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.

Read this next

Retail FX

ThinkMarkets expands CFDs lineup to over 4000 ETFs and shares

ThinkMarkets has expanded its service offering by incorporating 2500 new CFDs on shares and ETFs on its ThinkTrader platform.

Retail FX

France regulator warns investors of Omega Pro,

France’s financial markets regulator alerted investors that scams related to Omega Pro Ltd are beginning to circulate, with the blacklisted firm capitalizing on the situation to run a range of “unrealistic” offers.

Digital Assets

Web3 platform Grand Time paid $2 million in token earnings to date

Community-driven Web3 platform Grand Time said its offering – which includes a multifaceted platforms and its native token – has been gaining significant traction highlighted by impressive operational metrics.

Institutional FX

FX volumes at MOEX halved in April as ruble gains gorund

Currency trading at Moscow Exchange (MOEX) halted its upward route in April as monthly volumes nearly halved from a month earlier.

Digital Assets

FTX US adds stock trading, fractional shares to crypto platform

FTX US, the American subsidiary of crypto exchange FTX has kicked off stock trading feature to its customers in an effort to compete with popular platforms such as Robinhood and eToro.

Industry News

UK FCA empowered to remove brokers’ permissions in 28 days

Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed.

Industry News

CFTC charges $44m Ponzi scheme but millions may have fled to foreign crypto exchange

The CFTC alleged that defendants transferred millions of dollars to an off-shore entity that, in turn, may have transferred funds to a foreign cryptocurrency exchange. None of these funds were returned to the pool.


Saxo Bank deploys Adenza to address Basel and EBA requirements

The integration of ControllerView will enhance Basel-driven capital calculations and reporting at Saxo Bank in support of the bank’s multijurisdictional capital and liquidity reporting requirements throughout Denmark, Switzerland and UK, with plans to expand into the Netherlands.

Executive Moves

ComplySci appoints CTO, CPO, and CLO to further regtech’s product expansion

ComplySci offers compliance software used by more than 1400 global institutions to identify risk and address regulatory compliance challenges.