From 3 January, Mifid II product governance will call for a change in how fund distributors and their asset management partners communicate with each other. But while the deadline is looming, not all stakeholders are doing enough to meet the demanding requirements.
The regulators, on the other hand, are moving forward with their plans. Earlier this month, the European Securities and Markets Authority issued a Q&A detailing what is expected from firms. These guidelines seek to ensure common, uniform and consistent application of the Mifid II requirements across the EU.
The regulation’s stated goals are the reduction of product misselling and the creation of a level playing field, thus facilitating greater, more efficient, cross-border activity.
In addition to increased transparency regarding investment target markets and costs and charges, product manufacturers will need to collect information from their distribution network confirming whether products have been sold to a suitable investor.
This will require closer communication between asset managers and platforms, wealth managers, advisers and so on.
In order to provide key sets of data to their distribution network, fund managers will need to act in consort, which means standardising the information they produce. Luckily, we have seen significant progress in this area, with the European Mifid Template issued by European trade associations in conjunction with industry firms.
Esma’s guidelines also clarified the fact portfolio management and reception/transmission of orders does fall under scope of activity requiring product governance. While this is not what discretionary portfolio managers wanted to hear, it was to be expected.
The rules do allow for an exemption on reporting of sales outside the positive target market where the sale relates to hedging or diversification but there are limitations to that.
Crossover with Priips
Then there is the issue of how Mifid II fits in with other regulations. Here, the regulator has tried to encourage crossover and commonality to come extent.
For example, in its Q&A, ESMA focused on the alignment between Mifid II and Priips, stating that where costs and charges are disclosed in a Priips Key Investor Document, this methodology can be used for Mifid II.
However, if a Priips is limited in its scope when compared to Mifid II and a KID is not available, distributors will need to liaise with their manufacturers.
Priips does provide a target market disclosure framework which could, at first glance, be used in Mifid II – but the problem here is that the method of disclosure differs from that recommended by industry working groups.
Priips’ target market is provided in text, while the EMT provides a coded target market that allows for automation of the process. The upshot of this is that both the Priips KID and Mifid EMT will have to be used by market participants.
One final issue (and one that is the most worrying) is the return of data up the sales chain, starting with the end adviser and going back to the original manufacturer.
Esma has clarified the obligation of distributors to provide sales reporting to manufacturers. This confirmation is to be welcomed, as distributors have been focusing on disclosure of costs and charges as their primary obligation to date.
That said, the clarification puts the spotlight on a worrisome difference in approach. On the manufacturer’s side there is a concerted effort through the European Fund and Asset Management Association to define standards for the required data exchange. However, on the distributor side, there is no equivalent to EFAMA coordinating the process, nor any structure advising how to provide sales reporting back to manufacturers.
As a result, there is a risk each jurisdiction may create its own methodology for the sales reporting process. This would not only be an unintended consequence for Mifid II but potentially a very problematic hurdle for advisers and managers further down the line.
John Dowdall is managing director of Silverfinch