Reverse enquiry – ESMA raises the possibility of new reporting rules

On 17 December 2021 the new Chair of ESMA, Verena Ross, wrote to the European Commission regarding reverse enquiry (or ‘reverse solicitation’, as in ESMA’s letter) in the context of the Cross-Border Funds Distribution (CBFD) regime.

ESMA’s letter contains little in the way of concrete information, explaining as it does that:

• the EU National Competent Authorities (NCAs) have very little readily available information that might help assess the extent of reverse enquiry within the EU; and
• there is “no tangible data from NCAs” to support the assumption that reverse enquiry can lead to an unlevel playing field between EU asset managers and non-EU asset managers operating in the EU (the fear being that reverse enquiry is used to circumvent the EU passport regime).

However, the letter may have a sting in its tail.

Asked to suggest ideas for filling any information gaps in working out how prevalent reverse enquiry is, ESMA notes that “one solution could be the introduction of new reporting requirements allowing to collect information on reverse solicitation across the EU” [sic].

There is no certainty that the Commission will act on this idea and, even if it did, it is likely to be a lengthy period before any new reporting rules came into play. Nor does the letter suggest how such reporting requirements might be imposed, particularly on non-EU managers not caught by the rules of the CBFD or AIFMD.

Nevertheless, the suggestion is now out there and – especially for non-EU managers accessing investors in the EU through reverse enquiry - we will be keeping a close eye on how this develops over the coming months.

Why was ESMA writing to the Commission?

ESMA was replying to a letter from the Commission dated 24 September 2021.

Article 18 of the CBFD Regulation requires the Commission to submit a report to the European Parliament and to the Council of the EU on “reverse solicitation and demand on the own initiative of an investor”.

(Admittedly, the original deadline for the report to be submitted was 2 August 2021 but even so…)

The Regulation specifies that the report must look at:

• how extensive reverse enquiry is as a means of subscribing to funds;
• its geographical distribution, including in third countries; and
• its impact on the EU’s passporting regime.

Before submitting its report, the Commission was instructed to consult with relevant stakeholders, including ESMA – hence, the Commission’s letter.

What was the Commission asking?

The Commission’s letter, then, asked ESMA whether NCAs:

1. had received any data from asset managers or investor associations about the use of reverse enquiry?

2. were able to estimate the share of reverse enquiry as compared to marketing?

3. had observed any impact of reverse enquiry on the passporting regime?

Importantly, ESMA was also asked to accompany its answers, where necessary, with its thoughts as to steps the Commission could take to fill any information gap ESMA had identified.

How did ESMA respond?

ESMA’s letter confirmed that it had surveyed the NCAs but, since EU law does not oblige asset managers to report information on subscriptions stemming from reverse enquiry, almost none had readily available information that might help.

As a result, “the vast majority” of NCAs could not estimate the share of reverse enquiry as against active marketing.

However, some anecdotal evidence was offered.

• Consob, for example, reported that 25% of fund subscriptions received by Italian asset managers in 2020 was on the basis of reverse enquiry, with 99% of such subscriptions being made for the account of professional investors.
• CySEC reported that 30% of the UCITS management companies and 50% of AIFMs established in Cyprus use reverse enquiry.
• the CNMV had no information on reverse enquiry in Spain. However, 1.36% of total AuM of Spanish funds is owned by foreign investors and – as Spanish funds are hardly marketed outside Spain - this figure could be used as a proxy to assess reverse enquiry in Spain.

On the possible impact on the passporting regime, several NCAs “believe that reverse solicitation is used in practice to circumvent the rules of the third-country and EU passport regimes” – this, of course, leads to the belief that an unlevel playing field could develop between EU asset managers and non-EU asset managers which operate in the EU through reverse enquiry.

ESMA’s letter, though notes that “this assumption could not be confirmed by any tangible data from NCAs”.

As for ESMA’s thoughts on steps the Commission could take to fill any information gap, ESMA noted that commercial databases on market data to which ESMA has access provided no quantitative information on reverse enquiry. The Commission could, then. consider contacting market participants (eg asset managers, depositories or account holders) either directly or via trade associations.

Since ESMA does not believe that using the proportion of foreign investors in funds is necessarily an appropriate proxy for all Member States, one solution could be the introduction of new reporting requirements allowing to collect information on reverse enquiry across the EU.