On 29 January 2024, The European Securities and Markets Authority (ESMA) has released a consultation paper focusing on the draft guidelines (ESMA guidelines) concerning reverse solicitation under the Markets in Crypto Assets Regulation (“MiCA”)1.This paper outlines the EU's regulatory framework for crypto assets, detailing technical standards and clarifying when third-country banks can provide services to EU clients at the client's request, aligning with MiCA provisions.
Concept of Reverse Solicitation
Reverse solicitation refers to a situation where a client initiates at its own exclusive initiative the provision of an investment service. The concept of reverse solicitation was introduced in the EU under the Markets in Financial Instruments Directive II (“MiFID II”),2 where reverse solicitation is recognized as an exception to the general rule that requires firms to be authorized in the jurisdiction where the client is domiciled. If an EU client approaches a non-EU firm on their own initiative to request investment services, the non-EU firm may not need to be authorized under MiFID II to provide the requested services. However, this exception is narrowly construed, and the burden of proof lies with the service provider to demonstrate that the client's request was unsolicited. In addition, while this exemption had to be implemented in each member state, each country had the possibility of interpreting the law and had a margin of flexibility in its implementation. As a result, the rules can be more or less restrictive from one member state to another, and the conditions for exemption may vary.
ESMA Guidelines emphasize that reverse solicitation should be applied narrowly and based on the factual circumstances of each client. This means that service providers must thoroughly document and demonstrate that the client's request is genuinely of their own exclusive initiative and was not prompted by any solicitation efforts.
The broad definition of solicitation, which includes activities such as press releases, advertising, and face-to-face interactions, remains consistent with MiFID II. Moreover, solicitation may occur irrespective of the person through whom it is performed, including the third-country firm itself or by any other person acting explicitly or implicitly on behalf of the third-country firm. This wide scope means that service providers must be extremely cautious to ensure that no active solicitation is conducted inadvertently. The burden of proof lies with the service providers to evidence true reverse solicitation requests, highlighting the importance of maintaining clear and convincing records.
Reverse solicitation under MiCA
In the context of MiCA, this concept is also crucial as it underlines the boundaries within which crypto asset service providers can operate without triggering the regulatory requirements that would apply if they were actively soliciting clients. This means that any service provided must be a direct result of the client's request without any prior solicitation by the service provider. The ESMA Guidelines aim to draw a clear line between a client's independent decision to seek services and any influence that might be construed as solicitation by the provider.
One of the more notable developments in the MiCA regulation is the introduction of a time limit on the validity of a reverse solicitation request. According to this regulation such requests are only valid for one month, after which service providers would need to re-establish that the initiative is still coming exclusively from the client. This temporal restriction adds a layer of complexity for crypto asset service providers, that must now monitor and manage these timeframes diligently.
The MiCA regulation makes it clear that reverse solicitation cannot be overridden by contractual terms or disclaimers. Disclaimers, often included in contracts or terms of service, attempt to limit liability or define the scope of services. However, MiCA recognizes that relying solely on disclaimers to override reverse solicitation would undermine investor protection. Clear documentation of client-initiated requests is crucial to demonstrate compliance. Such documentation may include detailed records of all client interactions, including emails, chat logs, or phone call transcripts; client inquiry forms or requests; confirmation letters and client’s acknowledgment of such confirmation, etc. The regulatory intent provides for the interaction between the client and the service provider to take precedence over any formal agreements that might suggest otherwise.
Implications for crypto asset service providers
ESMA Guidelines on reverse solicitation will have significant implications for crypto asset service providers operating in the EU. Firms will need to carefully assess their client engagement strategies to ensure compliance with MiCA. This may involve revising their marketing practices, enhancing client onboarding processes, and implementing robust documentation procedures.
