On 5 October 2016, the European Security and Markets Authority (ESMA) has opened a consultation for all market participants, about product governance guidelines under MiFID II regarding the target market assessment to be made by manufacturers and distributors.

Both manufacturers and distributors should consider - in respect of such assessment - the following categories in order to:

  1. Identify the relevant target market in respect of their products.
  2. Determine whether or not such products are compatible with the identified target market.

In particular, they need to assess:

  • The type of client to whom the product is targeted
  • Knowledge and experience
  • Financial situation with a focus on the ability to bear losses
  • Risk tolerance and compatibility of the risk/reward profile of the product with the target market
  • Clients' objectives
  • Clients' needs

The required identification should be carried out considering the tools of the investment product - including its complexity, risk-reward profile, liquidity or innovative features - and the profile of the targeted clients. To this end, distributors should consider, inter alia, the information collected when they are providing investment and ancillary services.

In addition, both manufacturers and distributors should carry out a regular review to assess whether products and services are reaching the target market.

All the financial instruments set out under section C of annex I to MiFID II will be covered by ESMA guidelines, and to this purpose, the target market requirements should be applicable irrespective of whether such financial instruments are addressed to professional investors or to retail investors. The consultation will end on 5 January 2017.

View the consultation paper (English only).