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ESMA detects firms disobeying EU's 'reverse solicitation' rules

Chris Hamblin, Editor, London, 18 January 2021

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The European Securities and Markets Authority is reminding firms that are not established or situated in the European Union to obey rules that the EU has made in accordance with its second Markets in Financial Instruments Directive regarding the provision of investment services to retail or professional clients.

According to Article 42 of MiFID II, when a retail client or professional client established or situated in the EU initiates "at its own exclusive initiative" the provision of an investment service or activity by a firm from a non-EU country, that non-EU firm is not subject to Article 39 of MiFID II (which deals with the subject of establishing a branch). Reverse solicitation - i.e. where an investment is made, at the initiative of an investor, in an alternative investment firm (AIF) managed or marketed in the EU - comes into play here. ESMA has already issued some pronouncements (in the form of written questions and answers) to firms on the subject.

Since the UK's "transition period" out of the EU ended on 31 December, ESMA has detected some questionable practices on the part of firms to do with reverse solicitation. It believes, for example, that some firms are trying to circumvent MiFID II 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 their own exclusive initiative.

ESMA quotes recital 111 of MiFID II: “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 [European] Union, it should not be deemed as a service provided at the own exclusive initiative of the client.” This is true “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.”

In the notice, ESMA reminds the market of three main principles.

  • Every means of communication to be 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...regardless of the person through whom it is issued."
  • The provision of investment services in the EU without proper authorisation in accordance with the EU and the national law applicable in member states exposes service providers to the risk of administrative or criminal proceedings, for the application of relevant sanctions.
  • When using the services of investment service providers which are not properly authorised in accordance with the laws of the EU and of member states, investors may lose any protection that they might have against various things that the relevant rules of the EU grant to them, including coverage under the investor compensation schemes in accordance with Directive 97/9/EC.

ESMA's offices in Paris are closed and all staff are teleworking.

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