On 13 January 2021, the European Securities and Markets Authority (ESMA), the European Union’s (EU) securities markets regulator, issued a public statement to remind firms of the second Markets in Financial Instruments Directive 2014/65/EU (MiFID II) requirements on the provision of investments services to retail or professional clients by firms not established or situated in the EU. This statement was issued to raise ESMA concerns over "questionable practices by firms around reverse solicitation" since the end of the Brexit transition period.
Reverse Solicitation and Brexit
The United Kingdom (UK) left the EU’s regulatory perimeter on the 31 December 2021 and as such, financial institutions in the UK can no longer freely provide services to EU under MiFID II passports. MiFID II does, however, allows authorised investment firms based outside the EU to serve the bloc's consumers if this is done properly through reverse solicitation.
According to Article 42 of MiFID II, “where a retail client or professional client, within the meaning of Section II of Annex II, established or situated in the Union initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the third country firm is not subject to the requirements under Article 39 of MiFID II (Establishment of a branch)”. This means that businesses based outside the EU, including those in the UK, can provide services to EU based clients where those clients initiate the contact themselves without having been solicited.
Overview of ESMA’s public statement
The statement was issued to remind financial firms based outside the EU that they must not solicit customers or advertise investment services in Europe. ESMA noted that with the end of the UK transition period on 31 December 2020, some questionable practices around reverse solicitation have emerged. "For example, some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their terms of business or through the use of online pop-up 'I agree' boxes, whereby clients state that any transaction is executed on the exclusive initiative of the client".
In response to such questionable practices, ESMA reiterated existing principles such as Recital 111 of MiFID II which states that where a third country firm solicits clients or potential clients in the EU, or promotes or advertises investment services or activities in the EU, such services should not be deemed to have been provided at the own exclusive initiative of the client, regardless of any contractual clauses or disclaimer to the contrary.
Furthermore, with regards to the meaning of solicitation, ESMA reminded firms that every communication means used (such as press releases, online advertising, 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 the EU in respect to the firm’s investment services, activities or by the firm in respect to any financial instruments.
ESMA also emphasised that such a solicitation, promotion or advertising should be considered regardless of the person through whom it is issued: the third country firm itself, an entity acting on its behalf, a firm with close links to the third country firm or any other person acting on behalf of such entity.
Sanctions for breaching the reverse solicitation rules
In terms of sanctions, ESMA highlighted in the public statement that the provision of investment services in the EU without proper authorisation exposes service providers to the risk of administrative or criminal proceedings for the application of relevant sanctions.
With regards to consumers, the EU watchdog also warned consumers that when using the services of investment service providers which are not properly authorised in accordance with EU law, they may lose protections granted to them under EU rules including coverage under the investor compensation schemes.
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