Following a period of consultation with the sector, the Dutch Authority for the Financial Markets (the AFM) has published the final guideline on ‘Scenario analyses from a customer perspective’ for the Product Approval and Review Process standard (the Guideline). With the publication of the Guideline, the AFM provides a framework for developers and co-developers of AIFs and UCITS marketed to Dutch retail investors to perform the scenario analyses as part of their Product Approval and Review Process (PARP). The Guideline is relevant for all (co-)developers covered by the PARP standard.
The requirement to apply a PARP also applies to licensed alternative investment fund managers (beheerders) who offer interests in alternative investment funds (beleggingsinstellingen) and UCITS to “retail investors”.
An important part of the PARP are the scenario analyses. Parties are required to use scenario analyses to examine the operation of a financial product in various circumstances (scenarios). This process gives them 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 outcomes of scenario analyses, the (co-)developer can adjust the financial product, target group and/or distribution strategy.
From its research, the AFM has noted that (co-)developers have difficulty, for example, in designing the scenario analyses and using the results of the analyses in the balanced weighing of interests that is required as part of the PARP. The AFM also noted that firms often conduct scenario analyses from the firm's perspective and examine the impact on the product’s target market (the customer perspective) to a lesser extent.
With the Guideline, the AFM aims to provide tools that (co-)developers can use to improve their scenario analyses. Therefore, the AFM provides a step-by-step plan for conducting thorough scenario analyses and answers the following questions:
- Why are scenario analyses important?
- How can a firm carry out scenario analyses?
- What do scenario analyses provide?
Additionally, the Guideline contains examples of scenario analyses for various product groups.
Next steps
Parties are recommended to evaluate whether their current PARP, and more specifically the scenario analyses included in it, are compliant with the new guidance from the AFM.