The issue of Mifid II has once more come under the spotlight with a warning from Morningstar that time is running out for fund distributors to integrate so-called target market data requirements into their processes, systems and documents, because of a lack of clarity on how to proceed with implementation.
Although regulators have issued guidelines for target market categories, “the industry has yet to finalise how they should be applied,” warns Connor Sloman, head of Products and Client Solutions for Morningstar in EMEA.
“From January 2018, distributors must use target market data from manufacturers when distributing products and making investment recommendations to clients. Distributors must also report back to manufacturers on how they have distributed their products through client portfolios on an aggregated level.”
“The product governance requirements are aimed at enhancing investor protection by making sure that firms manufacture and distribute investments in an investor’s best interests. Distributors must assess the type of client a product is targeted at in terms of knowledge and experience, and their financial situation, with a focus on risk tolerance, objectives and the ability to bear losses.”
“Mifid II is not black and white for advisers when it comes to using target market information in their investment recommendations. There may be circumstances where it is appropriate for a product to be sold to an investor in a different target market, but advisers must justify their individual security decisions as enhancing the suitability or diversification of the investor’s portfolio.”
“Once distributors have access to target market data, they may start reviewing their investment lineups to see where they can simplify and improve the quality of the funds on their platform. Distributors may begin to reconsider whether broad product ranges are relevant or efficient, with some rationalisation likely as a result.”
“Certain details around target market data reporting requirements remain unclear, and regulators and industry working groups are still collaborating on what’s required. Distributors will be required to report on a proportionate and aggregate basis, highlighting where products are sold outside of a manufacturer’s intended target market. Where a manufacturer is a non-Mifid firm – for example a Ucits asset manager or an AIFM – that is providing sufficient detail to the distributor, the distributor’s reporting back to that manufacturer will depend solely on the contractual arrangement between the parties.”
In a note on the target market requirements outlined by PwC Luxembourg earlier in 2017, the consultancy noted that there are a number of choices distributors must make in their response to the guidelines put out by the European Securities and Markets Authority.
Meanwhile, providers and distributors must also ensure they implement suitable treatment of products that may be in distribution before the 3 January Mifid II deadline, and which continue to be distributed thereafter, according to a note from Ashurst a full year back:
“Where a product is manufactured before 3 January 2018 but distributed thereafter it will require the distributor to treat the manufacturer as if it was a non-Mifid II entity. However, MiFID II requirements should be complied with in either scenario from the date of the next product review process cycle after 3 January 2018.”