In response to feedback, ESMA has refined some of the descriptions and has merged the two draft categories of clients’ objectives and clients’ needs, as the distinction between then was unclear.
There are now five categories that must be considered by product manufacturers and distributors, using both quantitative and qualitative criteria:
The second and third categories may be the most difficult for manufacturers to specify for many products. It is not clear how someone could be a first time investor, as they will have no experience and, likely, very little knowledge. ESMA does note that “the simpler the product is, the less detailed a category may be” and a new example is given for non-complex UCITS. However, specifying the numerical percentage of losses that can be borne or maximum percentage of assets that should be invested in the product will be difficult.
ESMA makes clear that manufacturers need to identify the potential target market (TM) using their theoretical knowledge and experience of the product, whereas distributors must identify the actual TM using information from manufacturers, knowledge of their client bases and taking into account the nature of the service they provide. This process is separate to the suitability and appropriateness requirements. The distribution strategy of both manufacturers and distributors should be consistent with the product’s TM.
Firms must also consider whether the product has a “negative” TM, sales within which should be rare. Distributors must document and substantiate these decisions and, if relevant to the product governance process, report them to the manufacturer.
The guidelines describe how the requirements apply in relation to professional investors and eligible counterparties, and to products manufactured by entities not subject to MiFID II (eg UCITS managers, AIFMs and third country firms). There is a new section on portfolio management, which recognises that a diversified portfolio will include a number of products with differing individual risk and return profiles. ESMA accepts that products can be sold outside their TMs where the portfolio as a whole, or the combination of a financial instrument with its hedge, is suitable for the client.