The response by the European Federation of Financial Intermediaries and Financial Advisers to Esma’s consultation on its Product Oversight and Governance rules came on the same day as the 1,400-word resignation email to staff by the UK’s outgoing ambassador to the EU, Ivan Rogers, was made public, after his departure from the post of permanent representative on 3 January.
Rogers said in the email that “serious multilateral negotiating experience” was in short supply in Whitehall, and that the UK government would “only achieve the best for the country if it harnesses the best experience and negotiates resolutely”.
“Senior ministers, who will decide on our positions, issue by issue, also need from you detailed, unvarnished – even where this is uncomfortable – and nuanced understanding of the views, interests and incentives of the other 27 [countries]”, he added.
Esma showed ‘lack of understanding’
Fecif had particular concerns that Esma had “little consideration or understanding” of open architecture platforms aimed at advisers and other intermediaries.
Fecif chairman Johannes Muschik said there had been a change to Mifid II’s definition of the “target-market” which must be assessed and identified by manufacturers of financial instruments within their product governance process.
Distributors, including advisers and intermediaries must gather all information about the target-market of each financial product that they intend to offer to their clients. There is also the concept of a “distribution strategy”.
“Esma seems to have introduced a new definition for this, which was not the one intended in the level 1 (Mifid II) text, inferring that manufacturers also need to define “distribution strategies” and distributors need to gather all information about the distribution strategy of each financial product that they intend to offer to clients. Esma is obviously assuming that there is always a direct relationship between manufacturers and distributors. However, this is not the case”.
Muschik said in many European member states the most common business models of cooperation between manufacturers and distributors are via “open-architecture” platforms, which often cooperate with thousands of different manufacturers and with hundreds or even thousands of distributors, all at the same time.
“It seems apparent that the concept of “distribution strategy” introduced by ESMA will never work within the world of open-architecture.
“Manufacturers are simply physically unable to foresee or oversee the individual distribution strategies of so many distributors, who are usually totally unknown to them – as both parties are solely contracting with the platform and never have any direct interaction at all. This appears to show a lack of understanding of how the market works”.
Binding deadline
Another concern for Fecif was the binding deadline for distributors to meet the new requirements by 3 January 2018, but no stated specific date for manufacturers.
Stanfield said: “For the period between that date and the undefined date on which the manufacturers will have to confirm a definitive target market for their products, it seems that the sole responsibility for defining target-markets will be transferred to the distributor.
“This means that the distributer should effectively act as if the manufacturer was an entity not subject to Mifid II product governance requirements. Such an approach for Mifid II regulated entities would be practically impossible.”
Stanfield said the situation raised all sorts of questions including whether clients would automatically have a right of cancellation, and if the distributor should inform the customer at outset that they believe they have correctly identified the appropriate target market.
“None of these scenarios are ones that ultimately protect consumers in an appropriate manner,” Stanfield said.
Priips amendment not agreed
In a further development on the European regulatory front, the three bodies that make up the European Supervisory Authority said in a letter to the European commission that they could not collectively agree to a proposed amendment to the Priips directive.
Signed by the European Insurance and Occupational Pensions Authority chair Gabriel Bernardino, European Banking Authority chair Andrea Enria, and Esma chair Steven Maijoor, the letter sent in December said they had “differing views expressed in particular concerning the treatment of multi-option products, the criteria to determine whether a comprehension alert should be included in a Kid, and the provisions in the RTS on the credit risk mitigation factors for insurers”.
