Back

MiFID II - Product development

The revision of MiFID I leads to important changes in rules and regulations with regard to investor protection. The investor protection is enhanced due to stricter and new rules of conduct under MiFID II.

MiFID II introduces rules for the development of investment products (product governance). Financial instruments and structured products are included under investment products.

With regard to product development, a distinction is made between investment firms that develop investment products (manufacturers) and investment firms that distribute investment products (distributors). Different rules apply for developers and distributors. An investment firm can be both a developer and a distributor. In that case both sets of rules apply.

Manufacturers

An investment firm that manufactures financial instruments to be sold to clients must have a process for the development, approval and revision of investment products. In this process, the target market of end clients (target group) must be identified for every financial instrument. The financial instrument must meet the needs, characteristics and objectives of the target group. This is tested by inter alia an assessment of the risk/return profile of the product. In addition, it must be ensured that the financial instrument meets the needs, characteristics and objectives of the target group.

In addition, the investment firm must ensure that all relevant risks for the target group are evaluated. To this end, the investment firm must perform scenario analyses. The cost structure must also be assessed. Finally, the manufacturer must ensure that the intended distribution strategy is consistent with the target group. .
Before the investment firm markets the product, it must check whether the financial instrument poses a threat for the orderly functioning or the stability of the financial markets.

Investment firms have to regularly review the financial instruments, taking into account any event that could materially affect the potential risks to the target group. In addition, the investment firm must assess at least whether the financial instrument remains consistent with the needs of the target group sufficiently and whether the intended distribution strategy remains appropriate.

Distributors

When selecting investment products and services, the distributor must satisfy the following requirements:

  • The distributor has an adequate process. This process ensures that the products and services that they wish to offer meet the needs, characteristics and objectives of the identified target markets of clients (target group).

  • The distributor ensures that the intended distribution strategy is consistent with the target group.

  • The distributor uses the information of the manufacturer and information on its own clients to ts identified target group. Based on the needs, characteristics and objectives of its clients, the distributor determines to whom it will offer the financial instrument or investment service. 

  • If the financial instrument has not been developed/manufactured by a firm that falls under the scope of MiFID II, the distributor must do everything it reasonably can to ensure that the product information is reliable and adequate. This type of information is required before products may be distributed. Without it, the distributor will not be able to fulfil the product governance requirements.   

  • The distributor must regularly evaluate the selection process of financial instruments and determine whether the product or investment service meets the needs of the target group. The distributor must also assess at least whether the distribution strategy remains appropriate. The distributor must inform the manufacturer about this and about the sale of the financial instrument. The developer needs this information to review its financial instruments.

Share information

Share on: Share this

Related content