On the 13th January 2021, the European Securities and Markets Authority (“ESMA”) issued a public statement reminding firms falling under MiFID II on the requirements applicable to the provision of investment services to retail or professional clients by firms not situated in the European Union.
ESMA made reference to Article 42 of MiFID II which provides that, where a retail client or professional client, established or situated in the Union initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the third country firm is not subject to the requirements under Article 39 of MiFID II which require third-country firms to establish a branch within the European Union.
With the end of the UK transition period on 31st December 2020, ESMA has noted some questionable practices through the use of reverse solicitation by certain firms to circumvent MiFID II requirements. It has been observed that some firms are inserting bad faith clauses in their Terms of Business or using online pop-up “I agree” boxes to coax clients in stating that any applicable transaction is being executed on the exclusive initiative of the client.
In this regard, ESMA reminds firms of recital 111 of MiFID II which states that “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”. This applies “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”.
Moreover, the means used for such solicitations may include every type of communication means used by the firm, including advertising on internet, brochures, phone calls and face-to-face meetings. These would be considered in order to determine whether the client or potential client has been subject to any solicitation, promotion or advertising in the European Union to the firm’s investment services or activities or on financial instruments. Furthermore, the solicitation, promotion or advertising should be considered regardless of whether it was issued by the third country firm itself or an entity representing it.
ESMA also reminded European investors that they may lose protections granted to them under EU relevant rules, including investor compensation schemes, when making use of services provided from investment service providers which are not properly authorised in accordance with EU and Member States’ law.
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