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ESMA statement on UK firms relying upon reverse solicitation for the provision of services to EU clients

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Investment funds and asset management
  • Financial services

19-01-2021

ESMA’s statement “Reminder to firms of the MiFID II rules on ‘reverse solicitation’ in the context of the recent end of the UK transition period”, warns UK firms against “questionable practices” relating to reverse solicitation and reminds UK firms of the limits to passive marketing under MiFID II.

ESMA reports that UK firms are “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.”  ESMA suggests that these terms and statements are not true reflections of the state of affairs between UK firms and current or potential EU clients.

UK firms’ communications to solicit, promote or advertise financial services to EU clients will not be considered permissible just because the communication or the eventual contract signed by the EU client contains any contractual clause or disclaimer deeming the UK firm to be responding to a contact made at the exclusive initiative of the EU client.  Nor will such communications be disregarded just because of any provisions attached to the product marketing materials.  However, it should be remembered that EU clients, whether natural or legal persons, have a directly effective right under the EU Treaties to free movement of capital, including the right to transfer their capital out of the EU to the UK.  That right is further protected by the EU Charter of Fundamental Rights and Freedoms and the European Convention on Human Rights.  An attempt by ESMA to frustrate reverse solicitation transactions genuinely initiated by EU clients in favour of UK firms would be in breach of international human rights law.

Three ESMA reminders

Article 42 of MiFID II provides limited exemptions under which third country firms (in this instance UK firms) with no established branch in the EU can provide new services to EU clients, if the client has initiated the contact “at its own exclusive initiative”.

Communication to solicit, promote or advertise

Recital 111 of MiFID II provides

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 will consider every means of communication used by a UK firm to determine whether it has solicited, promoted or advertised its investment services or activities, or its financial instruments to clients or potential clients in the EU.

Those means of communication include:

  • press releases
  • internet advertisements
  • brochures
  • phone calls
  • face to face meetings

Contractual provisions or disclaimers

UK firms’ communications to solicit, promote or advertise financial services to EU clients will not be considered permissible just because the communication or the eventual contract signed by the EU client contains any contractual clause or disclaimer deeming the UK firm to be responding to a contact made at the exclusive initiative of the EU client.  Nor will such communications be disregarded just because of any provisions attached to the product marketing materials. 

See Q&A 13.1 of ESMA’s Q&A on MiFID II and MiFIR investor protection and intermediaries topics.

Unauthorised UK firms cannot solicit in the EU through other entities

UK firms cannot circumvent the rules on solicitation, promotion or advertisement by making communication through an intermediary, for instance a firm which is authorised in the EU which has close links to a UK firm or is acting on its behalf.  Such communications will be deemed to be initiated by the UK firm regardless of the person through whom it is issued.  

Reverse solicitation after Brexit

Under MiFID II, reverse solicitation is an exemption only applicable to a specific product or service requested at an EU client’s own exclusive initiative.  When UK firms rely on the exemption, they should keep records that can track the relationship between the firm and the EU client to evidence that the client had taken the initiative to receive investment in relation to a new product.

Currently, Member States have different approaches and regulatory perimeters in respect to reverse solicitation under MiFID II, however, we expect those different interpretations will align with the stricter approach taken by ESMA.

Free movement of capital

All EU persons, whether natural or legal, have the benefit of the four freedoms set out in the Treaty on the Functioning of the EU.  Art 63(1) TFEU provides “all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.” This includes the right to the free movement of capital, not just within the EU, but in and out of the EU.  Further, Article 17 of the EU Charter of Fundamental Rights gives every EU person the right to dispose of their lawfully acquired possessions as they see fit, as does Article 1, Protocol 1 of the European Convention on Human Rights, to which all EU Member States are signatories.

Conclusion

This statement from ESMA is a warning to UK firms which are currently relying on reverse solicitation to provide cross-border services to EU clients.  UK firms which lack EU authorisation could be exposing themselves to civil, administrative or even criminal proceedings.  UK firms relying on reverse solicitation should consider reviewing their procedures and record keeping in relation to approaches from EU clients and how they might adjust their marketing communications to ensure that they are less likely to be considered as soliciting, promoting or advertising financial services to EU clients. 

Yet none of that changes the fact that reverse solicitation is a valid, legal right under both EU and UK law and UK firms have every right to provide services to EU clients which genuinely act on their exclusive initiative to seek financial services from those UK firms.

Our Brexit tracker

Our Financial Services Brexit tracker “Helping you through changing times - Our European Brexit tracker for financial services institutions” provides a quick overview of the current position in relation to UK funds and UK fund managers seeking to sell services into EU27 countries after Brexit.

How can Eversheds Sutherland help?

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we were at the forefront of MiFID II implementation. Our in depth understanding of the sector and experience with the practical implementation of MiFID II mean that we are very well placed to guide you in complying with the changing regulatory environment.