On 3 December 2024, the Dutch Authority for the Financial
Markets (AFM) has published guidelines on the
‘Scenario analyses from a customer
perspective' for the Product Approval and Review Process
standard. These guidelines aim to provide tools for financial
undertakings, that offer or create financial products and make them
available in the market, to better perform scenario analyses in the
context of the PARP.
In this blog, we have outlined the relevant aspects of the
guidelines for Dutch investment firms, insurance companies and
offerors of credit offering financial products to in-scope
clients.
Background
Since 2013, statutory requirements apply for the manufacturing and distributions of financial products by financial undertakings to the appropriate target market ('product governance'). Product governance is often referred to as the Product Approval and Review Process (PARP). Financial undertakings are expected to organise and implement their PARP with due care in accordance with Article 32 et seq. of the Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Bgfo)and as further outlined in sectorial legislative. The PARP requirements apply to (among others) investment firms, insurance companies, offerors of credit offering financial products to in-scope clients, and distributors of insurance products (i.e., insurance intermediaries).
PARP
General
The AFM devotes constant attention to product development and evaluation by financial undertakings. An important part of this process is the scenario analysis (as further discussed below). Investment firms, insurance companies and offerors of credit who offer or create financial products and make them available in the market to in-scope clients are obliged to conduct such analysis. Exemptions do however also apply. For example, the product governance obligations do not apply to investment firms that only distribute financial instruments to eligible counterparties. The product governance rules are considered an important aspect of business operations: non-compliance with the relevant provisions has resulted in administrative fines in the not-too-distant past.
AFM research
The AFM's research shows that financial undertakings have difficulty in designing their scenario analyses and using the results of the analyses in the balanced weighing of interests that is required as part of the PARP. Additionally, it has shown that financial undertakings often conduct scenario analyses from the firm's perspective rather than from consumer's perspective. To provide financial undertakings with tools to better implement scenario analysis, the AFM has established guidelines on the ‘Scenario analyses from a customer perspective'.
Guidelines
Scope
The Guidelines are applicable to financial undertakings offering or creating financial products and making these available in the market (i.e., (co-)developers). We note that the Guidelines do not apply to per se distributors (such as intermediating financial service providers, including insurance intermediaries). According to the AFM, distributors may nevertheless carry out additional analyses for their distribution strategy for which the Guidelines may also be relevant.
Scenario analysis
Financial undertakings should use scenario analyses to examine
the operation of the product in various circumstances (scenarios).
This provides financial undertakings visibility on the operation of
the product and enables them to check whether it continues to
fulfil the target market's objectives in the specific
circumstances. Based on the results of the analysis, financial
undertakings can then consider adjusting the target market,
distribution strategy or financial product.
The Guidelines furthermore give guidance on how, which, and when
scenario analyses can be used. The Guidelines also contain several
examples of scenario analyses and follow-up measures based on the
analysis for various product groups including insurance, credit and
investments products. Relevant scenarios include life events of
clients, changing regulation but also sustainability. As an
example, the AFM refers to sustainability scenarios for insurances
in the context of climate change.
The AFM emphasises that the Guidelines do not provide an exhaustive
overview of all requirements regarding scenario analyses and do not
serve as a substitute for sectoral legislation. However, the AFM
expects that with the Guidelines, financial undertakings will be
able to perform adequate development and evaluation of financial
products, which will contribute to better consumer protection and
more trust in the financial sector.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
