European UnionMiFID II Product Governance for Manufacturers and Distributors of Financial Instruments (Articles 16(3) and 24(2) and Delegated Directive 2017/593 Articles 9 and 10)
In force since .
An AI sector rules rule binding public and private bodies.
- Obligation class
- Governance
- Audit expectation
- continuous
- Who audits it
- Self
- Where the report goes
- Produced on request
As of .
What it requires
- Directive 2014/65/EU is addressed to the Member States (Article 97), which had to adopt and publish the measures necessary to comply with it by and apply them from (Article 93(1), as amended by Directive (EU) 2016/1034, Article 1, point (7)); Delegated Directive (EU) 2017/593 is addressed to the Member States (Article 16), which had to adopt and publish the measures necessary to comply with it by and apply them from (Article 14(1)), and Delegated Directive (EU) 2021/1269 changed its Articles 9 and 10 for the measures that Member States apply from (Article 2(1)), so an investment firm meets these rules through each Member State's national law.
- It reaches you if you are an investment firm, meaning a legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis (Directive 2014/65/EU, Article 4(1), point (1)), that manufactures financial instruments for sale to clients, or that offers or recommends financial instruments: maintain, operate and review a process for the approval of each financial instrument and significant adaptations of existing financial instruments before it is marketed or distributed to clients, specify in that process an identified target market of end clients within the relevant category of clients for each financial instrument, assess all relevant risks to that target market, and make sure the intended distribution strategy is consistent with it (Directive 2014/65/EU, Article 16(3)).
- Regularly review the financial instruments you offer or market, taking into account any event that could materially affect the potential risk to the identified target market, to assess at least whether each remains consistent with the needs of the identified target market and whether the intended distribution strategy remains appropriate (Article 16(3)).
- If you manufacture financial instruments for sale to clients, make available to any distributor all appropriate information on the financial instrument and the product approval process, including the identified target market (Article 16(3)), ensure that the instruments are designed to meet the needs of an identified target market of end clients, that the strategy for distribution is compatible with it, and take reasonable steps to ensure that the instrument is distributed to it (Article 24(2)).
- If you offer or recommend financial instruments that you do not manufacture, have in place adequate arrangements to obtain the information a manufacturer must make available and to understand the characteristics and identified target market of each financial instrument (Article 16(3)); understand the financial instruments you offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom you provide investment services, also taking account of the identified target market, and ensure that financial instruments are offered or recommended only when this is in the interest of the client (Article 24(2)).
- Ensure that the relevant staff involved in the manufacturing of financial instruments possess the necessary expertise to understand the characteristics and risks of the financial instruments you intend to manufacture (Delegated Directive (EU) 2017/593, Article 9(5)), and that the relevant staff involved in offering or recommending products possess the necessary expertise to understand the characteristics and risks of the products and services and the needs, characteristics and objectives of the identified target market (Article 10(7)).
- If you manufacture financial instruments, identify at a sufficiently granular level the potential target market for each financial instrument and specify the type or types of client with whose needs, characteristics and objectives, including any sustainability related objectives, the financial instrument is compatible (Article 9(9), as replaced by Delegated Directive (EU) 2021/1269), undertake a scenario analysis that assesses the risks of poor outcomes for end clients posed by the product and in which circumstances they may occur (Article 9(10)), and give distributors information about the appropriate channels for distribution, the product approval process and the target market assessment that is of an adequate standard to enable them to understand and recommend or sell the financial instrument properly (Article 9(13)).
- If you distribute financial instruments, determine the target market for each financial instrument even if the manufacturer did not define it (Article 10(1)), and have in place adequate product governance arrangements to ensure that the products and services you intend to offer or recommend are compatible with the needs, characteristics and objectives, including any sustainability related objectives, of an identified target market and that the intended distribution strategy is consistent with it (Article 10(2), as replaced by Delegated Directive (EU) 2021/1269).
- Ensure that the management body has effective control over your product governance process, that compliance reports to the management body systematically include information about the financial instruments you manufacture, and that the compliance function monitors the development and periodic review of your product governance arrangements; make the compliance reports available to the competent authority on request (Delegated Directive (EU) 2017/593, Article 9(6) and (7)).
Who enforces it
Enforcement body
The competent authorities that each Member State designates under Article 67(1) of Directive 2014/65/EU to carry out the duties provided for under the Directive and Regulation (EU) No 600/2014.
What this law does
Article 16(3) of Directive 2014/65/EU requires an investment firm that manufactures financial instruments for sale to clients to maintain, operate and review a process for the approval of each financial instrument and significant adaptations of existing financial instruments before it is marketed or distributed to clients.
The product approval process must specify an identified target market of end clients within the relevant category of clients for each financial instrument and ensure that all relevant risks to that target market are assessed and that the intended distribution strategy is consistent with it.
Article 16(3) also requires the firm to regularly review the financial instruments it offers or markets, taking into account any event that could materially affect the potential risk to the identified target market.
Where an investment firm offers or recommends financial instruments which it does not manufacture, Article 16(3) requires it to have in place adequate arrangements to obtain the information a manufacturer must make available and to understand the characteristics and identified target market of each financial instrument.
Article 24(2) requires an investment firm that manufactures financial instruments for sale to clients to ensure that they are designed to meet the needs of an identified target market of end clients, that the strategy for distribution is compatible with the identified target market, and that it takes reasonable steps to ensure that the instrument is distributed to the identified target market.
Article 24(2) also requires an investment firm to understand the financial instruments it offers or recommends, to assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services, also taking account of the identified target market, and to ensure that financial instruments are offered or recommended only when this is in the interest of the client.
Article 9(5) of Delegated Directive (EU) 2017/593 requires an investment firm to ensure that relevant staff involved in the manufacturing of financial instruments possess the necessary expertise to understand the characteristics and risks of the financial instruments they intend to manufacture.
Article 9(9), as replaced by Delegated Directive (EU) 2021/1269, requires a manufacturer to identify at a sufficiently granular level the potential target market for each financial instrument and to specify the type or types of client with whose needs, characteristics and objectives, including any sustainability related objectives, the financial instrument is compatible.
Article 9(10) requires a manufacturer to undertake a scenario analysis of its financial instruments that assesses the risks of poor outcomes for end clients posed by the product and in which circumstances these outcomes may occur.
Article 9(13) requires the information a manufacturer provides about a financial instrument to distributors to include information about the appropriate channels for distribution, the product approval process and the target market assessment, and to be of an adequate standard to enable distributors to understand and recommend or sell the financial instrument properly.
Article 10(1) requires a distributor to determine the target market for the respective financial instrument even if the manufacturer did not define it.
Article 10(2), as replaced by Delegated Directive (EU) 2021/1269, requires an investment firm to have in place adequate product governance arrangements to ensure that products and services it intends to offer or recommend are compatible with the needs, characteristics and objectives, including any sustainability related objectives, of an identified target market and that the intended distribution strategy is consistent with that target market.
Article 10(7) requires an investment firm to ensure that relevant staff possess the necessary expertise to understand the characteristics and risks of the products it intends to offer or recommend and the services provided, as well as the needs, characteristics and objectives of the identified target market.
None of these provisions requires a firm to explain a decision, and none refers to a decision made by an automated system or an algorithm; the duties run to the firm's staff, who must understand the instruments, and to the manufacturer, which must give distributors information of an adequate standard.
Article 14(1) of Delegated Directive (EU) 2017/593 requires Member States to adopt and publish the measures necessary to comply with it by at the latest and to apply them from . Article 2(1) of Delegated Directive (EU) 2021/1269 requires Member States to adopt and publish the measures necessary to comply with it by at the latest and to apply them from .
Article 1, point (7), of Directive (EU) 2016/1034 replaces in Article 93(1) of Directive 2014/65/EU the date for adopting and publishing the transposing measures, , with , and the date for applying them, , with . Article 70(3), point (a), of Directive 2014/65/EU lists Article 16(1) to (11) and Article 24(1) to (5) and (7) to (10) among the provisions an infringement of which Member States shall regard at least as an infringement of the Directive.
Article 70(1) requires Member States to lay down rules on, and ensure that their competent authorities may impose, administrative sanctions and measures applicable to all infringements of the Directive.
Article 70(6) requires Member States to give competent authorities the power to impose at least maximum administrative fines of at least EUR 5,000,000 on a legal person, or of up to 10% of its total annual turnover, of at least EUR 5,000,000 on a natural person, and of at least twice the amount of the benefit derived from the infringement where that benefit can be determined, so the amounts are floors for the maximum fines that Member States must make available and not fines that the Directive imposes on a firm directly.
When LexLint raises it
When your app profile says your app provides financial services.