Twelve days after the provisional entry into force of the EU-UK Trade and Cooperation Agreement (TCA)¹ the European Securities and Markets Authority (ESMA) published a short but focused public statement, reminding non-EU/EEA firms and notably UK firms on the principles of “reverse solicitation”. Reverse solicitation allows third-country firms, including UK firms, to service EU clients without triggering local licensing requirements. This requires, however that the client in the EU initiates, “at its own exclusive initiative” the business relationship with the third-country firm. Even if the business relationship was initiated on the exclusive initiative of the client, the service that the third-country firm can provide will be limited to those originally requested by the client. The third-country firm cannot offer further services to a client, because such further services would not be covered by the reverse solicitation exception.

It is worth recalling that the TCA does not cover market access rights for UK firms that do not have an establishment in the EU-27. In addition, there is no temporary access regime in EU law similar to the UK’s Temporary Permissions Regime facilitating access for EU-27 firms into the UK. Equally, the European Commission has not yet granted the UK any equivalence decisions that would allow for some avenue for access and it is not expected that the EU-27 will likely do so anytime soon.

ESMA specifically highlighted it had become aware that, since December 31, 2020, (clarifications in square brackets): “…some questionable practices by [non-EU-27/EEA firms] around reverse solicitation have emerged.” ESMA goes on further to narrow in on two specific elements by stating: “For example, some firms appear to be 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.”²

Why now?

While it was generally expected that after December 31, 2020, that the European Supervisory Authorities (ESAs)³ would, along with possibly the European Central Bank (ECB), acting in its role at the head of the Single Supervisory Mechanism (SSM) of the Banking Union, pick up the pace and increase supervisory scrutiny of reverse solicitation, ESMA is the first out of the gate. ESMA’s public statement sets a clear tone that reverse solicitation has moved quite quickly to being an area ESMA will increase to monitor and possibly take supervisory action using the breadth of tools available to it.

All types of communications ranging from use of press releases, internet based advertising, brochures, phone calls or face-to-face meetings are set out by ESMA as those it will look at as whether there is reverse solicitation or active solicitation. This list of communication channels should be viewed as non-exhaustive. Firms will therefore also want to consider other communication channels, such as the use of mobile apps and how these are positioned i.e., in which app stores these are made available, as well as how some firms advertise using social media. ESMA is also clear in its public statement that any solicitation of clients, any promotion or advertising conducted in or directed towards the EU-27 can also be made by any such person acting on behalf of the third-country firm, which thus means that ESMA will monitor the use and conduct of distributors.

It should be noted that the TCA did not replace, repeal or otherwise impact the breadth of the ESAs and the ECB-SSM’s guidelines that were drafted with Brexit in mind but have since found application towards other non-EU/EEA firms, in a collection of publications known as the “Supervisory Principles on Relocations” (SPoRs). The SPoRs continue to apply and also have an impact on the longer-term viability of the use of reverse solicitation for certain business and distribution models.⁴ The SPoRs and equally ESMA’s most recent public statement apply to services provided to professional clients as well as retail clients in particular.

ESMA’s public statement reiterates that the concept of reverse solicitation must be narrowly construed by reminding⁵ firms that: “…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”. 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’”. ESMA also cross-refers to its existing guidance on what constitutes the client initiating “…at its own exclusive initiative the provision of an investment service or activity by a third-country firm.”⁶

What firms will want to consider

That being said, firms will want to note that despite there being common principles, the 27+ national competent authorities (NCAs) will determine the precise scope of reverse solicitation in their respective jurisdiction. Thus, firms will want to note that the interpretations may differ between those NCAs, so that activity that would fall under reverse solicitation in say Germany may not be seen as such if such activity was directed towards French clients. Differences in the supervisory approach of the NCAs remain in respect of the type of outreach and communication, the categories of clients as well as the types of financial services and products to which reverse solicitation may apply. Equally, not every NCA has published guidance of how reverse solicitation applies in “their” jurisdiction.Importantly, the statements of ESMA do not yet apply to all financial institutions and it will remain to be whether the EBA and EIOPA will issue similar public reminders that apply to those firms within EBA’s banking and EIOPA’s (re-)insurance and pensions market.

That being said, even prior to the publication of ESMA’s public statement let alone the SPoRs both EU and national authorities were clear that:

• a “bullish” use of reverse solicitation will not be tolerated nor will attempts at circumvention.⁷ Third-country firms cannot engage in marketing activities and then seek to claim that all services provided to clients in the EU-27 are solely based on reverse solicitation. A more subtle, sensible and measured approach will be required if an activity is to qualify as falling into the scope of reverse solicitation. Third-country firms will want to ensure they can provide detailed evidence of how that relationship came about in respect of each service provided; and
• the “exclusive initiative” test under reverse solicitation applies on a service by service basis as opposed to a relationship basis. In other words, following the establishment of a client relationship between a third-country firm and an EU-27 client that firm cannot provide new products and services to that client unless such additional services have also expressly been requested at the sole and exclusive initiative of that client. Some ambiguity (and thus regulatory risk) exists as to whether that third-country firm may provide a repeat of similar services/product type for that client.

ESMA’s reminder is also quite clear and direct in stating that:

• “the provision of investment services in the EU without proper authorization 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”⁸ – which can be levied against third-country firms and persons of those firms; and
• “when using the services of investment service providers which are not properly authorized in accordance with EU and Member States’ law, investors may lose protections granted to them under EU relevant rules, including coverage under the investor compensation schemes in accordance with Directive 97/9/EC” – which should also be viewed as a litigation risk, including through the EU’s new collective action regime.⁹

Outlook and next steps

ESMA’s public statement expresses its supervisory expectations in an unequivocal manner. It remains to be seen whether the other ESAs and the ECB-SSM will follow the approach taken by ESMA in particular in the supervision of banks, payment service providers and asset managers. Furthermore, it is quite likely that the NCAs may equally publish their own statements. ESMA, could also commence a Common Supervisory Action (i.e. coordinated multi-NCA set of investigations coordinated by ESMA) and if it does this might flow into a further set of coordinated guidance of the ESAs for more harmonized principles on reverse solicitation so as to end the differences that might exist across certain EU-27 Member States and thus reduce fragmentationamong the other ESAs and/or the NCAs approaches.

In light of the above and the direction of travel of increased supervisory scrutiny by ESMA and the NCAs, affected third-country firms will want to ensure that their marketing and market access strategies, where these do rely on reverse solicitation comply with the expectations of ESMA and the NCAs as well as those set in the SPoRs. Many firms have taken preparatory measures by adopting documented reverse solicitation policies and procedures to ensure they do not directly or inadvertently trigger a licensing requirement in the respective jurisdictions. With this in mind, some UK firms will need to reconsider their post-Brexit market access and structuring plans.

If you would like to discuss any of the items mentioned above, in particular how to forward-plan any impacts on preparing in case of supervisory scrutiny and/or operationalizing compliance across documentation and non-documentation workstreams or how these priorities may affect your business or your clients more generally, please contact our financial regulatory team, other Brexit Board members or the listed key contacts who have been actively advising on the use of reverse solicitation principles into the EU-27 as well as the drafting of reverse solicitation policies across a breadth of business and distribution models.

1. For further details on the TCA and its impact on financial services firms please see here. For coverage on the EU’s and UK’s Equivalence Decisions Framework please see here. ↩
2. Public statement p. 1.↩
3. The ESAs comprised of in addition to ESMA, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).↩
4. See full breadth of coverage available here.↩
5. Public statement p. 2; including by cross-referencing to the existing guidance set out in “Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics” (ESMA 35-43-349 as published December 21, 2020) available here. ↩
6. Public statement p. 2; ESMA cross-refers to Question and Answer in Section 13 “Provision of investment services and activities by third-country firms.” ↩
7. Some recent attempts at this have included certain firms using “.eu” or other email addresses or mobile phone numbers that purport to be in the EU-27 where such persons are in the UK with no intention of relevant activity or such person relocating to the EU-27 – see discussion on this topic in our coverage on the SPoRs. It is certainly conceivable that such workarounds, even those that are legitimate, temporary and possibly impacted by COVID-19 may attract supervisory scrutiny and requests for information.↩
8. Public statement p. 2. ↩
9. See coverage here and relevant updates. ↩