The EACB has participated in ESMA’s public consultation (ESMA35-43-3114) on the review of guidelines on MiFID II product governance requirements. This is an important consultation for us because product governance requirements are an important element of the investment chain for distributors and so we welcome the opportunity to contribute. As part of our key messages, we would like to highlight the below:-
• Proportionality, execution-only and appropriateness - Seeing the product rules that our members implemented since MiFID II came into force, we have noted in some markets a bias towards simpler products and investment advice (e.g. Spain). In contrast, many of the proposals in the draft guidelines seem to push the manufacturer and distributer to go way beyond in terms of identification of the target market than what can be done on an aggregated basis. Many factors like early exit for example (paragraph 19e of the guidelines) must be addressed at the individual level (e.g. via the suitability assessment). Simple products can be sold to the client through execution only, whereas, complex products would require an appropriateness assessment, and thus we see in current MiFID II the proportionality element is already embedded. In this context, we wish to highlight that complex products and risky products are not the same. We see the use of “risky products” and “level of complexity” to be confusing when it comes to the proposed draft guidelines by ESMA. Indeed, a simple product can be riskier than another but is still not classified as complex. Therefore, we see that many of the proposals seems to be transcribing the concepts under the suitability assessment into the target market identification. Of course there must be alignment between the two, but it is going beyond especially for professional clients and considering there is the appropriateness assessment in place for execution-only. We believe that the use of appropriateness and execution-only rules should be upheld as per the current product governance rules.
• Conceptual error - ESMA believes most financial instruments (shares, bonds and funds) are manufactured by investment firms. In reality, stocks and bonds are issues by companies or governments, not by investment firms. In this case, defining target markets and conducting reviews, is legally not the responsibility of such issuers which are not manufactures under MIFID II. If this ‘manufacturer’ does not exist, the burden of these assessments should not be put at the level of the distributor. We believe that distributors should be able to rely on the correctness of the information regarding the target market provided by the manufacturer. We do not need to re-do the manufacturers ‘homework’. This would be in line with the current Level I requirements that do not foresee a target market definition by distributors (see Art. 24 (2) MiFID II: “…also taking account of the identified target market of end clients as referred to in Article 16(3)….”). .
• Sustainability - On sustainability, these draft guidelines are based on and aligned with critical concepts in ESMA’s guidelines on suitability requirements which were recently published. However, we already see issues in the suitability guidelines in terms of comparison with the EIOPA guidance published in July 2022 on suitability assessments under IDD. For example, the EIOPA guidance goes beyond in terms of the Taxonomy alignment KPIs. We call for better alignment between MiFID and IDD when it comes to ESG requirements as these will be confusing to clients buying investment and insurance products. In addition, we would encourage ESMA to consider the answers from the European Commission to its Q&A JC 2022 47 submitted on 9 September 2022 (particularl question 1 on the definition of “sustainable investment”) once completing the final report on the MiFID product governance guidelines.
• Deviation possibility – We wonder why ESMA mentions two specific categories, as appropriate reason for deviation of the target market. We do not see why Knowledge and Experience or Type of Client should obstruct a distributor to gain diversification advantages. We believe it would be better if ESMA deleted the two examples in the guidelines.
• Professional clients - In paragraph 17 of the proposed guidelines it is stated that manufacturers should not exclude any of the five categories. In case the type of client is professional, the categories’ knowledge and experience, financial situation with a focus on ability to bear losses and risk tolerance and compatibility of the risk/ reward profile seem not that relevant. This would also be in line with the suitability requirements in case of investment advice or portfolio management provided to professional clients. We refer to article 54, paragraph 3 of Commission Delegated Regulation 2017/565. Alternatively a
proportionate approach in line with the treatment of professional clients under the suitability requirements, should be acceptable.
• ECM/ DCM business - We note problems for the Equity Market (ECM) and Debt Market (DCM) activities of investment firms, in particular with regard to reviews on the basis of recital 15, and paragraph 1 Article 9 of Commission Delegated Directive 2017/ 593 where investment firms accompanying the issues of corporates assigned to act as the manufacturer even though they are not. In relation to corporate issues investment firms provide services like advice, underwriting and placing of the securities. The fees paid by corporates are related to these services. After the issue the services are ended and no on-going fees are paid by corporates. Therefore, there is no funding for ongoing reviews of individual securities (ISIN) by investment firms which have been involved in a corporate issue in the past. The corporates take the responsibility for the issued securities themselves. Normally these securities are traded on secondary markets (no specific distribution channels) and the corporate takes care of the publication of relevant information related to the securities e.g. public disclosure of inside information and through custody chains (e.g. on the basis of SRD 2). Investment firms providing investment advice, portfolio management and execution only services use this information as distributor for their reviews. Involvement of external parties like investment firms which were involved in a corporate issue in the past, doesn’t have any added value. Therefore, we would advocate a proportionate approach with regard to reviews in relation to investment firms which have been involved in a corporate issue in the past. We refer in that context to point 57 of the ESMA product governance guidelines of 2nd June 2017. Reviews by these firms could be more generic on the type of instruments in relation to their services provided as accompanying investment firm and not on individual financial instruments (ISIN).
For further information please refer to our position paper.