ESMA – Increased Focus on “MIFID II Reverse Solicitation” Rules Following the End of the UK Transition Period

On 13 January 2021, the European Securities and Markets Association (ESMA) issued a public statement to firms who provide investment services to retail and/or professional clients from locations outside of the European Union , reminding them of the MiFID II rules on “reverse solicitation.” This is an explicit warning to UK firms in the context of the end of the Brexit transition period, but it also has wider relevance. 

We have witnessed many third country firms availing themselves (albeit conservatively) of the reverse solicitation carve out. It’s therefore important to remind firms of their obligations, particularly in the light of this easily missed ESMA publication.

In addition to guidance on how Article 42 of MIFID II should be interpreted and applied, the statement from ESMA also identified key concerns, specifically “questionable practices by firms around reverse solicitation (that) have emerged.” 

One specific example noted by ESMA was the common practice of including general clauses in Terms of Business, or through the use of website pop-ups, which seek to circumvent the MIFID II rules by having a prospective client or investor agree that any future subscription or transaction is entered into based on their exclusive initiative. ESMA signals that neither practice is compliant to the rules of reverse solicitation and that it sees both as an unacceptable attempt to by-pass investor protections in Europe.

The statement goes further to reiterate recital 111 of MiFID II, which outlines that “where third-country firms solicit 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.” Specifically, “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client.”

ACA Guidance

In our view, the keyword here is “promote,” which should be interpreted very broadly to include multiple forms of media even those not commonly associated with advertising. Therefore, firms are asked to review all communication and marketing media, (press releases, advertising on internet, brochures, phone calls, or face-to-face meetings) to determine whether a potential client or investor has been provided with solicitation, financial promotion, or advertising in the EU in relation to financial services or instruments.  

ESMA clarifies that such material and/or communications are caught irrespective of who is providing it. Thus, any person acting on behalf of the third country entity, or any entity affiliated to that firm, would also be captured by the rules. 

We note an omission of specific guidance regarding similar reverse solicitation provisions within the Alternative Investment Fund Managers Directive (AIFMD) and have found no specific guidance on such. However, it is our strong conviction that, by extension, we believe the same scrutiny is, or will shortly be placed on marketing activity under that legislative regime.  We therefore recommend a similar review of practices and material as they apply to the AIFMD.

Finally, ESMA ends the publication with a stark reminder of the ramifications of breaching the reverse solicitation rules, to the extent that firms would be subject to administrative, enforcement, or criminal penalties or sanctions if found guilty of providing investment services in the EU without appropriate authorisation within a recognised member state.

For More Information

For further information on this alert, please speak to Andy Welch , Martin Lovick, or your ACA consultant at +44 (0)20 7042 0500.

How We Help

Our consulting and advisory team can help you address the challenges raised in this alert, including the methods by which third country firms can register to actively market in the EU without the restrictions of reliance on reverse solicitation. 

We also have a wide range of Brexit solutions designed to help global firms find solutions to overcome their Brexit challenges and continue to access the UK markets. These include:

• Mirabella tied agent MiFID-passporting solution
• Ongoing compliance support, including MIFID II reviews and SM&CR support and implementation

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