On 17 January, ESMA published advice received from the Securities and Markets Stakeholder Group (SMSG) in relation to the consultation on MiFID II product governance. This CP was released on 5 October 2016 and it set out to create guidelines relating to the target market assessment. The SMSG established a working group with the specific intention of giving commentary on these draft guidelines and this report represents their feedback.
The SMSG’s overall review of these guidelines has been positive, as the objective of establishing the target market for investment products under MiFID II serves a greater purpose of reducing the risk of mis-selling. However, the guidance sets out seven points for further consideration.
- While the guidelines will suit a small market of familiar distributors and manufacturers, they may become too difficult to implement in the context of a large market, which will be particularly problematic for the facilitation of a Capital Markets Union.
- The SMSG has requested the necessity to provide clear guidance on the responsibilities and treatment of products in cases where assets trade only on a secondary market, after initially being offered publicly.
- It has also advised that the guidelines should be rephrased to ensure that execution-only and execution under appropriateness remain workable, particularly in relation to the position of brokers. This could be applied under a guiding principle that the target market guidelines should not have more restrictive consequences than the existing ‘know your client’ requirements.
- The fourth consideration relates to the dichotomy of product approach versus a portfolio approach. In particular, the SMSG recommends clarity for manufacturers on what their responsibilities are in defining the target market from either perspective.
- In relation to asset managers, “manufacturers” of UCITS and AIFs that fall outside the scope of MiFID II, it is proposed that ESMA mitigates any clashes in the definitional scope of target market. In this regard, it recommends that such manufacturers use the target market description on the PRIIPs KID as a starting point.
- Another consideration looks at the implications of establishing a common cross-border ICT platform as a means of managing implementation costs. It is recommended that such a system should be implemented sooner rather than later in order to ensure that sales and advice staff can be adequately trained and the system can be fully tested and put to use outside the ‘peak load’ as MiFID II approaches implementation.
- Finally, reference is made to the PRIIPs KID and the potential confusion or lack of granularity in the definition of target market, as opposed to the specificity of MiFID II’s guidelines. In order to remove any misunderstandings, the SMSG recommends that the product governance target market definition is aligned.
Overall, the guidelines highlight some inconsistencies and uncertainties that may need to be clarified, with divergences in definitional scope across legislative initiatives being listed as a potential issue. Also, as mentioned in the sixth point, it’s crucial, now more than ever, to get processes and systems in place that can manage the full remit of MiFID II regulatory requirements before it’s too late. The countdown clock is ticking down and, if ESMA’s Securities and Markets Stakeholder Group can recognise gaps in the implementation measures, then there are sure to be more bumps along the way. Firms should be steaming ahead with their implementation strategy in order to mitigate the disruptive effects of, as yet unknown, complications.
You can follow the discussion by joining our MiFID II LinkedIn group, where we capture and analyse the latest implementation developments and issues as they occur, or find out more about how RegTech can help firms manage their regulatory requirements by checking out our RegTech Capital Markets Conference which will be held in London on 28 February 2017.