The Enhanced Product Governance under MiFID IISalvus Team
Following the ‘One year anniversary from MiFIDII-its implications’ article, we continue our series of commentaries aimed at simplifying the process of understanding the new regulation. Among others, the new regulation introduces, for all investment firms, requirements for enhanced product governance. The motive is, again, to achieve ‘investor protection’.
The product governance obligations include procedures for the European investment firms to; understand and analyze the specifics of the investment products pre-manufacturing and pre-distribution, while the firms need to identify the compatible target market when they;
1. analyze the type of client for whom the product is intended (retail and/or professional),
2. assess all relevant risks for investor protection, and
3. ensure the recommended product offering is in the interest of the client.
Manufacturers are firms that; create, develop, issue, design and/or advise for the launch of the new investment products, and Distributors are firms that; offer or sell investment products and services to clients.
Manufacturers must ensure that the intended investment products are designed to meet the needs, characteristics, and objectives of the end clients – ‘Target Market’, while the distribution strategy shall be compatible with the identified target market. It is worth mentioning, that firms are also required to identify the groups of clients for whom the investment products are not-compatible to their needs, characteristics, and objectives – ‘Negative Target Market’.
Distributors that are not manufacturers must ensure to obtain from the manufacturer the appropriate information in regards to the specifications of the investment products, including the peculiarities of the identified target market.
It is highly important for investment firms to ensure that the management body follows the approved internal processes and procedures of Product Governance; before manufacturing and/or distributing investment products. Firms shall establish, implement and maintain adequate procedures and measures to ensure the specifications of the product do not adversely affect the clients and ensure to prevent any conflicts of interest; including remuneration.
Further, the investment firms are required to have sufficient procedures in place to ensure they conduct a diligent suitability and appropriateness assessment of the investors, prior to the recommendation of any investment advice or service.
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The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.