Reverse solicitation rules in Portugal — An overview
The reverse solicitation exception in the European Union’s Markets in Financial Instruments Directive (MiFID) applies to foreign entities that provide investment services in the EU. It covers traditional investment firms, such as asset managers and broker-dealers, as well as other financial institutions, such as banks and insurance companies, FinTech companies, in addition to payment processors and e-money institutions.
However, there are limitations to the reverse solicitation exception — it does not apply to all investment services provided by these entities. Firms must only provide services in response to a request from the client and not as a result of active marketing. If a firm actively promotes its investment services, even if a client subsequently expresses an interest in those services, the exception will not apply — the firm will be considered an investment firm under MiFID.
There is still much uncertainty about several aspects of the regime, such as pre-marketing rules on reverse solicitation in each Member State. The concept of marketing has traditionally been interpreted very broadly in Portugal, covering any activities aiming to promote financial products or services. The concept of premarketing is not yet defined.
The distribution of documents with sufficiently detailed information enabling an informed investment decision is regarded as marketing, as it is also considered to be marketing the provision of subscription documents.
In practice, the reverse solicitation exception exempts from complying with a full range of regulatory requirements under MiFID, including authorization, capital adequacy, business conduct rules, local AML requirements and reporting requirements. This arrangement allows institutions to provide investment services in a more flexible and cost-effective manner.
On the contrary, if the reverse solicitation exception does not apply, foreign institutions must comply with Portuguese/EU regulatory requirements set forth under MiFID. For instance, an entity would be forced to seek authorization from the Portuguese securities regulator, the Comissão do Mercado de Valores Mobiliários (CMVM), and meet the capital adequacy requirements, business conduct rules, and reporting obligations set forth by MiFID.
For qualified investors, the application of the reverse solicitation exception may not be as relevant as in dealings with retail clients or investors, as dealings with the formers are exempt from some of the regulatory requirements under MiFID. Qualified investors, or professional investors, are defined as professional clients or eligible counterparties under MiFID and broadly include (non-technical listing):
· Institutional investors.
· High-net-worth individuals.
· Specific other categories of investors are considered to be experienced and knowledgeable about financial markets.
In general, investment services provided to qualified investors are subject to less regulatory oversight than those provided to retail clients. Accordingly, the reverse solicitation exception may be less relevant in these cases.
However, it is still essential for investment firms to carefully consider the application of the reverse solicitation exception and ensure that they fully comply with all relevant regulatory requirements, regardless of the type of client or investor they are serving.
In Portugal, there is limited guidance available on the reverse solicitation exception. The CMVM has issued several opinions, indicating that it takes a narrow interpretation of the exception and will only apply it in limited circumstances where the client has explicitly requested the investment services. Similarly, the Bank of Portugal has provided guidance on the reverse solicitation exception, indicating that it will only apply in cases where the client has requested investment services and has not been subject to any marketing or promotional activities by the payment institution.
There has yet to be a significant amount of Portuguese case law or regulatory guidance from the Banco de Portugal or the CMVM regarding applying the reverse solicitation exception. However, EU-level guidance from the European Securities and Markets Authority (ESMA) has partly clarified the scope of the exception. It has indicated that the exception should be narrowly construed to prevent investment firms from circumventing MiFID requirements.
In light of this guidance, it is crucial for foreign firms dealing with the Portuguese market to carefully consider whether the reverse solicitation exception applies in each case and to ensure that they are fully compliant with MiFID requirements if the exception does not apply.
If you are considering offering financial services in Portugal and require legal assistance, feel free to contact us.
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