The European Securities and Markets Authority (ESMA) has issued a statement to remind firms of the rules on reverse solicitation under MiFID II. It says, that since the end of the UK transition period on 31 December 2020, some firms appear to be trying to circumvent MiFID II requirements and questionable reverse solicitation practices have emerged. These practices include using general clauses in Terms of Business or online pop-up “I agree” boxes, whereby clients state that any transaction is executed on the exclusive initiative of the client. In ESMA’s view, these practices do not amount to a client exclusively initiating the service.
ESMA reminds firms that:
- It has already provided guidance on the application of the MiFID II requirements on the provision of investment services and activities by third country firms, including how the reference in Article 42 MiFID II to a client initiating “at its own initiative the provision of an investment services or activity by a third-country firm” should be understood and applied (see Q&A 13.1 on page 112 of the guidance).
- Recital 111 of MIFID II says “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”.This also applies where a person acts on behalf of the third-country firm.
- Every communication method used, such as press releases, advertising on the internet, brochures, phone calls or face-to-face meetings should be considered to determine if the client or potential client has been subject to any solicitation, promotion or advertising in EU on the firm’s investment services or activities, or on financial instruments. Any such solicitation, promotion or advertising should be considered regardless of the person through whom it is issued.
- The provision of investment services in the EU without proper authorisation exposes service providers to the risk of administrative or criminal proceedings.
- Investors using the services of firms which are not properly authorised may lose protections, for example, coverage under the investor compensation schemes.
How can you establish reverse solicitation?
The concept of reverse solicitation is recognised in MiFID II and the AIFMD. The UK equivalent is the overseas person exclusion in the Regulated Activities Order. The difficulty with relying upon reverse solicitation to provide services within the EU is that the interpretation of the concept varies in different EU Member States and different views are taken as to the degree of marketing permitted and the extent to which subsequent services can be provided to the client. Under MiFID, whether the relationship has been initiated exclusively by the client needs to be assessed on a case-by-case basis for each investment service or activity provided. Contractual clauses or disclaimers are not deemed to be sufficient. Reverse solicitation should never be presumed and records tracking the relationship with the client should be kept. Even where reverse solicitation has successfully been established, a firm cannot necessarily go on to market new categories of investment products to that client or provide new services. For example, a case-by-case assessment needs to be carried out to determine whether a product constitutes a new category, taking into account the type of financial instrument being offered, the distinction between complex and no-complex products and the riskiness of the product.
Please do not hesitate to get in touch if you would like to discuss how the issues raised in this article may impact your cross-border activities. We have advised many clients on their Brexit business planning, including the use of reverse solicitation practices across the EU-27.