ESMA recommends review of MiFID II with regard to reverse solicitation

Maria Nikolova

This practice may pave the way for legal uncertainty and potential detriment for investors, ESMA warns.

In a recent Letter to the European Commission, the European Securities and Markets Authority (ESMA) has hinted at a review of the MiFID II directive with regard to the so-called “reverse solicitation”.

Let’s recall that third country (TC) firms may provide investment services and activities without being subject to the relevant framework, at the exclusive initiative of EU clients – this is called “reverse solicitation”.

ESMA is concerned that, as a result of this practice, no investor protection rule would apply to the provision of such services.

The EU regulator has already provided clarifications, through Q&As, on some parts of the framework regulating reverse solicitation.

For instance, the watchdog has explained that, under the reverse solicitation regime, a third-country firm cannot market new categories of investment products to the client. Whether a third-country firm markets a new category of an investment product needs to be assessed on a case-by-case basis, taking into account elements such as (i) the type of the financial instrument which is offered; (ii) the distinction between complex and non-complex products as referred to in Article 25(4) of MIFID II; (ii) the riskiness of the product. For example, a subordinated bond does not belong to the same category as a plain-vanilla debt instrument. In addition, categories of investment products should be granular enough to ensure that the reverse solicitation is not used as a way of circumventing a national regime of a Member State governing the provision of investment services by a third-country firm.

In its Letter to the European Commission, ESMA voiced its concerns of other issues stemming from the reverse solicitation regime.

“Allowing clients, and especially retail clients, in the EU to interact with third-country firms in a context where the MiFID II regulatory and supervisory framework does not apply in its entirety could be a source of legal uncertainty and potential detriment for them”. ESMA says.

“Therefore, considering the importance of this issue, particularly in the context of the UK withdrawal from the EU, ESMA recommends to consider reviewing the MiFID II framework in order to mitigate the effects of reverse solicitation”.

The EU regulator offers the following options to address this problem:

  • the explicit obligation for TC firms to demonstrate to supervisory authorities in the EU, upon request, the client’s initiative;
  • the submission of any dispute to EU Courts and dispute-resolution bodies, upon client’s request, even in case of reverse solicitation;
  • the possible reassessment and clarification of existing provisions on reverse solicitation (for instance, clarify that the reverse solicitation for retail clients should be assessed on a transaction by transaction basis and the specification of the notion of “new categories of investment products and services” to limit the scope of services that can be provided by third country firms upon the clients’ initiative).

Whether ESMA’s calls will lead to actual changes to the MiFID II rules remains to be seen.

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