The European Securities and Markets Association (ESMA) has published its guidelines on the MiFID 2 product governance rules to ensure a common and consistent application of the product governance rules under Articles 16(3) and 24(2) of MiFID 2 and the relevant MiFID 2 Delegated Directive, in particular addressing the required ‘target market assessment’.

The Guidelines follow a consultation undertaken by ESMA in Q4 2016, to which AIMA submitted a response, and concern both manufacturers and distributors of investment products.

Among other things, the Guidelines: (i) provide definitions of ‘manufacturer’ and  ‘distributor’; (ii) provide a list of five categories to be considered by manufacturers and distributors when assessing the relevant target market, with manufacturer assessments to be based on a theoretical knowledge and experience of the product in absence of direct client contact; (iii) specify that manufacturer target markets should be identified in more detail as products become more complex; (iv) clarify the timing and relationship of the target market assessment of the distributor with other product governance processes; (v) state that a suitability assessment does not replace the distributor obligations to ensure distribution to the actual target market; (vi) clarify for portfolio management that a distributor can use hedges and diversification, thus sell a product outside of its target market if the total portfolio/instrument hedge combination is suitable for the client, and without triggering a reporting obligation to the manufacturer unless it is a sale into the negative target market; (vii) cover the regular review by the manufacturer and distributor to assess whether the products are reaching the target market; (viii) clarify the obligations on distributors, in particular when the manufacturer is not subject to MiFID 2 product governance rules; (ix) elaborate upon manufacturers processes to determine a negative target market; and (x) differentiate how target market requirements apply to wholesale scenarios, distinguishing between end-client and intermediation relationships with per se and elective professionals, as well as eligible counterparties. The Guidelines also contain a series of illustrative case studies.

Once published on ESMA’s website, a two-month period will commence during which NCAs must notify ESMA whether they comply or intend to comply with the Guidelines. If members have any questions or comments, please contact Adam Jacobs-Dean, Oliver Robinson or Adele Rentsch.