National regulators and the industry continue to await the final Level 2 provisions to implement Markets in Financial Instruments Directive (MiFID) II and Market in Financial Investments Regulation (MiFIR). Meanwhile, European Securities and Market Authority (ESMA) is reportedly working on FAQs covering a number of detailed issues, one of which is how to identify the “target market” for a MiFID instrument or product and how manufacturers and distributors should monitor whether the products end up with investors outside the target market.
MiFID II requires investment firms (manufacturers) to make available to distributors all appropriate information on a financial instrument and their product approval process. This includes specifying an intended target market of end clients, and ensuring that all relevant risks are assessed and that the intended distribution strategy is consistent with the identified target market. Also, they must take reasonable steps to ensure that the financial instrument is, in fact, distributed to the identified target market.
Distributors have to obtain this information from manufacturers and to understand the product characteristics and identified target market. This is seen as bringing non-MiFID manufacturers/issuers of MiFID financial instruments (e.g. corporate issuers of securities and Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIF) managers) into the target market requirement for MiFID manufacturers. This has wide implications.
The delayed MiFID II Level 2 measures will provide further articulation of the Level 1 requirements, but the operational details of what will be required sit with ESMA (and European Insurance and Occupational Pension Authority (EIOPA) for insurance products). We understand that ESMA’s initial thinking was to specify a number of criteria against which all products should be described and to issue these in the form of FAQs in time for the MiFID II implementation date. However, as this date is to be extended to January 2018, ESMA now has time to consult. Moreover, given that the range of products, product manufacturers and distributors is wide and that the final requirements could have significant strategic and operational implications for firms, the industry at large is questioning whether such important and complex requirements should sit in FAQs, on which ESMA is not obliged to consult.
Guidance (as opposed to FAQs) would enable a more consistent regulatory approach across Europe. If the target market requirements vary materially between Member States, this will hamper cross border distribution and restrict investor choice. In order to meet their ongoing monitoring obligation, product manufacturers in one Member State would need to request more or different information from distributors in another Member State than those distributors are themselves required to provide under their own national rules. This would add extra costs for both manufacturers and distributors and would be a clear disincentive to cross border distribution, especially for smaller firms.
KPMG member firms’ clients that are most closely involved with discussions on the development of ESMA’s and certain national regulators’ thinking are concerned that some of the criteria being considered cannot be monitored by manufacturers or by many distributors (such as the total financial wealth of the end-investor). There is also a concern that the different roles of the manufacturer and the distributor are not at present properly recognized, which could lead to unworkable requirements.
Given the strategic and operational implications for clients, we are following this debate closely and will keep you informed of developments.