Reverse inquiry

MiFID 2 Anatomy™ →Go uptown In a Nutshell™ Section 42: 42. Provision of services at the exclusive initiative of the client Where an EU client solicits (exclusively) an investment service from a third-country firm, the third-country firm is not required to be authorised under Article 39 for that investment service. Just because a client has made such a solicitation it does not entitle the third-country firm to market other investment products or services to that client. view template Full wikitext: 42. Provision of services at the exclusive initiative of the client Member States shall ensure that where a retail client or professional client within the meaning of Section II of Annex II 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 requirement for authorisation under Article 39 shall not apply to the provision of that service or activity by the third-country firm to that person including a relationship specifically relating to the provision of that service or activity. An initiative by such clients shall not entitle the third-country firm to market otherwise than through the branch, where one is required in accordance with national law, new categories of investment products or investment services to that client. view template MiFID 2: Less fondly known as EU Directive 2014/65/EU (EUR Lex) | MiFID 1Articles: 16(7) (Recording of Communications) Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

To the unsuspecting, a topic to be approached with great caution but to cross-border boxwallahs with much antipicatory licking of the lips. It’s all about one’s regulatory perimeter — a topic which will bore many people to tears, but provides a luxuriant lifestyle to the kind of attorney (aka a cross-border boxwallah) who can break through that outer crust of stale, doughy tedium and into the delicious, weed-strewn details of cross-border regulation.

Now if a fellow sets herself up to provide regulated financial services in, oooh, I don’t know, say the United Kingdom, subject to and all watched over by the machines of loving grace of the Financial Conduct Authority, then must she withhold her services from someone who reaches out from foreign shores to ask for them? Must she worry about the financial services regulations of that far-away place?

The answer question depends on the regulatory “perimeter” of that foreign jurisdiction. Normally, it will coincide with the physical borders of the country: as long as our fellow doesn’t provide her services in that jurisdiction she will not be subject to its laws and regulations.

These days, the mod cons — telephony, the world-wide internet — makes it all so much harder. What if our fellow stays in England and the client stays in its jurisdiction? Where then is the business conducted?

“At the client’s initiative”

Here we consider who initiates the business. Does the client initiate the business request? What if our fellow promoted herself, advertised, in that jurisdiction? The legislation has two passages which help us. The first is Recital 85 of MiFID 2, which ponders what is to be considered at the client’s initiative:

A service should be considered to be provided at the initiative of a client unless the client demands it in response to a personalised communication from or on behalf of the firm to that particular client, which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction. A service can be considered to be provided at the initiative of the client notwithstanding that the client demands it on the basis of any communication containing a promotion or offer of financial instruments made by any means that by its very nature is general and addressed to the public or a larger group or category of clients or potential clients.

The second is ESMAs Q&A, released as firms readied themselves for that great New Year’s Day push into the sun-enlightened uplands of modern securities regulation. Quoth ESMA:

According to Article 42 of MiFID II, 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.

As provided in recital 111, in order to qualify for Article 42 of MiFID II, “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”.

...ESMA is of the view that every communication means used such as press releases, advertising on internet, brochures, phone calls or face-to-face meetings should be considered to determine if the client or potential client has been subject to any solicitation, promotion or advertising in the Union on the firm’s investment services or activities or on financial instruments.

“It-definitely-was-a-reverse-inquiry-honest” letters

The less imaginative legal eagle might hatch a plan to document your client’s stout assertion that it was her idea, and not yours, that you should do business. This is the classic “the lady doth protest too much” gambit, and we would heartily caution against it.

For what kind of offshore client, of her own motion, innocently writes her broker such a letter? Only one who has been told to, we submit. Now if you really can evidence the genuine unsolicited request for your services, as it arrived unbidden on your potential client’s scented personal notepaper, then happy days: keep the letter somewhere safe. If you can’t, don’t think contriving a phony letter pretending that happened will help.

While it undoubtedly aggrieves ESMA that huckster brokers from the failed states around the EEA periphery should be flirting outrageously with their innocent fund managers operating within the Internal Market, not even ESMA has got so much time or bureaucratic energy that it is going to send flying squads out to dawn raid its clients to see exactly how they came to meet their brokers: they are far too busy inspecting their netting opinions for that.

See also

• Disclaimers
• Art. 42 of MiFID