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ESMA publishes product governance guidelines

by Silvia Saccardi 3 April 2023

The European Securities and Markets Authority (ESMA) has recently published its final report, entitled Guidelines on MiFID II product governance requirements.

The guidelines are similar in nature to the FCA’s Consumer Duty, but unlike the UK rules, they are not legally binding.

While there is no direct equivalent to Consumer Duty in the EU, according to Sam Tyfield, partner at Shoosmiths, there is a widely accepted overarching duty of ‘best execution’, which encompasses all financial product and service regulations.

The updates to the FCA’s Consumer Duty are due to come into effect on 31 July 2023. It is also expected that by the end of April, distributors will have gathered the necessary fund information from manufacturers to be delivered to their end users.

The Drawdown discussed ways in which the expanded scope of the rules could apply to fund managers indirectly supplying retail investors earlier this year.

Across the border, the EU seems to be developing its own wording to protect clients’ best interests.

Far from clear-cut
The EU’s governance guidelines apply to manufacturers in the following way, suggesting a targeted approach to:

  1. Identifying clients
  2. Assessing a client’s knowledge and experience
  3. Analysing a client’s financial situation, taking into account their ability to bear losses
  4. Understanding a client’s needs
  5. Conducting a risk assessment of the compatibility of the risk/reward profile of the product with the target market.

Distributors must use the same five categories as manufacturers but take a more targeted approach, as the distributor should have specific clients in mind.

Nonetheless, the same problem remains for both the FCA’s Consumer Duty and the ESMA’s updated governance guidelines – that of the definition and scope of ‘manufacturer’.

Tyfield sheds further light on the matter: “There is nothing explicit in the Consumer Duty or the ESMA guidance to suggest a PE fund manager has to have in mind the distributor’s beneficiaries. A fund manager could argue to not have any responsibility, a line which has been blurred for years.”

Avoiding a sticky situation
Amid the ongoing dilemma of a duty that GPs could find tricky to satisfy, Tyfield suggests actions firms can take to avoid unwanted FCA scrutiny: “To demonstrate compliance with the Duty or the EU guidelines, I recommend GPs conduct discussion internally and document the outcomes. If this is done, there will be a record of the matters seriously considered, regardless of the outcome. This kind of procedure will be hard to criticise.”

For UK fund managers with a foot in Europe, it is expected that any rules or guidelines implemented in the EU will be applied more strictly to them, given the competitive arena of a post-Brexit world. This means it is more important for those managers to understand what might be expected of them, in comparison to what is required in the UK.

A link to the full guidelines can be found here.

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