Investor Information & Product Governance for CySEC regulated entities
Through the most recent financial crisis, significant vulnerabilities were identified that questioned the integrity and transparency of European financial markets. For the investment services industry to become more investor protection oriented, the European Commission (EC) introduced requirements relevant to the product governance of financial instruments. The said requirements consist of regulatory obligations according to the Markets in Financial Instruments Directive II (MiFID II).
Our Regulatory Compliance team at SALVUS wishes to provide important information on product governance requirements by discussing the following key aspects:
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1. Information provided to investors
The transposition of MiFID II into national legislation mandates for Cyprus Investment Firms (CIF) to always provide existing and potential clients with fair, clear and not misleading information. Most of the information is required to be disclosed on a pre-trade basis, whereas information specific to the execution of orders needs to be disclosed on an ex-post basis.
A non-exhaustive list of pre-trade information requires investment firms to:
- Notify new and existing clients of their categorisation and their right to request a different categorisation along with limitations to be applied on the level of protection.
- Provide clients with the terms and conditions of the agreement to be binded with.
- Disclose the firm’s name, address, contact details and license specifics.
- Provide clients with an overview of the controls employed for safeguarding client funds and assets.
- Inform clients whether their funds and assets are held on behalf of the firm by a third party and in an omnibus account.
- Enlighten clients about the nature and risks of the financial instruments offered.
- Equip clients with all the necessary documentation or indicate where it can be easily accessible.
Ex-post information required to be shared with the clients concerns primarily the costs and charges incurred for the investment and ancillary services provided to them. For complex financial products legislation mandates the publishment of a Key Information Document (KID) disclosing the specific nature, risks, and characteristics of the product.
2. Client Assessment & Categorisation
Following the provision of pre-trade information investment firms are required to conduct a suitability or appropriateness assessment before a client is onboarded or any product is distributed. Through the assessment, the necessary information is obtained to compose an economic profile based on the client’s investment objectives and risk tolerance.
Furthermore, clients must be categorised under one of the following three categories to determine the protection level that needs to be offered by the company.
- Eligible Counterparties can be investment firms, credit institutions, insurance companies, pension funds, national governments, central banks, and other EU financial institutions.
- Professional Clients are clients who have adequate knowledge and experience to assess the risks involved in the investment products and decide on their investment activity.
- Retail Clients are clients who are neither professional clients nor eligible counterparties.
As we move from Eligible Counterparties to Retail Clients, an investment firm is required to provide a higher level of investor protection.
3. Target Market Identification
Any investment firm is considered to be a product manufacturer if its involved with the development and design of new investment products and a product distributor if it offers or sells investment products and services to clients. In this respect, an investment firm can be both the product manufacturer and distributor.
Considering the nature and the characteristics of an investment product, manufacturers and distributors must identify the product’s potential target market. In case the manufacturer differs from the distributor, the latter is responsible to ensure that products are offered to clients that meet the manufacturer’s identified target market.
To identify the target market the following five factors should be taken into consideration by manufacturers and distributors:
- Type of clients to be targeted, as per the abovementioned client categorisation.
- Knowledge and experience required by the clients, to understand the product type and features.
- Clients’ financial situation and ability to bear losses, specifying the loss percentage that targeted clients should be able and willing to afford.
- Clients’ risk tolerance and compatibility with the product’s risk-reward profile.
- Clients’ specific objectives and needs that a product is designed to meet including financial goals and their overall investment strategy.
Going a step further, we invite investment firms to identify each product’s negative target market. The negative target market consists of clients whose needs, characteristics and objectives are not consistent with the product and to whom it should not be distributed. The identification of the negative target market will ease the appropriateness assessment procedure and the evaluation of the product’s distribution strategy.
4. Product Governance Monitoring
Along with other regulatory obligations, product governance is to be perceived as a dynamic procedure rather than a one-off exercise. This is achieved through the product governance monitoring process which ensures that the management of the firm exercises effective control over the investment products offered.
The function that bears the responsibility of product governance monitoring is the Compliance function, which shall prepare and submit relevant reports to the management body frequently. The said reports shall include information on the financial instruments manufactured, their distribution strategy, as well as the related services provided.
In conclusion, product governance mandates investment firms to provide clients with all the necessary information that enables them to take informed investment decisions. Furthermore, it requires them to conduct suitability or appropriateness assessments to ensure that investment products offered are appropriate for the client.
Professionals working in at Cyprus Investment Firms, Crypto-Asset Services Providers (CASP) or other entities regulated by the Cyprus Securities and Exchange Commission (CySEC) shall be in a position to achieve the abovementioned objectives.
In this respect, SALVUS Funds in collaboration with the Institute for Professional Excellence (IforPE) has developed a self-study course titled Investors Information – PRIIPs, KID & MiFID Product Governance suitable for the annual Continuous Professional Development (CPD) requirements.
The course is designed to educate professionals regarding the regulatory obligations towards the information provided to investors and MiFID II Product Governance aspects. Professionals who undertake this course will gain the skills to establish the required monitoring and assessment procedures regarding product governance, through practical examples.
Additionally, the SALVUS Regulatory Compliance team can support CIF, CASP, as well as other CySEC regulated entities, to establish the required policies and procedures for the fulfilment of their product governance requirements.
Contact us at email@example.com or call us at +357 7000 7898 if you require more information about your Product Governance regulatory obligations or if you have questions about our Investors Information – PRIIPs, KID & MiFID Product Governance course with IforPE.
Should you be interested to read more about Product Governance, Cyprus Investment Firms or Crypto-Asset Services Providers, please visit the selected articles below:
- Establishing an Investment Firm in 2022 in Cyprus
- MiFID II Product Governance & KIDs for PRIIPs
- MiFID II Ex-Post Information on Costs and Charges
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.