In a recent letter to the European Commission (the Commission), the European Securities and Markets Authority (ESMA) suggests changes to MiFID II / MiFIR, including further restrictions on MiFID II reverse solicitation and using AIFMD letterbox provisions for outsourcing of critical and important functions under MiFID II. While the concerns ESMA raise are identified in the context of the UK's withdrawal from the EU, ESMA states that the issues "seem more general and apply beyond the Brexit debate, thereby making it important to address them".

ESMA's communication follows a November 2017 letter it sent to the Commission in which ESMA forewarned the Commission that it may propose further actions regarding the MiFID II / MiFIR third country (TC) regimes. In its latest communication, ESMA makes suggestions relating to:

  • TC firms providing investment services and activities at the exclusive initiative of clients (reverse solicitation): ESMA recommends the Commission reviews the MiFID II framework which permits reverse solicitation, to mitigate the effects of reverse solicitation which are "a source of legal uncertainty and potential detriment" to clients. ESMA suggests limiting the services that may be provided by reverse solicitation and imposing additional obligations on TC firms relying on reverse solicitation, such as an explicit obligation on them to demonstrate on request to EU authorities the client's initiative and submitting to EU dispute resolution at the client's request.
  • The requirements on firms for the outsourcing to TC providers of critical or important functions other than those related to portfolio management: ESMA suggests that the regime should be made stricter to facilitate supervision and ensure a higher level of investor protection. In particular, ESMA is concerned about the risk of the establishment of letterbox entities. ESMA puts forward the AIFMD anti-avoidance framework as a starting point for further development under MiFID II.
  • The MiFIR regime for TC firms providing investment services and performing investment activities to eligible counterparties and per se professional clients: ESMA supports the Commission in further harmonisation and, in addition to the existing requirement for equivalency decisions, suggests such TC firms directly comply with MiFID II / MiFIR provisions relevant to the service or activity being performed and are brought under direct supervision of national competent authorities in the EU
  • TC firms providing investment services and activities to retail and professional clients on request: While this is permitted where a member state chooses to permit branches of TC firms, ESMA suggests the Commission considers harmonisation. ESMA states that the lack of harmonisation risks legal uncertainty and regulatory and supervisory arbitrage between jurisdictions with potential detriment for investors (including eligible counterparties and per se professional clients until the TC regime is active for the relevant TC).

Firms currently making or implementing contingency plans for a no deal Brexit should pay heed to the tightening direction of travel in Europe regarding TC access.