Updated ESMA guidelines on MiFID II product governance requirements

On 3 August 2023, ESMA issued updated Guidelines on MiFID II product governance requirements (“Guidelines”), enhancing the MiFID II investor protection framework. On 14 September 2023, the CSSF published Circular CSSF 23/840, thereby formally informing the in-scope entities under its supervision that it would apply the Guidelines as from their date of application, namely 3 October 2023.

The Guidelines recast and replace the previous ESMA Guidelines on this topic.

The main objective of the Guidelines is to further emphasise the importance of understanding the needs and characteristics of the target market and of ensuring that products are designed and distributed accordingly.

The main changes brought about by the Guidelines relate to recent regulatory and supervisory developments and are the following:

• updated definitions of “manufacturer”, “distributor” and “products”;
• integration of sustainability-related objectives within the broad category of clients’ objectives and needs;
• introduction of the possibility to resort to a “clustering approach” for the definition of a target market per cluster of products with comparable homogeneous characteristics instead of an individual approach;
• further detailed rules on the compatibility of the distribution strategy in the context of non-advised sales of more complex products; and
• refined rules regarding the periodicity of the product review, applying the principle of proportionality.

It is expected that the Guidelines will be complemented by questions and answers from ESMA.

Furthermore, it is worth mentioning that on 3 October 2023, ESMA announced that it will launch a Common Supervisory Action (CSA) with national competent authorities (NCAs) on the integration of sustainability in credit institutions’ and investment firms’ MiFID II suitability assessment and product governance processes and procedures in 2024.