On 27 March 2014, the European Securities and Markets Authority (ESMA) published an opinion in relation to good practices for product governance arrangements for structured retail products. This paper was a follow-up to some of the issues raised by ESMA in its July 2013 report on “Retailisation in the EU.” The opinion paper sets out a broad set of non- exhaustive examples of good practices that ESMA believes firms should put in place to enhance investor protection, particularly in relation to the complexity of structured retail products they manufacture or distribute, the nature and range of the investment services and activities undertaken in the course of that business, and the type of investors they target. ESMA states that the good practices should be a helpful tool for competent authorities in carrying out their supervisory action.
The good practices recommended in the opinion cover (i) the general organization of product governance arrangements, (ii) product design, (iii) product testing, (iv) identification of target market, (v) distribution strategy, (vi) value at the date of issuance and transparency on costs, (vii) secondary market and redemption, and (viii) the review process. The overall themes of the opinion include the need for transparency and consistency in product governance arrangements, ensuring that in developing the product, priority is given to meeting the financial needs, investment objectives, and knowledge and experience of the target market and taking into account potential risks arising from the way that products are distributed (whether directly or indirectly) to investors.
The ESMA opinion is consistent with the approach already taken by some competent authorities in the EU. The UK’s Financial Conduct Authority (FCA) (through its predecessor, the Financial Services Authority) has already published similar guidance on structured products. Many of the recommendations in the opinion are also consistent with principles for managing the provider/distributor relationship and distributor/individual investor relationship previously published by the Joint Associations Committee on retail structured products. It is therefore unlikely to have a major impact on the way structured products are manufactured and distributed in the EU. However, it may be helpful in facilitating a consistent approach for competent authorities in the supervision of structured retail products.
The opinion may be found at the following link: http://www.esma.europa.eu/system/files/2014 332_esma_opinion structured_retail_products_-_good_practices_for_product_governance_arrangements.pdf.