European Union: ESMA Final Guidelines On MiFID II Product Governance Requirements (Investment Management Brief: 15 June 2017)

Last Updated: 15 June 2017
Article by David Heffron, Elizabeth Budd, Michael Lewis and Ian Warner


ESMA Final Guidelines on MiFID II Product Governance Requirements

ESMA published [02.06.17] its Final Report on Guidelines on MiFID II Product Governance Requirements following its 5 October 2016 Consultation Paper. ESMA suggests its 2 June 2017 final report is read in conjunction with this 2016 CP. MiFID II introduces certain product governance requirements which require product manufacturers and distributors to act in the best interests of clients throughout the life of the product (see principally Article 16(3) and Article 24(2) of MiFID II). ESMA has devised guidelines on the 'target market assessment' which was identified as being key for the consistent application of these articles. The guidelines are in Annex IV of the final report. They apply from 3 January 2018 to firms, including UCITS management companies and external AIFMs, carrying on individual portfolio management or non-core services under either the UCITS directive (2009/65/EC) or the AIFMD (2011/61/EU). There are specific guidelines for manufacturers, distributors, and some that are applicable to both. Among the case studies in Annex V is one on the target market assessment for a non-complex UCITS.

ESMA updates MiFID II and MiFIR investor protection Q&As

ESMA updated its MiFID II and MiFIR investor protection Q&As [06.06.17] adding 14 new Q&As on the following three areas:

costs and charges information:

  • whether the PRIIPs calculation method covers the product costs to be disclosed under MiFID II (question 6);
  • how investment firms are to use the product's costs as shown in the PRIIPs KID (question 7);
  • whether the PRIIPs method applies to costs and charges calculations for financial instruments outside the scope of PRIIPs (question 8);
  • how investment firms are to gain access to relevant data on financial instruments to apply the PRIIPs methodology (question 9);
  • steps an investment firm should take when calculating costs for products (such as UCITS) in the PRIIPs transition period (question 10);
  • what investment firms should do if they are not able to obtain the relevant information from the manufacturer (question 11);
  • the calculation method for investment firms for 'costs related to transactions initiated in the course of the provision of an investment service' for ex-post costs disclosure (question 12);
  • if providing information on costs and charges to clients the basis on which costs should be aggregated and the aggregation level firms need to apply (question 13); and
  • how investment firms provide ex-ante disclosure of costs and charges to clients without data being available on the costs incurred (question 14).

post-sale reporting:

  • how firms reporting on a portfolio depreciating by the 10% threshold deal with clients adding to the portfolio during the reporting period (question 4);
  • how firms are to value daily portfolio depreciating by the 10% threshold when there is no secondary market or daily price reference for financial instruments in the portfolio (question 5);
  • how firms are to value daily under Article 62 of the MiFID II Delegated Regulation when the firm's reporting period starts after MiFID II takes effect (3 January 2018) (question 6); and
  • how a firm is to calculate the 10% threshold when reporting on a portfolio depreciating by the 10% threshold (question 7);


  • establishes shares in non-UCITS collective investment undertakings are per se complex, cannot be reassessed under Article 57 of the MiFID II Delegated Regulation and MiFID firms are therefore to carry out the appropriateness test before providing MiFID execution services in relation to them (question 1).

Rules on the EuSEF and EuVECA to be overhauled

A European Commission press release [30.05.17] announces the EU's agreement for greater support of venture capital and social enterprise by revamping the European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF) regulations 2016. This is part of the Capital Markets Union (CMU) Action Plan - part of the Commission's drive to encourage investment in venture capital in Europe.The agreement:

  • extends marketing and managing of EuSEF and EuVECA funds to larger fund managers (with assets under management exceeding Euro 500 million);
  • enables EuVECA funds to invest in small mid-caps and SMEs listed on SME growth markets so EuSEF and EuVECA funds can be more diversified; and
  • reduces costs by preventing fees being imposed by competent authorities of host Member States that are not carrying out supervisory activities;
  • simplifies the registration processes; and
  • sets the minimum capital for becoming a manager.

The text that was agreed will now follow the usual legislative process before being endorsed by both the European Parliament and the Council of the EU.


ESAs consult on group-wide anti-money laundering and counter terrorist financing risk management

The Joint Committee of the three European Supervisory Authorities (ESAs) (the EBA, EIOPA and ESMA) are consulting [31.05.17] on draft RTS for how credit and financial institutions are to manage money laundering and terrorist financing risks in third country branches or majority owned subsidiaries where such third countries' laws prevent them from implementing group AML/CTF policies and procedures. Although most third countries outside the EEA will not prevent groups implementing more demanding policies than their national law requires, there may be cases where all or aspects of the policy conflict with local laws (such as data protection or banking secrecy requirements) and firms must then address resulting money laundering/terrorist financing risk. There will be a public hearing on the RTS on 23 June 2017 in London at the EBA; comments on the consultation to be sent by 11th July 2017 using the button on the EBA's consultation webpage.

ESMA adds to its MAR Q&As

ESMA updated [30.05.17] its Q&As on the implementation of the Market Abuse Regulation (MAR).The new Q&As address disclosure of inside information regarding Pillar II requirements (Q&As on the disclosure of inside information question 5.1) and the blanket cancellation of orders policy (General Q&As question 4.1).

FCA consults on the use of its powers in its guidance, policies and procedures under new money laundering regulations

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 replace the Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007 (so-called 'wire transfer regulations') from 26 June 2017. More information here. Under the new regulations firms subject to anti-money laundering obligations are to have policies and procedures for assessing money laundering and terrorist finance risks and for commensurate customer due diligence and monitoring. As the new regulations contain wider supervisory and enforcement powers for regulators, the FCA is consulting [12.06.17] on its proposed changes to its Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG). Send comments to the FCA on these proposals by 7 July 2017.


Nine supervisory convergence principles apply on Brexit to UK entities relocating to the EU27

ESMA published its opinion [31.05.17] addressed principally to the National Competent Authorities (NCAs) of the Member States of the EU that will remain in the EU (EU27) fleshing out nine principles they are to apply to authorisation, supervision and enforcement of entities, activities and functions relocating from the UK. ESMA's Press Release describes the opinion as a "practical tool" for NCAs to "support supervisory convergence" faced with increasing UK financial market participants' relocation requests and, in the words of ESMA's Chair Steven Maijoor, to "avoid competition on regulatory and supervisory practices between Member States." The opinion covers legislation in the ESMA Regulation, in particular the AIFMD, UCITS and MiFID I and II.

The press release comments specifically, in the Brexit context, of UK-based market participants relocating into the EU27 to retain EU financial market access and seeking to outsource or delegate to UK-based entities "to minimise the transfer of the effective performance of those activities or functions in the EU 27...". The press release and opinion note any outsourcing or delegation is to be "strictly framed" and not to result in letter box entities.

  • Principle one: no automatic recognition of existing authorisations - clarifying there can be no "automatic recognition of the authorisation granted by the UK regulator into the EU27" although the UK has full rights as an EU Member State until it leaves the EU. Authorisations take time, so entities that wish to re-locate must contact the relevant EU27 NCA as soon as possible;
  • Principle two: authorisations granted by EU27 NCAs should be rigorous and efficient – with any conditions set met from day one of the authorisation;
  • Principle three: NCAs should be able to verify the objective reasons for relocations - with NCAs checking the planned EU27-based activity is "the main driver";
  • Principle four: special attention to avoid letter-box entities in the EU27 - NCAs to reject a relocation request where there is to be substantial outsourcing and delegation so as to benefit from the EU passport but perform the main activities or functions outside the EU27;
  • Principle five: outsourcing and delegation to third countries is only possible under strict conditions;
  • Principle six: NCAs should ensure that substance requirements are met - implying the presence in the EU27 of key functions and activities. The opinion lists some which need to be particularly scrutinised and that, in certain (unspecified) "sector specific circumstances" cannot be outsourced/delegated without jeopardising the activity of the regulated entity and of the supervisor to supervise effectively;
  • Principle seven: NCAs should ensure sound governance of EU entities – ESMA expects key executives and senior managers of EU authorised entities to be employed in the Member State of establishment and work there "to a degree proportionate to their envisaged role, if not on a full-time basis";
  • Principle eight: NCAs must be in a position to supervise effectively and enforce Union law; and
  • Principle nine: coordination to ensure effective monitoring by ESMA.

Next steps: ESMA will develop "sector-specific opinions" - including for asset managers. It expects to do so before the summer of 2017, according to Stephen Maijoor's speech "Looking to the Future" [07.06.17] to the Futures Industry Association IDX Conference, London.


ESMA's response to the Commission's Consultation Paper on "Fintech: A more competitive and innovative financial sector"

ESMA has responded [07.06.17] to the Commission's Fintech consultation paper and notes that fintech and technological developments generally have led to a range of developments in the financial services industry, generating new businesses such as automated advice and crowd funding. ESMA has a positive view of such developments if they improve customer experience and enhance financial inclusion. ESMA agrees the core principles - technological neutrality, proportionality and market integrity - must inform EU policies, ensuring the financial sector takes advantage of new technologies while being "sound and safe for investors". ESMA shares its views on a range of topics the Commission consulted on, including:

  • AI and big data analytics for automated advice and business;
  • crowd funding;
  • regtech;
  • outsourcing and cloud computing;
  • distributed ledger technology;
  • the role of regulation and supervisors; and
  • the role of industry - standards and interoperability.

Its Annex contains "Investment-based crowd funding: Insights from regulators in the EU". This touches on the regulatory status of investment-based crowd funding platforms in the EEA including the rules that regulate them, their services and capital requirements and how this compares with the situation in 2014. It analyses the investment instruments, structures and remuneration models platforms use. In this context 'regulated platforms' means platforms directly authorised/registered under EU or national law or which are tied agents of authorised/registered firms.

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Read our recent article on Private Fund Limited Partnerships (PDF, 428 KB).

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