ESMA is particularly concerned with third-country firms providing investment services and performing investment activities in the EU, but equally EU-established investment firms outsourcing critical functions related to portfolio management to third-country providers. Although the issues addressed first arose in the context of the UK withdrawal from the EU, their implications are wider and beyond this context.
The letter raises the following concerns.
The MiFIR regime for third–country firms providing investment services and performing investment activities in relation to eligible counterparties and per se professional clients
MiFIR requires third-country firms providing investment services and performing investment activities in relation to eligible counterparties and per se professional clients to obtain an equivalence decision and register with ESMA. The Commission adopted a proposal to introduce new prudential requirements for investment firms, including the obligation of ESMA-registered thirdcountry firms to report to ESMA on an annual basis. ESMA emphasizes the need for more consistency and convergence in this area and suggests that third-country firms comply directly with the MiFID II/ MIFIR framework and some direct supervisory powers are exercised by the National Competent Authorities (NCAs). Alternatively, the registration and reporting framework under ESMA could be complemented with a requirement for third-country firms to point out specific information on the member states they are active in order to allow ESMA to share the report with the relevant NCAs.
The MiFID II regime for thirdcountry firms providing investment services and activities to retail and professional clients on request
The MiFID II framework for the provision of investment services and performance of investment activities on behalf of third-country firms in relation to retail and professional clients on request is rather fragmented, according to ESMA. MiFID II only empowers member states to require thirdcountry firms to establish a branch under the applicable national regimes and does not provide for passporting rights in this respect. MiFID II provides for member states to opt in for a minimum common regulatory framework regarding the requirements applicable to those third country branches, but this is at the member states’ discretion. This results in legal uncertainty and regulatory arbitrage and undermines investor protection. ESMA therefore, urges further harmonization in this area.
Third-country firms providing investment services and activities at the exclusive initiative of EU clients (reverse solicitation)
Investor protection rules under MiFID II are not applicable when third-country firms provide investment services and perform investment activities at the exclusive initiative of clients, better known as reverse solicitation. According to ESMA reverse solicitation, which is likely to lead to legal uncertainty and investor detriment, is an important issue, particularly in light of Brexit. To mitigate the effects of reverse solicitation, especially the impact on retail investors, ESMA proposes several options, including:
- Introducing an explicit obligation for third-country firms to demonstrate the client’s initiative to EU supervisory authorities, if they request so;
- Submitting any dispute to EU courts and dispute-resolution bodies, if the client requests so; and
- Clarifying existing provisions on reverse solicitation, for instance the fact that reverse solicitation for retail clients should be assessed on a transaction by transaction basis or limiting the scope of services that can be provided by third-country firms upon the client’s initiative by specifying the notion of “new categories of investment products and services.”
Investment firms outsourcing critical or important functions other than those related to portfolio management to third-country providers
Outsourcing critical or important functions other than those related to portfolio management to third-country providers may make supervision more difficult and may increase the risk of establishment of letter-box entities in the EU. ESMA emphasizes the need for a stricter approach under MiFID II in this respect.