Reverse Solicitation

Forever the bugbear for those in the compliance field who have a penchant for all things marketing and Distribution is the grey area of ‘reverse solicitation’. In a turn of good fortune, prompted by some practices that clearly fall short of acceptable since the Brexit transition ended, the ESMA have provided a public statement on the topic. The first, I am sure, of several subsequent warnings and regulatory interventions for firms that choose to ignore their regulatory duty post-Brexit.

So, what do we mean by reverse solicitation?

Sales Team: “Good news, we’ve won a mandate… yeah, I know we’re not licenced in that country, but the client came to me so we’re in the clear… I’ve asked for an email from them to confirm it’s REVERSE SOLICITATION… win!”

On the face of it, reverse solicitation seems relatively clear and relates to prospects, in this case, from the EU engaging with a 3^rd country firm (UK) to provide an investment service or activity. To quote MiFID II (Article 42):

“… 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… shall not apply…”

In this context, an investment service and activity for asset managers would broadly relate to MiFID services and activities. Essentially, all the MiFID activity UK firms were able to provide by the MiFID passport to the EU, prior to the removal of the passport for UK firms from 31 December 2020.

What does reverse solicitation allow in practice?

In theory, if you are approached directly with no prior communication to the prospect, this would be acceptable. It is entirely possible that word of mouth or by research of the market may lead the prospect to your inbox or telephone. Given the interaction by email or company telephone, even a message on LinkedIn, then there is a degree of evidence to confirm that this does relate to true reverse solicitation.

Easy, you have an audit trail and something a compliance team can consider prior to proceeding any further… provided the information is accessible and can be evidenced.

Where does the complexity begin?

When we consider solicitation, promotion or advertising we think about the banner on a website, a half page advert in a newspaper, a call from a sales rep or a direct email to your inbox promoting a product or service. Yes, these clearly fall into this category, but are there more?

Firms need to consider any information that may be available in the EU and consider whether that may be considered a solicitation, promotion or advertising. Examples may be an EU part of your website, press releases, availability of brochures, face-to-face meetings, speaking at events et al. This significantly increases the focus required from compliance teams.

Pre-authorisation of marketing material is a requirement for UK firms under COBS4, but should there be a stronger compliance influence on all activity within the EU?
Audit trails and robust reviews may help post-event, but is education of the sales and client teams enough to ensure compliant practices within the EU?
Marketing and communication frameworks have been developed to review exactly the marketing materials that may leave the firm, but does the framework cover all activity that can be considered solicitation, promotion or advertising?

Disclaimers will save us, right?

In short, no. Both pop-up boxes to ‘agree’ or including general clauses in your Terms of Business to state that any transaction is executed on the exclusive initiative of the client, have been highlighted as ‘questionable practices’ by the ESMA.

The ESMA reminds firms to consider every communication means used should be considered to determine if the client or potential client has been subject to solicitation, promotion or advertising in the EU.

Can we use a 3^rd party based in the EU on our behalf?

This is quite simple and falls on the activity but generally firms need to ensure that any solicitation, promotion or advertising meets their own licencing requirements in the EU. You can use an authorised 3^rd party firm to conduct MiFID activities on your behalf, but you must be conscious of your firms own permissions when providing any communications within the EU. If your communication is solicitation, promotion or advertising to prospects or clients within the EU, you cannot do this without authorisation even with a 3^rd party representing you.

What happens if we get it wrong?

Provision of an investment service in the EU by a UK firm without proper authorisation can lead to the risk of administrative or criminal proceedings and sanctions. This is a significant concern for compliance officers and distribution teams alike.

Even worse may be the impact to the end investor, who may lose the protections granted to them under the EU Rules. Firms would certainly like to avoid any negative press relating to investor detriment.