MiFID II introduces product governance requirements to ensure that firms which manufacture and distribute financial instruments act in the clients’ best interests during all stages of the life-cycle of products or services.
The MiFID II product governance regime is further detailed in Articles 9 (for manufacturers) and 10 (for distributors) of Commission Delegated Directive of 7.4.2016 supplementing MiFID II with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.
ESMA consultation on guidelines
On 5 October 2016, the European Securities and Markets Authority (ESMA) published a consultation paper concerning draft guidelines on MiFID II product governance requirements. The draft guidelines mainly addressed the target market assessment, as this aspect was identified as the most important one for ensuring a common, uniform and consistent application of the MiFID II requirements. The consultation closed on 5 January 2017.
ESMA final report on guidelines
ESMA has now published a final report containing the final version of the guidelines on MiFID II product governance requirements.
For manufacturers of financial instruments the guidelines include the following topics:
- identification of the potential target market by the manufacturer: categories to be considered;
- identification of the potential target market: differentiation on the basis of the nature of the product manufactured; and
- articulation between the distribution strategy of the manufacturer and its definition of the target market.
For distributors of financial instruments the guidelines include the following topics:
- timing and relationship of target market assessment of the distributor with other product governance processes;
- relation between the product governance requirements and the assessment of suitability or appropriateness;
- identification of the target market by the distributor: categories to be considered;
- identification of the target market: differentiation on the basis of the nature of the product distributed;
- identification and assessment of the target market by the distributor: interaction with investment services;
- distribution strategy of the distributor;
- portfolio management, portfolio approach, hedging and diversification;
- regular review by the manufacturer and distributor to respectively assess whether products and services are reaching the target market;
- distribution of products manufactured by entities not subject to MiFID II product governance requirements; and
- application of product governance requirements to the distribution of products that were manufactured before the date of application of MiFID II.
The guidelines also cover the following issues that are applicable to both manufacturers and distributors:
- identification of the ‘negative’ target market and sales outside the positive target market; and
- application of the target market requirements to firms dealing in wholesale markets (i.e. with professional clients and eligible counterparties).
The guidelines also include illustrative examples and case studies.
The guidelines will be translated into the official EU languages and published on ESMA’s website. The publication of the translations in all official languages of the EU will trigger a two-month period during which Member State competent authorities must notify ESMA whether they comply or intend to comply with the guidelines. The guidelines apply from 3 January 2018.
View ESMA publishes final report on product governance guidelines to safeguard investors, 2 June 2017