Understanding Product Governance under MiFID II & MiFIR
MiFID II rules distinguish between manufacturers and distributors of financial products, outlining obligations for each. Manufacturers must ensure products meet target market needs, while distributors must understand and recommend products in clients' best interests. ESMA guidelines detail criteria for assessing target markets. Both manufacturers and distributors are key players in ensuring product governance compliance under MiFID II and MiFIR regulations.
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Diamonds are forever? Product governance & product intervention under MiFID II/ MiFIR Danny Busch
Product governance MiFID II distinguishes between firms that - manufacture the product (manufacturer), and - those that distribute the product (distributor) Manufacturer: - the manufacturing of products encompasses the creation, development, issuance and/or design of financial instruments Distributor: - product governance rules apply irrespective of the type of service provided and of the requirements applicable at point of sale
Product governance Manufacturers must ensure that - products are manufactured which meet the needs of an identified target market of end clients within the relevant category of clients - the strategy for distribution of the products is compatible with the identified target market, and - they take reasonable steps to ensure that the product is distributed to the identified target market
Product governance Distributors must - understand the products they offer or recommend - assess whether the products are compatible with the needs of the clients to whom they provide investment services, and - ensure that the products are offered or recommended only when this is in the interests of the client
Target market ESMA35-43-620, Final Report - Guidelines on MiFID II product governance requirements (2 June 2017) Assessment target market by the manufacturer: - the type of clients to whom the product is targeted - knowledge and experience - financial situation with a focus on the ability to bear losses - risk tolerance and compatibility of the risk/reward profile of the product with the target market - clients objectives and needs - the negative target market In a proportionate manner, considering the nature of the investment product articulation between the distribution strategy of the manufacturer and its definition of the target market
Target market Distributors should use the same list of criteria But they should define target market on more concrete level and should take into account - the type of clients they provide investment services to - the nature of the financial instrument and - the type of investment services they provide Relationship with KYC rules and other MiFID II/MiFIR provisions Product approach <-> portfolio approach?
Product intervention A distinction is made in this connection between - product intervention by NCAs, and - the intervention powers of ESMA and EBA NCAs can impose permanent product ban ESMA & EBA can only impose a temporary product ban
Scope product governance & product intervention rules Investment services + financial instruments Selling OR advising structured deposits
Gap 1: manufacturers of UCITS and AIFs ESMA/2014/1569, Final Report ESMA s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p 52 (No. 9) ESMA50-1215332076-23, Opinion Impact of the exclusion of fund management companies from the scope of the MiFIR Intervention Powers (12 January 2017) Commission Proposal of 20 Sept 2017 with respect to the modernisation of the ESAs, includes an amendment of MiFIR: Articles 40 and 42 [MiFIR] also apply to in respect of management companies of undertakings for collective investment in transferable securities (UCITS) and UCITS investment companies authorised in accordance with Directive 2009/65/EC and of managers of alternative investment funds (AIFMs) authorized in accordance with Directive 2011/61/EU
Gap 2: banks selling diamonds Several Italian banks distribute diamonds for diamond brokers, an unusual partnership that generated around 300 million euros ($332.88 million) in sales for the brokers last year Several banks sold diamonds as financial products in bank branches at twice the market price. Bank officials advising a customer to make the investment without spelling out the risks and promising the diamond would appreciate consistently above the inflation rate in the long run
Evaluation Step forward in protecting investors Perhaps less choice, but retail investors couldn t care less Identification of the target market bound to pose difficulties in practice Important gaps remain Rules must be viewed within the broader context
Thank you for your attention! Contact details Prof. Dr. Danny Busch Chair for Financial Law Institute for Financial Law Faculty of Law | University of Nijmegen T +31 24 361 2190 | M +31 6 1463 4994 | F +31 24 361 1583 E d.busch@jur.ru.nl | http://www.ru.nl/law/busch | http://www.ru.nl/ifr P.O. Box 9049 | 6500 KK Nijmegen | Montessorilaan 10 | The Netherlands
