FIDLEG SOLUTION - News 2/2018

Reverse Solicitation under MiFID II as an Option to Enter The EU Market?

INTRODUCTION

This issue of the MiFID II series of FIDLEG SOLUTION – News 02/2018 discusses the MiFID II rules on reverse solicitation (also called “self-initiative”, “reverse enquiry” or “passive marketing”), i.e. the much discussed – though risky – situation in which Swiss asset managers may escape from the MiFID II regulatory requirements when dealing with clients from the European Union. This issue, thus, answers the question whether revere solicitation is an option for Swiss Asset Managers to enter the EU market.

This question can upfront be answered as follows: The concept of reverse solicitation only applies in the following, narrowly defined situations. Therefore, it does not serve as a legally reliable and sustainable option to enter the EU market.

REVERSE SOLICITATION – THE RISKY OPTION?

According to the rules of MiFID II, a Swiss asset manager may market its products and services to EU retail clients provided that it has established and licensed a branch in the EU target market or on a cross-border basis provided that the national MiFID II implementation provides for this option. For a more detailed discussion of this, please see the FIDLEG SOLUTION - News 1/2018. As concluded therein, the third country regime was one of the most heated topic in the MiFID II debates and the achieved regulation is far from being harmonized.

Harmonised, however, is the fact that there remain some –rare but risky - situations in which the MiFID II third country regime does not apply: reverse solicitation. Art. 42 MiFID II reads: “Member States shall ensure that where a retail client or professional client (…) initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the requirement for authorisation under Article 39 shall not apply to the provision of that service or activity by the third country firm to that person including a relationship specifically relating to the provision of that service or activity. An initiative by such clients shall not entitle the third-country firm to market otherwise than through the branch, where one is required in accordance with national law, new categories of investment products or investment services to that client.”

However, the interpretation of art. 42 MiFID II is still vested in the hands of the EU member states, their regulators and judges. The consequence is that there will hardly be a final and EU-wide common understanding of reverse solicitation. Whether investment services can be provided following a reverse solicitation comes, thus, down to the position in each separate EU member state – having the final call on it.

This is also the reason why one has to put a legal disclaimer on this FIDLEG SOLUTION – News 02/2018: This issue of the MiFID II series is for information purposes only and does not constitute legal advice. A clear definition of art. 42 MiFID II in each EU member state is still not available yet.

CHARACTERISTICS OF REVERSE SOLICITATION

Irrespective of the disclaimer, certain elements of the concept of reverse solicitation which shall be recognized on an EU-wide basis can be found.

Preamble (85) of MiFID II provides some guidance for the interpretation of art. 42 MiFID II: “A service should be considered to be provided at the initiative of a client unless the client demands it in response to a personalised communication from or on behalf of the firm to that particular client, which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction. A service can be considered to be provided at the initiative of the client notwithstanding that the client demands it on the basis of any communication containing a promotion or offer of financial instruments made by any means that by its very nature is general and addressed to the public or a larger group or category of clients or potential clients.“

Based on this as well as on the provision of art. 42 MiFID II, the following criteria can be summarized and it seems like that they apply in all EU jurisdictions:

  • Reverse solicitation is only given if the initiative for a service of product really comes from a (potential) client. If the (potential) client is made aware of a service or product by the Swiss asset manager – whether directly or indirectly – no reverse solicitation is given any more.
  • Reverse solicitation needs to be sufficiently specific, the request has to deal with a specific service, a specific product or a specific type or product. General enquiries on a company or a person may usually not satisfy this requirement.
  • Reverse solicitation remains at all times an exception. Therefore, irrelevant of how the concept or reverse solicitation is interpreted in the various EU member states, reverse solicitation does not serve as a basis for any business model whatsoever. Therefore, the more of a Swiss asset manager’s EU clients are treated as reverse solicitation clients, the more likely it is that the concept of reverse solicitation has been misunderstood.
  • As reverse solicitation is an exception, it has to be interpreted narrowly. In particular, it only applies to the services specifically asked for by the potential client. At no time, it should be possible for a Swiss asset manager to promote to an existing client new services or products, which the client has never asked for.

Special care needs to be taken with websites. As the experience in some EU jurisdictions reveals, it cannot be excluded that a website in the official language of a specific country without any form of disclaimer stating that, the website is not addressed at the inhabitants of this country, might be deemed to be an initiative to get in contact with the inhabitants of this country. If this is true, reverse solicitation initiated by such client is not available.

So, how can a Swiss asset manager pass the test of reverse solicitation? As a general rule the following applies: As long as the initial initiative to engage a Swiss asset manager or to invest in a specific product or specific type of product (and, as part of that process, each initiative to make a request for information or documentation) was taken by the EU client rather than the Swiss asset manager (or someone acting on its behalf), the Swiss asset manager can accept the engagement or investment (or, as part of that process, the request for information or documentation) from the EU client.

If a Swiss asset manager takes this uncertain and not bullet-proofed option, its internal guidelines have to allow this. This is usually done in the distribution policy or a cross-border policy. The relevant policy has to clearly define how reverse solicitation is verified, how specific it has to be, which type of evidence is required and how this evidence is safeguarded. The comprehensive documentation of FIDLEG SOLUTION offers a cross-border policy which satisfies these requirements.

WHAT IS RECOMMENDED?

As reverse solicitation is an exception, needs to be interpreted narrowly and is badly seen by supervisory authorities and judges, it is recommended to apply the following in the case of a reverse solicitation:

  • It is to be made sure that the situation really is one of reverse solicitation so that the first initiative has really been taken by the then potential client.
  • The necessary evidence is to be established that the first initiative has been taken by the client. This is best done in writing by keeping the first mailing request of the client. If the first contact has been made by telephone so that there is no evidence, it is recommend to request the client to confirm in writing that he/she has taken the first step.
  • The established evidence is to be kept in a secure way so that it can at all times be provided to requesting authorities, auditors, clients or judges.
REVERSE SOLICITATION FOR FUNDS

It should be noted that reverse solicitation relating to products, structured as funds, i.e. UCITS and/or AIF, is not subject to the rules set out in MiFID II but rather in the UCITS Directive or the AIFM Directive. These special rules will be discussed in one of the following issues of the FIDLEG SOLUTION – News.

On the basis of the above mentioned restrictions, there could be a number of non-EU managers that will now only deal with EU clients on a “reverse enquiry” basis – without requiring authorisation or registration in the EU. Given the guidance of MiFID II, this is – without any doubt – a risky route to go and not a sustainable marketing strategy.

THERE IS MORE TO COME…

The next FIDLEG SOLUTION – News shall discuss the new rules of MiFID II in respect of a Swiss asset manager managing an EU fund – UCITS or AIF.

Your FIDLEG SOLUTION Team
www.fidlegsolution.ch


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