News 28/09/23

Updated ESMA Guidelines on product governance requirements taking effect

The Dutch Authority for the Financial Markets (the AFM) wants to draw investment firms’ attention to the fact that ESMA has updated its Guidelines on product governance requirements. This update further clarifies how companies should deal with new developments and product governance requirements. Good product governance is vital as it ensures a product range and a product distribution that serves the clients’ best interests.

In brief

Sustainability objectives must now also be weighed in when defining the target market for financial instruments.
Also, the importance of properly setting up the online choice environment in execution-only services is further illustrated.
In their policies, investment firms need to be clear about the criteria they use to evaluate whether or not products are distributed outside their target market, among other things.
Case studies offering tools have been added to the update.

Sustainability objectives must now also be weighed in when defining the target market for financial instruments

Sustainability objectives are trending and relevant for investors. To enable investors with sustainability preferences to invest in financial instruments that match their preferences, investment firms need to consider sustainability objectives when defining the target market and distribution strategy (see Guideline 25).

The importance of properly setting up the online choice environment in non-advised services is further illustrated

If investment firms choose to offer financial instruments through non-advised services, they remain responsible for not (structurally) distributing outside the target market. For more complex instruments in particular, this presents greater challenges due to their limited or highly limited target market. ESMA provides examples of measures that can help prevent distribution outside the target market, such as deciding not to show more complex financial instruments as standard in the online choice environment and not to make use of gamification techniques or finfluencers (Guideline 64).

In their policies, investment firms need to be clear about the criteria by which they make evaluations, among other things

Having substantiated a distribution strategy, investment firms need to evaluate whether this strategy actually proves effective in practice. In order to ensure that these evaluations take place and result in reliable conclusions, investment firms need to include in their policies the criteria by which they perform these evaluations.

Case studies offering tools

The updated guidelines also contain case studies, which provide tools on whether or not to introduce more complex products through non-advised services. Different case studies, which are available in the ‘ESMA Final Report Guidelines on MiFID II product governance requirements’, show what is expected in terms of substantiation and explanation when defining the target market and distribution strategy for products.

More information about product governance for investment products can be found on our website. An extensive AFM explanation of the amended guidelines can also be found here.