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Global Trustee and Fiduciary Services News and Views | MiFID II Special Edition 2016
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of impact include: target market assessments,
product approval and monitoring processes, and
distribution strategy.
Under the new product governance rules asset
managers and distributors must conduct target
market assessments as part of the approval
process for each product they manufacture
and distribute. MiFID II does permit the level of
detail and the criteria used to define the target
market to be proportionate to the complexity
of the financial instrument. Setting the target
market criteria and level of detail on a fund-by-
fund basis could pose a significant challenge
to manufacturers and distributors alike. For
example, asset managers will need to define
the needs, objectives and characteristics
of those investors for whom the product is
deemed to be compatible and identify types of
investors for whom the product is not deemed
compatible. Product compatibility should be
based on the investor’s knowledge of, and
past experience with, the product (or similar
products) and on the investment strategies
and market exposures of that product. Industry
bodies across the EU have been working
extensively to define exactly what the criteria
should be for assessing target markets.
Examples of the criteria under consideration
include:
• MiFID classification (retail, professional,
eligible counterparty client)
• Client’s investment expertise
• Client’s ability to bear losses
• Client’s needs and objectives
• Firm’s intended distribution strategy
Distributors also need to perform their own
target market assessments for the products
they distribute, based on information obtained
from manufacturers, in order to gain the
necessary understanding and knowledge of the
products. It is possible that the target market
assessment conducted by the distributor does
not align completely with the assessment
performed by the manufacturer. Hence
distributors should periodically provide the
manufacturer with data on where the product
has not reached the target market identified
by the product manufacturer. Obtaining
information on target market assessments
from some asset managers could pose a
particular challenge for those distributors
marketing products of non-MiFID asset
managers (e.g. those outside the EU). That
is because those asset managers may not be
subject to these new regulations and therefore
may not be required to conduct target market
assessments at the outset to identify the
characteristics, needs and objectives of the
target market. Therefore, distributors should
ensure that when dealing with manufacturers
not subject to the MiFID II requirements, they
have appropriate arrangements in place to
obtain sufficient information about the product
they plan to distribute.
Where distributors offer execution-only services
without a need for client appropriateness
testing, the FCA stated at the MiFID II Conduct
Forum (on 18 April 2016) that the distributor
role may be limited to communicating the
target market of the manufacturer to the
investor rather than imposing any additional
point-of-sale assessment requirements onto
distributors.
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How this should be communicated
will depend on the distribution model, although
it should be set out clearly to the customer as
part of any product literature.
The new product monitoring requirements
put the onus on distributors to pass sales
information (e.g. the types of clients the product
has been distributed to and complaints data) to
asset managers periodically. Asset managers
are expected to use the information to monitor
the performance of each product against
the needs and objectives of the identified
target market identified for it. Under MiFID II,
asset managers should regularly review the
information provided by their distributors and
consider whether their initial target market
assessment and distribution strategy remain
appropriate. This review should form part of
a suite of holistic management information
covering sales, comparisons across distributors
and also product performance data, so as
to ensure that the product is performing as
intended. As part of product performance
monitoring, asset managers should consider any
current stress testing performed, including the
implementation of monitoring under PRIIPs. The
objective would be to identify whether existing
processes cover so called “material events”,
which could in some way impact the potential
risks associated with the product and thereby
alter the identified target market.