A stricter approach to reverse solicitation for financial services?

Introduction

On 30 January 2024 ESMA published a consultation (the “Consultation”), which closes on 29 April 2024, on the draft guidelines on reverse solicitation under the Markets in Crypto Assets Regulation (“MiCA”). The Consultation relates to guidance on the use of reverse solicitation under MICA. While this is clearly of importance to third country crypto asset firms, it may also reveal the increasingly restrictive approach of EU regulators towards reverse solicitation across financial services more broadly.

Approach to reverse solicitation under the Consultation

The key points from the Consultation include the following:

• the approach follows “largely, but not in all regards, the established practice under the MiFID II framework”. Therefore, the reverse solicitation exemption should be understood as applying in very limited circumstances;
• whilst reverse solicitation is often referred to as an exemption, it is, in fact, a prohibition - a prohibition on third-country firms soliciting clients established or situated in the Union;
• updates the concept of marketing to align with technological advancements and the way that crypto assets are marketed in practice, for example through social media and mobile applications;
• solicitation includes “promotions, advertisements and offers of a general nature and addressed to the public (with a broad and large reach) such as, for instance, brand advertisements by way of sponsorship deals.” For example, sponsoring a football team could prevent firms from relying on reverse solicitation;
• a website in an official language of the EU is a “strong indication” of solicitation, unless geo-blocking measures are in place to prevent clients in the EU from accessing it; and
• solicitation may occur irrespective of the person through whom it is performed. However, where the approach under MiFID II focuses on people or entities acting on the third-country firm’s behalf, the Consultation suggests that the solicitation may be carried out by any other person “acting explicitly or implicitly on behalf of the third-country firm” – stating that this can include “so-called influencers”.

What direct impact will the Consultation have beyond crypto assets?

Strictly speaking, there may be limited direct impact on financial services more broadly, as they are subject to different regulatory regimes, depending on the relevant products and services (e.g. MiFID II and CRD IV). A stricter approach towards reverse solicitation may be deemed necessary for crypto assets, in particular to protect ordinary retail investors when investing in an asset class that is not yet well-understood and not subject to established regulatory protections and is also understandable in light of the widely publicised losses that retail investors suffered when investing in crypto assets without fully understanding them and the risks involved, which was an acute concern during the pandemic. However, there is the risk that the approach of ESMA in the Consultation is used by way of analogy into other measures such as MiFID II and AIFMD and therefore extends beyond just crypto assets.

Where the Consultation may have broader application

The Consultation states whilst reverse solicitation is often referred to as an exemption, it is, in fact, a prohibition - a prohibition on third-country firms soliciting clients established or situated in the Union. This seems to be contrary to the underlying rationale for reverse solicitation as under MiFID II it is a right of EU market participants to seek and receive services from third country providers. Historically reverse enquiry was a question of interpretation of the territorial scope of national law - in particular when a service was rendered “in the jurisdiction”.

The Consultation indicates that the use of generic or brand marketing by crypto asset firms will prevent reliance on reverse solicitation. Under MiFID II, a patchwork of national law regimes and exemptions must be considered and brand marketing is widely permitted, so a stricter approach towards this practice would be unwelcome.

Also, the statement that “solicitation may occur irrespective of the person through whom it is performed” – which includes any person acting explicitly or implicitly on behalf of the service provider – seems to go beyond the current understanding of MiFID II. Often actions a firm is in control of has been an indication of someone acting on behalf of the firm. This new approach seems to suggest that control is not necessarily the trigger.

There is some evidence to suggest that EU regulators are taking a stricter approach towards the use of reverse solicitation more broadly. For example, post-Brexit, ESMA issued a statement in respect of MiFID II reminding firms not to misuse reverse solicitation, in response to it identifying “questionable practices” by third country firms in the EU where reverse solicitation was automatically stated to have occurred even if this was not in fact the case. The proposed amendments to the Capital Requirements Directive IV (known as “CRD VI”) aim to restrict the ability of third country firms to provide certain banking services to clients in the EU, removing most national law exemptions and moving towards a more harmonised approach in this area.

However the approach of CRD VI towards marketing other categories of products or services is broader than that under MiFID II, allowing those that are “necessary for, or closely related to” those originally requested, even if provided “subsequently”. Under MiFID II, only similar types of products (determined according to the type of the instruments and its risk profile) may be offered “during the course of” the transaction originally requested by the client.

What should third country financial service providers do?

Third country financial service providers with clients in the EU should consider engaging with the Consultation to test the assertion that reverse solicitation is a prohibition rather than a fundamental right. The underlying rationale of the doctrine of reverse solicitation is to protect EU investors, to preserve their right to choose their own service provider and to increase competition (and thus the standards of service) within the EU. Therefore, the legitimate use of reverse solicitation is a “win-win” for EU clients and third country service providers alike, whilst providing EU firms with an incentive to provide competitive alternatives. Firms may also wish to distinguish crypto assets from other asset classes as well as arguing for a carve out for professional clients, for the reasons set out above. Addressing/ lobbying the areas where the Consultation is going beyond the current expectation under MiFID II would also be beneficial for the industry.

From a practical perspective, to prepare for any tightening of the rules or supervisory practices towards reverse solicitation, firms should review their applicable policies and procedures, ensuring that there are robust controls in place, including that appropriate evidence of reverse solicitation is kept on record and that front line business personnel are suitably trained to understand the approach of the firm towards reverse solicitation in each EU jurisdiction and in respect of the applicable product / service type. Using digital tools for such purposes can be extremely efficient and effective, providing an auditable record of actions taken and compliance with applicable law at a particular point in time.