Circular C236 (Product Governance requirements under MiFID II)

Through the Circular, CySEC informs CIFs, UCITS MC, AIFMs (“the Reporting Entities”) on their obligations regarding product governance requirements, as provided in Law 87(I)/2017 (“the Law”) which transposes MiFID II, and in other documents issued pursuant to this. These requirements will enter into force on 03.01.18 aiming to:

• enhance the level of investor protection, through avoidance and reduction of potential risks from failure of investor protection rules, by the Reporting Entities who manufacture and distribute financial instruments; and
• comply with product governance requirements, meaning to regulate all stages of the life-cycle of products or services to ensure that, firms which manufacture and distribute financial instruments and structured deposits, act in the clients’ best interests; and
• address issues specific to:

1. Manufacturers (i.e. the Reporting Entities  that create, develop, issue and/or design financial instruments, including when advising corporate issuers on the launch of new financial instruments); and
2. Distributors (i.e. the Reporting Entities that offer or sell financial instruments and services to clients).

Particular sections of the legislation which provide for the product governance requirements, include:

1. Articles 17(3) and 25(2) of the Law;
2. Chapter III of Commission Delegated Directive (EU) 2017/593 regarding safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (soon to be transposed into National Law as a Directive);
3. ESMA35-43/620 guidelines on MiFID II product governance requirements.

The Circular provides detailed product governance requirements for:

1. 1. Reporting Entities manufacturing Financial Instruments;
   2. Reporting Entities distributing Financial Instruments;
   3. All Products (i.e. financial instruments and structured deposits) sold on primary and secondary markets, irrespective of the type of product or service provided and of the requirements applicable at point of sale.

Note: Products manufactured and distributed before 03.01.18 do not fall within the scope of product governance requirements.

CySEC’s expects that: By 31.12.17 the Reporting Entities must provide CySEC with a declaration from their Board of Directors that, they have taken all appropriate measures to comply with the law and all the relevant documents issued pursuant to the Circular as of 03.01.18. The declaration should be submitted through:

• CySEC’s web portal as a free text and have the following title: “C236 – Product Governance under MiFID II – Obligations for Regulated Entities”.

Clarifying on the above, Reporting Entities must look at the product governance requirements and undertake an analysis of their existing procedures and arrangements regarding their products offered and services provided. They must also take appropriate measures and ensure that from 03.01.18 onwards they will comply fully with these requirements. Among the matters to be considered by Reporting Entities, are:

1. Target market identification (e.g. a target market for each product should be identified, the types of clients, their needs, characteristics, objectives, financial situation, risk tolerance, knowledge and experience should be specified, how factors that might affect target market are monitored and how are reflected in the target market).
2. Stress testing of existing products (e.g. whether these are robust, all risks posed by products are identified and fit with the identified target market and risks are adequately disclosed to investors).
3. Organisational requirements – corporate governance issues (e.g. whether the staff involved have the necessary expertise, what are the duties/responsibilities of the board of directors and what is the role of the compliance function in this process).
4. Charging structure (e.g. whether the charging structure is fair and clear to investors).
5. Manufacturer/distributor liaison (e.g. who are the distributors, whether distribution chain is known, what information should be collected and how is collected and provided to distributors, whether distributors understand the product or further education is needed).
6. Agreements (whether the agreements between manufacturers, distributors, collaborated entities should be revisited).

Staff should at least be qualified in line with R.A.D.174/2015, i.e. be holders of Basic or Advanced Certification and be registered in CySEC Public Register of certified persons.