Revenant: Why we should have a More Open Attitude to Reverse Enquiries
The reverse enquiry has been largely — excessively, I believe — discredited. Here are a few reasons why we should reconsider that position (and a tribute to Massimo Troisi)
I would have never imagined I would write a post in defense of the “reverse enquiry”, i.e., the idea that if an Italian client approaches a foreign financial institution for its services, such institution does not need to be authorized to do business in Italy.
When I started practicing financial law, the reverse enquiry was the panacea to all licensing requirements: The offer of non-harmonized funds in Italy requires an authorization which is difficult to obtain? The reverse enquiry comes to the rescue, you just need to have the client sign a reverse enquiry form.
“Passive marketing”, it was also called. I have always wondered whether the obvious irony behind that expression was voluntary. The picture of a wealth manager in Lugano “passively marketing” to clients in Italy, waiting for them to seek that manager’s services, without any solicitation, has always brought to my mind a scene from a movie by Italian comedian Massimo Troisi. He is sitting on a chair, trying to use the power of his mind to move objects around — “Come here… Come…” he would whisper to a vase — hoping that he could finally learn how to drag Pasqualino out of the bathroom.
Then over time a more balanced understanding of how licensing requirements work, together with a bit of common sense, have prevailed.
There are two main perspectives which should be considered in approaching the issue of reverse enquiries. Firstly, a reverse enquiry is a factual situation: It either exists or it does not. In the example above, either the bank has been passive and the client has approached it, or the bank has been active and it has approached the client, which of course tarnishes the reverse enquiry. One cannot “structure” or “create” a reverse enquiry. Secondly, even genuine reverse enquiries may ex post be challenged. The issue arises, therefore, as to what level of risk even a genuine reverse enquiry may entail. Ex post facto, it may be difficult to provide enough evidence as to the genuine nature of the enquiry.
Foreign financial institutions have thus generally come to terms with the idea that reverse enquiries cannot be a business model for the offer of financial services in Italy.
However, I feel that the contempt for reverse enquiries has gone too far. I have found myself in discussions with clients where I have commented that a given situation was on its face a genuine reverse enquiry and the in-house counsels I was talking to would shake their heads out of skepticism.
And yet there are areas where genuine reverse enquiries abound. Such areas must be properly understood, as they may help financial institutions to do business with Italian clients, while complying with Italian licensing requirements. Consider the following situations:
1. ShoeMaker Alfa Italy S.p.A. enters into a loan agreement with a US bank;
2. Mario Rossi, Luigi Verdi, Paolo Bianchi, and Luca Neri, all living in Milan, enter into asset management agreements with a Swiss bank;
3. Holdco S.p.A., an acquisition SPV established by the private equity fund Omega, funds the acquisition of a target company in Italy by entering into a loan agreement with a pool of international banks.
Let’s assume that none of the foreign banks involved are authorized to offer the products described above in Italy. Does this imply that the banks are breaching the relevant regulatory requirements?
What if ShoeMaker Alfa Italy is a fully owned subsidiary of ShoeMaker US, which has entered into an umbrella agreement with the US bank, whereby the latter shall provide financing to all subsidiaries of ShoeMaker US, throughout the world?
What if Rossi, Verdi, Bianchi, and Neri are ultra-high-net-worth individuals, who are assisted by family offices which, acting on their behalf, scout for financial services providers? Or what if they have been referred to the Swiss bank by a relative or a friend, who may in turn have an established relationship with the bank?
What if fund Omega is based in London, searches for investments opportunities throughout Europe, and funds the acquisitions on the back of established relationships with banks established in London?
One would need to further dig into the facts, but these could most likely all be cases of genuine reverse enquiries. And other cases can fairly easily be imagined.
Note that my point is of course not that financial institutions can deliberately “structure” reverse enquiries in those markets: Reverse enquiries cannot be structured. Note also that I do not ground these remarks on the fact that EU law in recent years has acknowledged explicitly the existence of reverse enquiries (1).
My point is different: I posit that genuine reverse enquiries do indeed exist and, that sometimes they may actually be frequent, and that — most importantly –when acting in certain context, it may be reasonably easy for financial institutions to provide evidence, ex post the transaction, that the enquiry was genuinely unsolicited.
Financial institutions, however, cannot easily rely on case-by-case analyses. Ideally, they need procedures to be devised ex ante, but as a second best they need to have a dashboard supporting their risk assessments.
Here are thus just some of the parameters against which the risk that a given reverse enquiry is challenged can be measured:
1. the higher the number of clients in Italy, the higher the risk (if you have hundreds of clients in Italy and are not licensed, you may find it difficult to explain how you sourced those clients).
But I am afraid that no, there is no magic number which draws the line;
2. the nature of the clients: explaining how come mass market clients have decided, absent any solicitation, to approach financial institutions abroad may prove difficult, compared to the case where institutional clients are involved;
3. the nature of the products involved: large corporate loans are very different from consumer loans. Wealth management products may be — other things being equal — an easier case (be they personalized portfolio class III insurance products or IMAs);
4. whether the foreign financial institution has an infrastructure in Italy. Representative offices are fully legitimate, but, among other considerations, their structures and resources must be commensurate to the role they play (why having a massive presence if you are not actively pitching clients?);
5. the remuneration structures of any personnel who is active on the ground in Italy: Variable remunerations, connected to the successful completion of deals in Italy, would per se raise issues (why would you remunerate your personnel on a success basis, if you are not actively targeting clients in Italy?).
(1) And of course it will have to be seen — in relation to funds — what will be the impact of the forthcoming provisions on pre-marketing contained in the revised text of the AIFMD and the UCITS (See European Parliament legislative resolution of 16 April 2019 on the proposal for a directive of the European Parliament and of the Council amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds).
