At the end of the transition period UK investment firms will lose the right to passport their investment services in the EEA, EEA investment firms will also lose the right to passport their investment services into the UK. With the increasing possibility that the transition period will end without a free trade agreement and mutual positive equivalence determinations UK investment firms and EU investment firms have been implementing contingency plans so that they can continue to service EEA clients and UK clients respectively. For EU investment firms, the contingency planning has been less problematic given the UK’s introduction of a temporary permissions regime (TPR) at the end of the transition period. However, for UK investment firms the position is more difficult with the European Commission not implementing a regime similar to the TPR across Europe.
For UK investment firms, contingency planning has involved either establishing a licensed EU affiliate or complying with the licensing requirements of each EEA member state in which they wish to provide services, either by establishing a licensed branch in that member state or by relying on (to the extent it exists) a local exemption. However, before going to the expense of finalising these plans, UK investment firms have also been reviewing the applicability of the characteristic performance test and reverse solicitation.
Characteristic performance covers the analysis of whether or not the investment activity or service occurs within a member state. Its drawback is that member states may take a different view on what the test is with some applying a solicitation test.
Reverse solicitation is defined in article 42 of MiFID II and article 46(5) of MiFIR. Its key components are that the third country firm:
- can evidence that the investment service is provided at the exclusive initiative of the EEA client (whether such client is a retail client or professional client);
- provides only categories of products and services requested by the EEA client; and
- does not solicit, promote or advertise, any new investment products or services (in any way) to the EEA client.
Like the characteristic performance test, what is permitted by reverse solicitation before breaching the regulatory perimeter varies among member states and is a matter of local law. Recently, we have seen one Member State (the Netherlands) announce that reverse solicitation is not permitted for third country financial services firms in respect of Dutch retail customers, payment firms, electronic money institutions and (re)insurers.
The European Securities and Markets Authority (ESMA) has tried to create some element of supervisory convergence through adding some questions and answers on reverse solicitation in its Q&As on MiFID II and MiFIR investor protection and intermediaries topics. In particular, it has sought to clarify to some extent the meaning of new categories of investment products and services.
Reverse solicitation is also found in the AIFMD and is often informally recognised under the UCITS Directive with respect to professional investors. Most member states take the view that, where there is “pre-marketing” under the AIFMD, reverse solicitation is not possible. At present, there is no harmonised definition of “pre-marketing”, although this will change when new rules for the pre-marketing of AIFs start to apply next year following the publication this summer of the Cross-border Distribution Directive and Cross-border Distribution Regulation in the Official Journal of the EU.
When relying on reverse solicitation there are a couple of things that a firm will need to consider. Most importantly, the firm will need a paper trail. It will need to ensure that it can demonstrate and evidence as a matter of fact that contact and communications in respect of the initiation of any investment services or activity came exclusively from the EEA client without any undue influence, direction or collaboration of the firm. This is usually done using a client-disclosed attestation or affirmation in the contract. The firm will also need to ensure that its related processes and controls provide ongoing assurance, and that adequate records are kept should it be challenged by the member state regulator. Also, the firm’s systems and controls will need to ensure that the firm’s website and other online presence does not nullify any objective assessment that the client acted on their own and exclusive initiative.