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Questionable practices by firms around reverse solicitation

May 18, 2022

What is happening?

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, issued in January 2020 a Public Statement to remind firms of the MiFID II requirements on the provision of investment services to retail or professional clients by firms not established or situated in the European Union.

What do you need to do?

Where a retail 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 third-country firm, that third-country firm is not subject to the requirement to establish a branch under Article 39 of MiFID II.

Following Brexit, some questionable practices by firms around reverse solicitation have emerged. For example, some firms are apparently trying to circumvent the 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.

ESMA has reminded firms that where a third country firm solicits clients or potential clients in the EU or promotes or advertises investment services or activities together with ancillary services in the EU, it should not be deemed to be 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. This is where firms’ use of contractual clauses or “I agree” pop-ups is relevant.

ESMA has also reminded firms that every communication method used, such as press releases, web advertising, brochures, phone calls or face-to-face meetings should be considered in order to determine if the client or potential client has been subject to any solicitation, promotion or advertising in the EU on the firm’s investment services or activities or on financial instruments. Also, such a solicitation, promotion or advertising should be considered regardless of the person through whom it is issued, whether it is the third country firm itself, an entity acting on its behalf or having close links with the third country firm, or any other person acting on behalf of the entity.

The Cross Border Distribution of Funds (CBDF) Directive and Regulation, launched in August 2021, defines pre-marketing activity for all alternative investment fund managers (AIFMs) marketing funds within the EU. Fund managers have traditionally relied on reverse solicitation to market their funds in Europe, but the CBDF was an initial step toward regulating pre-marketing contact by increasing the scope of what “pre-marketing” means.

Further, ESMA guidance applicable to CBDF came into force in February 2022, effectively broadening the definition of marketing while narrowing the definition of reverse solicitation. The European Commission has decided that pre-marketing a fund—even if that fund has not been set up yet—should prevent funds from capitalising on reverse solicitation for a period of 18 months.

Under the current guidelines for reverse solicitation, investors can access funds they want to invest in without falling within AIFMD marketing requirements—if the investor initiates the approach. However, EU regulators aim to limit the use of reverse solicitation, which suggests that it is often used to circumvent AIFMD.

AIFMD II regulation is not expected until 2024 or beyond, but change is on its way. If reverse solicitation is a closing door, firms may need to act now to get ahead of regulatory changes.

How can we help you?

If you’d like to know more about how we can help you with your EU investment marketing and reverse solicitation arrangements, or with any other aspect of FCA compliance, our expert team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.