ESMA announces consultation on MiFID II product governance guidelines

ESMA has announced a consultation on reviewed MiFID II product governance guidelines following the outcome of its 2021 common supervisory action (CSA) on the same theme.

The results of the CSA revealed that:

  • firms generally define a target market for the products they manufacture and/or distribute and that firms follow the list of five target market categories set out in the ESMA guidelines but that this exercise is approached by some firms as a formalistic exercise without sufficient granularity or the use of clearly defined terms;
  • the definition of a target market by firms does not always translate into a compatible distribution strategy that enables the product to reach said target market; and
  • firms continue to struggle with the requirements to perform:
    • scenario analyses as required under Article 9(10) of the MiFID II Delegated Directive; and
    • charging structure analyses as required under Article 9(12) of the MiFID II Delegated Directive.

In light of these findings ESMA has launched a consultation setting out proposals which include:

  • the specification of any sustainability-related objectives a product is compatible with;
  • the practice of identifying a target market per cluster of products instead of per individual product;
  • the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales; and
  • the periodic review of products.

The consultation closes on 7 October 2022.

Duncan Scott