The European Securities and Markets Authority (ESMA) has published the guidelines for product governance requirements under the Markets in Financial Instruments Directive (MiFID II). Created to ensure “common, uniform, and consistent application” of said rules, the authority expects the guidelines to strengthen investor protection. Firms and competent authorities have a period of two months from the publication date to notify the authority on their compliance status.
Under the guidelines, manufacturers are required to give consideration to the customer when identifying target markets for their products. Some considerations include whether the customer has the relevant knowledge and experience for the product type; the customer’s risk tolerance; the financial situation of the customer and subsequently, their ability to bear losses.
Distributors are responsible for ensuring the consistency of the products offered, and their compatibility with the needs, characteristics, and objectives of target clients. Product marketing should be done with care. The guidelines highlight gamification as a particular concern, stating that “distributors should carefully assess whether using such techniques would be in the best interests of the client group for which such strategies would be used”.
ESMA states that in general, the guidelines “should be applied in a way that is appropriate and proportionate, taking into account the nature of the product, the investment service, and the target market of the product”.