In the post-Brexit period, UK firms are increasingly relying on the reverse solicitation regime to provide investment services to clients based in the European Union as a consequence of losing their passporting rights.
The reverse solicitation regime is established in Article 42 of the Markets in Financial Instruments Directive (“MiFID II“) which allows firms based outside the European Union (“Third Country Firms“) to provide services to European clients without being subject to the requirement of establishing a branch in the relevant member state.
However, in order to benefit from the reverse solicitation regime, Third Country Firms must comply with certain conditions. In particular, Third Country Firms need to demonstrate that the client requested “at its own exclusive initiative the provision of an investment service”. The definition of “own exclusive initiative” has been a matter of intense debate amongst investment industry participants. In light of this, ESMA published a Questions & Answers providing more clarification on how to interpret the reverse solicitation regime and exclusive initiative of the client. With an increasing number of firms relying on the reverse regime, ESMA published a statement on 13 January 2021 highlighting that, following the departure of the UK from the European Union, some UK firms have been trying to circumvent the MiFID II rules on reverse solicitation. As a result of this, certain firms are including clauses in their contracts whereby clients acknowledge that they requested the firm’s services by their own initiative.
However, by entering into an agreement under such circumstances, Third Country Firms are risking breaching recital 111 of MiFID II which states that “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”.
ESMA also reminded Third Country Firms that:
- communication should be broadly understood for the purposes of solicitation under the reverse regime. It includes press releases, marketing material published on the internet, phone calls and presential meetings;
- it is not necessary that the solicitation comes directly from the Third Country Firm. It can be also be performed by any representants of the Third Country Firm;
- Third Country Firms providing services in the European Union without proper authorisation might face administrative or criminal proceedings; and
- clients contracting with Third Country Firms which are not properly authorised in accordance with European local rules cannot benefit from the protection granted under European law, such as the investor compensation schemes.
It is important to highlight that Third Country Firms may face administrative or criminal proceedings for providing services in the European Union without the proper authorisation of the local authority.
ESMA’s statement is an indication that European regulators will be focusing on Third Country Firms relying on reverse solicitation to conduct their business in Europe. Therefore, Third Country Firms will need to ensure that services provided to clients based in a European member state are in compliance with the narrow definition of reverse solicitation under MiFID II, as it is interpreted by ESMA.
For more information, and any guidance or advice on MiFID II rules on the reverse solicitation regime, or on how to market your financial products in the UK and in Europe, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help