MiFID II investor protection
Years in the making, MiFID II was finally implemented on 3rd January 2018. The regulation covering investor protection remains a key area of uncertainty, with the rules around product governance, costs and charges and research unbundling proving the most difficult to decipher.
The first step to clarification should be the detailed understanding of the new product governance regime. If an investment firm succeeds in understanding and mapping their distribution chain, standardising their product data, assessing the target market and distribution strategy by product – they will not only be on track to a successful MiFID II investor protection implementation, but also add value to their offering in the longer term.
Target market assessment – do not underestimate the size of this piece of work!
Under MiFID II product governance regulation, target market assessment must be carried out by firms who manufacture and distribute products – the manufacturer’s target market being the conceptual target end-client and the distributer’s target market adding information on their own clients to the manufacturer’s assessment. The Level 3 guidelines require the product’s distribution strategy to be identified and communicated along with the target market from manufacturer to distributer. The product governance regulation should be applied in an appropriate and proportionate manner, taking into account the nature, scale and complexity of a firm’s business and the range of financial services and activities.
Distributers are obliged to provide manufacturers with feedback on product performance and sales outside of the target market (with exceptions for sales for the purposes of hedging or portfolio diversification).
Building blocks to success
Back in October 2016, ESMA published draft guidelines on product governance. They published their ‘Final Guidelines on Product Governance’ on 2nd June, 2017 – these focus specifically on target market assessment and feedback from distributers. Firms should now be clear on what is required and take the key steps to implementation.
The building blocks of product governance are key to the successful implementation of all of the processes involved in the pre-sales process – including costs and charges, disclosure of information to clients, suitability and appropriateness and inducements.
The regime focuses on the identification and assessment for each product of the target market and the distribution strategy. The regime can be applied proportionately depending on the complexity of the product and the sophistication of the end-client.
Key building blocks are: