interested.”

The benefit for operators is obvious – sparing them the considerable expense of getting their own licence and also giving them instant access to the online technology developed over the years at considerable cost.

“Mifid 2 will create a completely different reality and as regulated entities they would need services provided by ‘qualified’ people but it is not economically feasible for these small operators to have their own compliance officers and risk managers. This is why so many companies are looking for the support that companies like FXDD can offer.”

However, for FXDD it could turn into a sour experience unless it handles it carefully, choosing partners that share its strategy and overall customer approach.

“Ultimately we will be responsible for everything the tied agent does as we are the regulated company. Many of them will be quite new to the regulatory framework so we will need to do good due diligence on them. As tied agents, they become our front office, our sales force, which will place a lot of responsibility on us as we will have to train them and explain the regulations – and they will have to endorse our policies and procedures.”

FXDD’s compliance department will still be able to review all their transactions – the advantage of having technology and online business. Once the network of tied agents is in place, it will greatly expand its operations.

“We are already very strong in Asia (which is serviced mostly through our NY support centre) but the consolidation of forex markets means it makes sense to be present in other EU countries. It is a bit more complex in other jurisdictions outside the EU as legislation, culture and customer centricity is very different,” she explained.

FXDD offers trading in a great number of currencies, precious metals and stock market indexes, but three main currencies – dollar, euro and sterling – represent the bulk of transactions. Lately the Chinese yuan is rapidly gaining in popularity as its volatility means that there is considerable scope for gains.

“The dollar is also getting stronger as the American economy is picking up, compared with the other three currencies. I would not be surprised if euro and dollar achieve parity by the end of the first quarter,” she mused, adding quickly that forecasts were notoriously difficult in this sector.

I would not be surprised if euro and dollar achieve parity by the end of the first quarter

One thing that she stressed was that the future lay with technology, which could provide solutions to the regulatory pressures that are mounting on anything to do withfinancial services.

“For example, there are lots of conversations about what they call digital banks, which would only supply services online. Everything is pushing towards compliance and you have to verify your customers’ identity somehow – whether you are facing them or engaging with them digitally.

“Our due diligence process is very complex since we are dealing with customers who are non-facing. It is a complex process and we sometimes rely on due diligence done by other institutions but with many conditions and controls.

“If there were a digital passport which could verify their identity more easily, it would solve many complications. Many software developers are trying to find ways to do this using access to multiple databases. This would change things completely.

“Right now many traditional companies look at the situation and say they do not believe it will happen. But I think in a few years’ time – five or 10 who knows – this will be resolved and it will significantly change how the whole industry is operating.”