BVI 1 position on ESMA s consultation paper (CP) regarding draft guidelines on MiFID II product governance requirements

Transcription

1 Frankfurt am Main, 5 January 2017 BVI 1 psitin n ESMA s cnsultatin paper (CP) regarding draft guidelines n MiFID II prduct gvernance requirements MiFID Prduct Gvernance rules have the ptential t significantly alter the distributin landscape f financial instruments including fund units. BVI therefre very much welcmes ESMA s cnsultatin n the draft guidelines regarding prduct gvernance requirements. While we appreciate that fund management cmpanies are nt bliged t fulfil the prduct gvernance requirements unless they render the MiFID services f individual prtfli management, investment advice, safe-keeping f fund units r receptin and transmissin f rders in ther financial instruments, fund managers will have t prvide distributrs with prduct gvernance infrmatin fr business reasns. ESMA s apprach t the prduct gvernance requirements is generally helpful in prviding guidance fr the implementatin. A cherent apprach f the target market requirements is crucial fr a successful implementatin nt nly fr asset managers and market participants but in particular fr investrs. In this regard, specific wrding as well as suggestins that culd be read int the guidelines shuld be amended in rder t achieve the bjectives f the prduct gvernance requirements, i.e. enhancing the level f investr prtectin by requiring firms t take respnsibility frm the cnceptin f a prduct until it is n lnger available fr the market. In particular, the apprach shuld nt jepardise investrs access t diversified prtflis and a cmpetitive market. It is decisive that in case f prtfli management, the fcus is n the manager s respnsibility t ensure the cmpatibility f the prtfli with the needs, bjectives and characteristics f the client. An apprach requiring each and every prduct t be cmpatible with the target market als in case f prtfli management ignres the benefits f diversificatin t the detriment f investrs. Furthermre, it is crucial t keep the cmplexity t the minimum required in rder t achieve investr prtectin: the mre cmplex the requirements are, the mre likely distributrs will significantly reduce their spectrum f financial instruments which are ffered t investrs tday. Fr any qualitative criteria and discretinary add-ns a single IT readable target market cncept will be difficult t establish. In particular manufacturers ffering prducts crss-brder r generally having hundreds f different distributin partners, it is vital t be able t use IT systems as far as pssible. If this cannt be achieved, this will have a significant impact n the crss-brder distributin f funds and the availability f prducts thrughut the Eurpean Ecnmic Area, thereby endangering any ptential benefits deriving frm the EU Cmmissin s aim t increase cmpetitin in the fund market. In this regard, we nte that mst f the wrding ESMA uses fcuses n cmplex prducts. While we appreciate that it is imprtant t enhance investr prtectin fr these prducts, target market requirements apply t all srts f prducts including very basic prducts, such as a standard Eurpean Equity fund. We are sympathetic that ESMA needs t ensure that there is n misuse f such prducts. Hwever, ESMA shuld ensure nt t limit investrs access t cmmn mass market prducts by using a wrding which is drafted mainly with a fcus n a ptential risk f cmplex prducts being mis-sld. 1 BVI represents the interests f the German investment fund and asset management industry. Its 98 members manage assets f sme EUR 2.8 trillin in UCITS, AIFs and discretinary mandates. As such, BVI is cmmitted t prmting a level playing field fr all investrs. BVI members manage, directly r indirectly, the assets f 50 millin private clients in ver 21 millin husehlds. BVI s ID number in the EU Transparency Register is Fr mre infrmatin, please visit

2 Page 2 f 11 We als appreciate ESMA s effrt in aligning the target market cncepts with the requirements accrding t the PRIIPs Regulatin as well as the IDD. This shuld be pursued in rder t facilitate effective implementatin and investr prtectin by the target market regime fr all investment prducts. Q1: D yu agree n the list f categries that manufactures shuld use as a basis fr defining the target market fr their prducts? If nt, please explain what changes shuld be made t the list and why. Cnclusive list is decisive: As a general remark, we encurage ESMA t clarify that the list is cnclusive. We believe that any ther aspects f the target market which shuld be cnsidered culd be added as a subcategry in the existing cmprehensive list f criteria. Any case-by-case apprach wuld als jepardise the practicability f the target market cncept, thereby likely restricting the number f prducts available fr investrs. IT-readable criteria: While we understand that manufacturers shuld base their assessment n bth quantitative and qualitative criteria, we urge ESMA t clarify that such assessment has t be clearly distinguished frm the result f such prduct assessment, i.e. the infrmatin t be shared with the distributrs. Again, this has t be prvided thrugh IT systems and hence qualitative infrmatin cannt be shared. Distinctin between manufacturers and distributrs knwledge: Althugh the list generally can be used in practice, the descriptin f the categries culd reflect better that the manufacturer has infrmatin n the prduct and n detailed, specific r individual infrmatin n clients. Further, we recgnise that ESMA des nt clearly distinct between the suitability test t be made in case f prtfli management r investment advice n the ne hand and the prduct gvernance prcess including the target market determinatin n the ther hand. Criteria fr prduct manufactures shuld hence fcus n the prduct features, while distributrs shuld use thse prduct features as described belw (Q4) in rder t match the target market with their client base. ESMA pints ut crrectly that the manufacturers usually d nt have direct client cntact and therefre can nly base their target market identificatin n theretical knwledge. Cnsequently, their fcus is n the features f the prduct and nt the client s characteristics. In general, it is als imprtant t allw sufficient rm fr first-time investrs t be able t invest in MiFID prducts ther than gvernment bnds. Fr instance, an unstructured, unleveraged UCITS investing in Eurpean standard equities shuld be a financial instrument available fr first-time investrs. Remarks regarding specific criteria: While we d nt have specific cmments n the criterin client type, we wuld like t raise the fllwing practical cnsideratins regarding the ther criteria: - Knwledge and experience: We appreciate that the wrding allws fr taking prduct specifics int accunt. Hwever, in rder t have an IT-readable apprach, it will be necessary t define subcategries such as basic, infrmed and specific knwledge/experience regarding prducts, e.g. in case f additinal payment bligatins. Where relevant, the prduct specifics as suggested by ESMA culd be taken int accunt when allcating the prducts t each grup. We understand that such an apprach wuld be in line with the prpsed guidelines. Furthermre, investrs d nt need t have bth knwledge and experience in all cases. In particular first-time investrs d nt have any experience. They shuld, hwever, be able t buy simple financial instruments withut thse being distributed utside the target market. Furthermre, regulatins require specific ffering dcuments such as a PRIIPs KID r a UCITS KIID. Thse dcuments have t be made available in rder t prvide the investr with the knwledge he requires t understand the risks and ptential utcmes f an investment in a financial instrument. It is imprtant t bear in mind that the investr des nt need t understand each element f the investment strategy.

3 Page 3 f 11 - Financial situatin and ability t bear lsses: We appreciate that ESMA takes int accunt the limitatins f manufacturers knwledge f the clients specifics. In this regard, we strngly supprt ESMA s apprach nt t require mandatry disclsure f the maximum prprtin f the client net assets he shuld invest. It wuld simply nt be pssible fr the manufacturer t determine this n an abstract level in a way beneficial fr investrs since their financial circumstances may vary significantly depending in particular n the incme, the persnal situatin including any alimny respnsibilities, pensin entitlements and assets. Furthermre, Case study 2 in Annex 4 shws that ESMA des nt require a specificatin f the amunt f lss the investr shuld be able t bear. In ur view the guidelines wrding des nt yet reflect the apprach. Cnsequently, the first sentence f paragraph 16 (c) f the guidelines shuld be amended as fllws: The firm shuld specify, in general terms, the amunt f lsses target clients shuld be able and willing t affrd (fr example, frm minr lss t a ttal lss) ( ). The current wrding althugh nt reflected in all f ESMA s examples culd be read as a mandatry requirement t prvide a percentage figure f ptential lss. Fr this, it is imprtant t bear in mind that market cnditins may in exceptinal circumstances (such as the dt cm crisis r 9/11) lead t lsses which under nrmal market cnditins wuld generally nt ccur. Wuld manufacturers be required t prvide a percentage figure, they wuld pssibly have t take exceptinal circumstances int accunt fr liability reasns which cnsequently wuld limit the significance f the infrmatin fr investrs. Cnsequently, manufacturers shuld be required t determine whether the investr can bear lsses (specifying whether thse are e.g. minr) r whether he wuld even be able t make additinal payments. - Risk tlerance and cmpatibility f the risk/reward prfile f the prduct with the target market: We generally agree with the apprach. The synthetic risk indicatr accrding t the PRIIPs Regulatin is based n a thrugh assessment f a PRIIP s risk and is the regulatr s chice t present investrs the risk f a PRIIP. Cnsequently, the risk sectin accrding t the PRIIPs Regulatin shuld be sufficient t describe the risk tlerance and cmpatibility f the risk/reward prfile f the prduct with the target market. In this regard, we suggest that the last sentence f the guidelines shuld read: Firms shuld als use the risk indicatr stipulated by the PRIIPs Regulatin, where applicable, t fulfil this requirement. It shuld be clear that fr UCITS and AIFs which are exempt frm the PRIIPs Regulatin, the risk/ reward indicatr as freseen by the UCITS KIID Regulatin culd als be used, where applicable. - Clients Objectives: We believe that there shuld be a clear distinctin between the persnal bjectives a client can have and an investment bjective a prduct can prvide. While manufacturers can prvide the latter, they wuld nt be able t categrise persnal bjectives. Clients bjectives shuld be translated int criteria which can be read by IT systems and therefre need t be clearly defined. Investment bjectives f prducts are ften distinct as fllws: Preservatin, Grwth, Incme and ther (which e.g. culd include speculative prducts). In additin, investment hrizn culd be a sub-criterin which wuld describe the target market. Bth criteria wuld fr instance als translate ESMA s example f retirement prvisin, i.e. the questin whether the investr needs his mney back at a specific time (investment hrizn) with a specific prbability (preservatin). - Clients Needs: The examples prvided by ESMA describe specific situatins. We therefre understand that the criterin culd als be filled in with a statement: n specific needs in case the prduct is prperly described with all the afrementined criteria.

4 Page 4 f 11 Q2: D yu agree with the apprach prpsed in paragraphs f the draft guidelines n hw t take the prducts nature int accunt? If nt, please explain what changes shuld be made and why. We generally agree with ESMA s apprach in paragraphs 18 t 20. It is ur understanding that the assessment described in paragraphs 18 and 19 wuld be the apprach applicable t the determinatin f the target market criteria as described in paragraph 16. We understand that e.g. fr mass retail market prducts, manufacturers wuld still have t cnsider all f the criteria; hwever, they culd d this with less detail. In additin, the infrmatin fr the distributr culd cmprise f less than every single criteria unless the specific infrmatin is relevant. Furthermre, we very much appreciate ESMA s apprach fr tailr-made prducts as described in paragraph 20. It is imprtant that tailr-made prducts are nt subject t a target market identificatin r assessment which has its fcus n prducts distributed mre widely. Nevertheless, regarding paragraph 21 et seq., we understand that ESMA has specific types f prducts in mind such as CFDs (this is in particular shwn with the example prvided fr in part 2, paragraph 21, page 8 f the CP). We ask ESMA, hwever, t be cnsiderate f the wrding in paragraph 21 et seq. f the guidelines and nt base the wrding nly n these specific types f prducts. Fr many prducts, e.g. nn-structured UCITS, it is sufficient fr the manufacturer t determine the distributin strategy by prpsing the type f investment service t be used. Whether such service is prvided via phne r face-t-face r nline shuld in these cases nt make any difference since MiFID requirements depend n the type f service, nt the way hw it is prvided. In additin, we think that the guidelines shuld be technlgy neutral in rder nt t discriminate technlgic develpments. Whether a prduct is sld withut advice but with apprpriateness test either ver the phne, the internet r face-t-face shuld nt make any difference since the same regulatry requirements apply. Clearly, it is the distributrs decisin which acquisitin channels their clients wuld expect fr such type f prduct. A general requirement fr the manufacturer t specify the set-up f the distributrs websites seems inapprpriate fr mst f the prducts. Q3: D yu agree with the prpsed methd fr the identificatin f the target market by the distributr? We d nt agree with ESMA s apprach regarding determinatin f the target market by the distributr (1.). Further, we understand that ESMA s apprach regarding interactin with investment services des nt cntradict the decisin in MiFID II Level 1 t allw fr certain prducts t be distributed by way f executin nly (2.). 1. Distributr s target market determinatin nly required in specific circumstances ESMA indicates that distributrs wuld have t determine a target market n their wn fr each and every prduct. Shuld ESMA pursue this apprach, the range f prducts available t investrs and the cmpetitin between prducts will decrease significantly. We urge ESMA t recnsider this apprach fr the fllwing reasns: - N additinal benefit fr investrs: We d nt believe that a separate target market assessment by the distributr wuld be f any advantage t investrs. As pinted ut by ESMA, the manufacturer is aware f the prducts features and the prduct specifics. Distributrs, hwever, are aware f their client base and need t understand fr what grup f clients the prduct wuld be cmpatible regarding needs etc. Distributrs shuld use the manufacturer s target market definitin in rder

5 Page 5 f 11 t determine (i) whether they have clients with whm the prducts wuld fit, i.e. whether they will distribute the prduct at all and if yes, t whm, and (ii) decide n the way they will distribute the prducts (actively, n request, etc.). A specific definitin f the target market in additin t these requirements wuld nt prvide further benefits t investrs. Any apprach where the distributr wuld have t refine the manufacturer s target market identificatin wuld disregard the fact that distributrs ften d nt sell prducts n a standalne basis but as part f a prtfli. While the manufacturer usually has n insight n hw a prtfli is cnstructed, the distributr ften des. A redefinitin f the manufacturer s target market wuld cnsequently nt take int accunt that distributrs have the client s view at hand. - Administrative burden will reduce investrs chice and market cmpetitin: Distributrs wuld have t bear a huge administrative burden fr prducts they decide t distribute. Cnsequently, distributrs wuld reduce their range f prducts t be able t deal with the peratinal cmplexity, thereby reducing investrs chice and affecting cmpetitin f prducts and pen architecture. This wuld als likely have a higher impact n smaller and medium sized manufacturers since distributrs wuld have t reduce the amunt f relatinships with manufacturers and wuld likely reduce thse with smaller manufacturers first. Likewise smaller and medium sized distributrs wuld have t find a way t manage peratinal cmplexity and might therefre even be required t reduce their prduct range even mre than larger distributrs. - Risk f pssible cntradictins t the detriment f investrs: The current draft Level 2 measures f the PRIIPs Regulatin require manufactures t describe the target retail investr. The descriptin f the target retail investrs features as stipulated by the text is very much alike t ES- MA s prpsed criteria fr the identificatin f the target market. Cnsequently, the investr will in future be infrmed f the target clients (i.e. the target market) in the PRIIPs KID. Any deviating definitin f the distributr s target market wuld be incnsistent and cnfusing fr investrs. Furthermre, a redefinitin f the target market culd lead t different utcmes at different distributrs fr the same prduct. Again, this culd cnfuse investrs. Fr example, an investr culd then be able t buy a prduct with ne distributr but nt the same prduct with anther althugh the latter ffers the prduct generally, just because he has defined the target market f the prduct differently. - Nt legally required: Furthermre, additinal target market identificatin by the distributr is neither required explicitly nr is it line with the bjective f the target market cncept. Accrding t Mi- FID II Level 1 (Art. 24 para. 2 subpara. 2), distributrs need t take int accunt the target market prvided by the manufacturer. Level 2 prvides that the distributr shuld determine the target market even if it was nt defined by the manufacturer. The difference in the expressin ( determine vs. defined ) already shws that the distributr s tasks d nt need t be the same as the manufacturer s. Fr instance, while the manufacturer culd be required t define the target market accrding t ESMA s prpsal, the distributr culd just be required t assess whether and with whm f its client base such target market fits. Furthermre, the wrding in Level 2 in Art. 10 para. 1 subpara. 3 f the Delegated Directive has t be read in cnjunctin with Level 1. This wrding has t be understd as clarificatin that distributrs need t define the target market fr prducts where n target market has been defined by the manufacturer, reading the expressin even as althugh. This is als shwn by the cntext f the explicit wrding f Art. 10 para. 1 subpara. 3 which directly fllws the descriptin f situatins where the manufacturer is nt a MiFID firm in subpara. 2. The requirement fr distributrs t identify a target market accrding t the same criteria as the manufacturer shuld be limited t the situatin where the manufacturer des nt prvide a target market n its wn. The target market requirements will increase investr prtectin insfar as manufacturers will have t ensure that they cnsider the typical investr when designing their prducts. The distributr n the ther hand will have t cnsider that target market when deciding which parts f his clients fall with-

6 Page 6 f 11 in the target market, if any. Cnsequently, he wuld have t decide if and by what service t which grup f his clients he wuld distribute the prducts. A separate definitin f the target market, hwever, is neither necessary nr helpful fr this cncept. This wuld result in an inapprpriate administrative burden withut any benefit fr r even t the detriment f investrs. 2. Executin nly service remains pssible Furthermre, we understand the interactin between target market and distributin services as fllws: The distributr decides n the basis f the manufacturer s target market identificatin whether he will distribute that prduct. In a secnd step, he decides hw he will distribute the prduct, i.e. advised nly r (als) withut advice but with apprpriateness test r even executin nly withut apprpriateness test. Shuld he decide t distribute the prduct executin nly, he shuld bear in mind that there will be n matching with any client infrmatin. MiFID II indeed allws certain prducts t be distributed by executin nly. This must als be the case when distributrs have n client infrmatin whatsever since the executin nly is the sle service they prvide. In this regard, we supprt the guidelines in paragraph 39 where ESMA clearly states that the distributr cannt even assess clients knwledge and experience in case f executin nly. We appreciate that distributrs might vluntarily decide t match sme client infrmatin they have als in case f executin nly. This wuld allw distributrs t ffer a wider range f prducts since they are able t determine their clients base mre precisely. The same must be true fr distributin with apprpriateness test in case the distributr uses mre infrmatin than just clients knwledge and experience. Q4: D yu agree with the suggested apprach n hedging and prtfli diversificatin aspects? If nt, please explain what changes shuld be made and why. While we appreciate ESMA s cnsideratins regarding in particular prtfli diversificatin and als hedging, this apprach is nt yet prperly reflected in the guidelines. Further, we agree with ESMA s statement that the target market assessment is prduct related but nly fr prducts. Insfar as a target market has t be prvided fr a service, the MiFID firm shuld nly be required t take the target market int accunt at the service level. In this regard, we d nt feel that the ESMA guidelines wuld be the prper place t clarify the requirements fr a target market regarding services. It is in particular imprtant fr the investment service f prtfli management that the target market has t be assessed at prtfli level. In this regard, we strngly disagree with the ntin that fr every prduct cnsidered fr the prtfli management a thrugh target market assessment is cncluded (para. 43 f the draft guidelines). This apprach wuld be gravely detrimental fr investrs, des nt distinct distributin services and prtfli management prperly and is nt required by law: - Lk-thrugh apprach cntradicts the benefits f a prtfli diversificatin: Fr the service f prtfli management, an investr delegates the decisin n the purchase f the individual instrument t a prfessinal. This is t entrust building up f a diversified prtfli t a prfessinal with the intentin t reduce unsystematic risk in a way the investr wuld nt be able t d it himself. An apprach that wuld require every prduct t be placed within a prtfli managed by a prfessinal t be in line with the target market wuld nt reflect the best interests f investrs seeking a diversified prtfli f investments. In particular given the fact that fr the investment advice each and every instrument has t be suitable, the investment pssibilities f an investr are limited. Cnsequently, the investment advisr is legally limited in building a prtfli in particular fr a first-time investr. In practice, first-time investrs nt nly cmprise yung peple wh want t invest their first spare funds but als clients wh have t build up wealth fr a certain time. Practical examples are clients wh always have invested mney in their wn business r in real estate r

7 Page 7 f 11 thse wh inherited it. A prtfli manager shuld be able t build a prtfli withut being limited t nly ffering these types f investrs nly a limited range f lw-risk investment ptins such as gvernment bnds. When defining the target market, the manufacturer will lk at the prduct withut any enhanced view hw it might be used in a prtfli. Thugh the manufacturer may describe that the prduct shuld nly be purchased as part f a prtfli, he will never be in the psitin the prtfli manager is when deciding whether a prduct fits int the specific prtfli taking regard t the needs and investment bjectives f a particular client. - Prudent hedging strategies wuld be inhibited: Prtfli managers, being cnsidered as prfessinal investrs under MiFID fr gd reasn, might want t engage in mre elabrate investment strategies cmprising hedging mechanisms in strive fr better returns fr their end investrs. By example, a prtfli manager might see high ptential in a small-cap stck, the target market f which des nt fit with the end investr. In rder t hedge against excessive lss risk, the manager wants t acquire a crrespnding put ptin, the target market f which wuld neither fit with the end investr. In cmbinatin, hwever, these tw assets wuld end up with an aggregate target market which fits perfectly with the end investr. It wuld be detrimental fr the end investr if such strategies were inhibited because the target markets f the assets individually d nt fit with the end investr. - Regulatry circumventin seems unlikely: We understand that ESMA fears prtfli managers culd misuse the requirement t match the target market at prtfli level nly and buy prducts fr the client which are utside the target market r even unsuitable withut any prper reasn. While this wuld fundamentally vilate the prtfli manager s fiduciary duty as stipulated by MiFID, UCITS Directive r AIFMD respectively and supervised by NCAs, a lk-thrugh apprach n a prduct level is nt the prper way t avid such vilatin. MiFID II already adds additinal safeguards t limit the incentives f a prtfli manager fr such vilatin, in particular the ban f inducements fr prtfli managers. The investr furthermre specifies in the investment management agreement detailed investment guidelines, i.e. the framewrk in which the discretinary prtfli manager may perate. It is ut f the questin that the prtfli manager has when setting the investment guidelines t act in the client s best interest. In additin, the manager has t ensure that the prtfli as a whle is at all times suitable fr the client and cnsequently has t build a prtfli which meets the client s interests. Furthermre, ESMA shuld bear in mind that even investrs with a lw risk appetite have an interest and shuld be able t invest in high risk prducts if these are nly a cmpnent f their verall prtfli if this fits within the verall prtfli. We fear that ESMA s intentin t prtect investrs with a strict applicatin f the target market assessment will in fact limit investrs chice in a way that is detrimental fr them. - Prtfli management is n distributin service: Cnsidering prtfli management simply as distributin service wuld nt d justice t the specifics f this service. Prtfli management is nt abut selling prducts t investrs but is abut prviding a service t the investr where the prtfli manager is bund by his mandate and in particular his fiduciary duties. Unlike distributin services where prducts are sld, the prtfli manager buys n his wn discretin prducts which he cnsiders fitting int the investr s prtfli. Distributin services shuld rather be thse services where the ultimate decisin t buy a prduct is indeed made by the investr. - Nt required by Level 2: Besides these practical cnsideratins, it is imprtant t clarify that the suitability test within the financial prtfli management des nt require that each and every prduct is suitable. In this respect the relevant prvisin in Art. 54 para. 2 sentence 2 f the draft delegated Regulatin reads as fllws: ( ) that the specific transactin t be recmmended r entered int in the curse f prviding a prtfli management service ( ) meets the investment bjectives

8 Page 8 f 11 f the client in questin, including client s risk tlerance ( ). The wrding des nt refer t the specific prduct, i.e. by stating that the specific prduct as such has t meet the client s investment bjective. It is clear that fr the transactin, suitability has t be assessed. In the case f prtfli management, hwever, the client des nt enter int individual transactins, but delegates the management f his prtfli t a prtfli manager. Hence, suitability has nt t be assessed against the individual prduct t which the transactin relates. Instead, it has t be assessed against the prtfli under management as a whle. This becmes apparent frm the criteria fr suitability testing in Art. 54 para. 2 lit. c) accrding t which the client s knwledge and experience shall be sufficient in rder t understand the risk invlved in the transactin r in the management f his prtfli. It shuld be clear that the secnd alternative applies t prtfli management and hence implies a suitability test at the prtfli level. Hence, the same cncept has t apply fr the target market assessment. We cnsequently urge ESMA t recnsider the apprach t target market assessment regarding financial prtfli management. We generally believe that the criteria fr the target market identificatin wrk well with respect t prducts. Hwever, with regard t services, target market identificatin accrding t these criteria is nt the prper apprach t match the custmers needs and bjectives. We therefre ask ESMA t recnsider the scpe f the guidelines insfar as services shuld nt be cvered. ESMA culd clarify the apprach fr services at a later stage, e.g. thrugh Q&As. Q5: D yu believe further guidance is needed n hw distributrs shuld apply prduct gvernance requirements fr prducts manufactured by entities falling utside the scpe f MiFID II? ESMA prvides in ur view sufficient guidance. ESMA s apprach, hwever, shuld take int accunt MiFID II Level 1 which clearly states that the distributr is required t define a target market nly in case the manufacturer des nt prvide him with the infrmatin he needs. Management cmpanies fr instance have an interest t prvide distributrs with the target market infrmatin. If distributrs needed t define the target market n their wn, the same prduct culd have a different target market with every distributr. Management cmpanies have a genuine interest that investrs d nt receive deviating r even cnflicting infrmatin n their prducts. We believe that in fact the management cmpanies will prvide the distributrs with a target market in a similar way that MiFID firms will be required t d. Furthermre, we understand that MiFID distributrs wuld be under n legal bligatin t prvide nn-mifid manufacturers with sales infrmatin but may d s ut f cmmercial cnsideratins. Regarding ESMA s apprach t the applicatin f prduct gvernance requirements t prducts that were manufactured befre the entry int frce f MiFID II, we generally agree with ESMA s statement in paragraphs 55 t 57. We understand, hwever, that if nn-mifid II manufacturers wuld prvide the distributr with a target market f the prduct in time (even if nt legally required) befre 3 January 2018, distributrs culd fllw the general rules applicable t them. Again, in this regard, we urge ES- MA t recnsider the psitin regarding a separate definitin f the target market (see answer t questin 3). Q6: D yu agree with the prpsed apprach fr the identificatin f the negative target market? We have difficulties understanding ESMA s apprach regarding sales utside the target market as described in part 2, paragraph 21, page 8 f the CP. If sales utside the target market can nly be justified by the individual facts f the case, the identificatin f a negative target market wuld have nearly n

9 Page 9 f 11 scpe in practice. MiFID II Level 2 thugh requires manufacturers t identify any grups f clients fr whse needs, characteristics and bjectives the financial instrument is nt cmpatible. We therefre believe that the mechanism as freseen in MiFID II Level 2 allws sales utside the target market generally withut limitatin; hwever, sales t a negative target market shuld generally nt ccur. Only based n this understanding a negative target market and the general idea f target markets as well as the pssibility fr distributrs t sell utside the target market fit tgether. Because therwise, the negative target market culd simply be the reverse f the psitive target market. Furthermre, frm a practical pint f view it is imprtant t allw first-time investrs the apprpriate range f prducts. With its apprach ESMA risks that investrs withut experience and knwledge will nt be in the psitin t build up wealth but will be required t stick with lw interest gvernment bnds. If ESMA pursues this apprach f sales utside the target market, the prduct range available fr investrs will be reduced significantly. Mrever, we understand that fr prducts which are designed fr the mass retail market, the negative target market assessment culd result in nne that there is n client grup identified t whm that prduct shuld nt be distributed. Q7: D yu agree with this treatment f prfessinal clients and eligible cunterparties in the whlesale market? Shuld ESMA nt review its psitin regarding prtfli management (cf. Q4), it is f the utmst imprtance t at the very least prvide mre specific flexibility fr prfessinal clients. In practice, this is in particular imprtant fr prtfli managers wh manage investment funds as a delegated functin fr a UCITS r AIF management cmpany (1.) and fr cases where a fund manager prvides individual prtfli management when a fund wrapper wuld be the less interesting ptin fr the client (2.). 1. Delegatin f fund management t asset manager. Where a fund manager delegates the asset management functins t a third party, this delegated party prvides the service f individual prtfli management t the management cmpany accrding t the EU Cmmissin 2. Cnsequently, ESMA s cnsideratins regarding target market fr prtfli management are f significant relevance fr the delegatin f fund management t a third party. If a prtfli manager wuld have t ensure that every transactin is generally within the target market fr the fund management cmpany as client f the MiFID service, this wuld be withut any further benefits fr prducts which are cvered by ther Eurpean and natinal framewrks and where the delegatin f the functin f prtfli management is subject t detailed rules. Rules cvering fund management and delegatin. UCITS Directive and AIFMD set specific standards fr the delegatin f cllective prtfli management. This includes that the prtfli in its entirety wuld have t cmply with the fund rules. In case f UCITS the fund rules are harmnised n a Eurpean Level. This regime fresees eligible assets, investment limits and ther minimum requirements fr fund rules. The same is true fr retail AIFs in many jurisdictins. In Germany, fr instance, similar rules apply t retail funds whse fund rules have t be apprved by BaFin. Furthermre, the delegatin rules require the fund management cmpany t mnitr and cntrl the perfrmance f the engaged prtfli manager. The management cmpany has a set f instruments such as cntrl and access rights t supervise and instruct the prtfli manager. Mrever, the management cmpany and hence als the prtfli manager are required t establish, implement and apply written plicies and prcedures n due diligence and implement effective arrangements fr ensuring that investment decisins n behalf 2 See FAQ MiFID I, ID 235

10 Page 10 f 11 f the funds are carried ut in cmpliance with the bjectives, the investment strategy and any risk limits f the fund. Administrative burden. A lk-thrugh apprach wuld in additin t the pre-investment due diligence require the external prtfli manager t implement the target market assessment n an instrument level within its investment prcess. Exemplarily, this wuld include the fllwing steps: Extract Target Market data per instrument Capture Target Market data in master data system Cde investment guideline checks in frnt ffice system t reflect target market requirements n instrument level Cnduct pre-trade checks t cnfirm cmpliance with the fund s prfile (needs, bjective and characteristics) / target market per transactin Define rules fr exceptins and dcument exceptin n a case-by-case basis (e.g. because f prtfli hedging) Cnduct pst-trade check Adapt investment strategy (target market requirements n instrument level might interfere with existing fund rules) Adapt investment management agreement and ptentially fund prspectuses Review target market n instrument level n a regular basis Reprt back t the manufacturer deviatins frm the distributin t the target market Implementatin f these steps wuld require nt nly internal adaptatin f the systems but wuld als trigger the fllwing steps: Negtiate and discuss with external IT prviders implementatin f these requirements Assess and clarify license requirements if data n instruments target markets are transferred t external IT prviders r internal data hubs. Besides the high administrative implementatin expenses, nging assessment wuld be required in the investment cmpliance prcess. Implementing this wuld be quite significant fr asset managers which in sme cases are in charge f up t 1,000 funds administered by ther management cmpanies, ften crss-brder. As described abve, in case f a fund, we believe that there wuld be n benefit fr investrs which wuld justify such administrative burden. 2. Segregated mandates. Furthermre, prfessinal investrs such as insurance cmpanies regularly decide t invest their funds thrugh segregated mandates instead f using a fund vehicle. The prtfli manager is required t ensure that the assets f all prducts remain within the bundaries specified by the investment guidelines determined by the institutinal investr. Cnsequently, the additinal target market assessment wuld prvide fr administrative requirements withut any additinal benefits fr such investrs. Furthermre, instead f a delegatin f prtfli management, a management cmpany r a MiFID firm may prvide investment advice t anther management cmpany fr a fund. The requirement t prvide fr a full matching f the target market in these instances wuld als trigger the administrative measures as utlined abve. We als believe that in these cases, a fund s eligible assets and invest-

11 Page 11 f 11 ment limits accrding t the fund rules prvide fr the apprpriate rules fr investment. An additinal target market assessment wuld nt be fr the benefit f investrs but nly add administrative red tape. Cnsequently, if an instrument is eligible under the fund rules f the relevant fund, the fund shuld be cnsidered matching the target market f the instrument. Mrever, ESMA s prpsal t differentiate between elective r per se prfessinal clients is nt in line with MiFID II. Art. 54 para. 3 f the Delegated Regulatin des nt distinct between thse types f prfessinal clients fr knwledge and experience. Rather, it allws assuming knwledge and experience in relatin t prducts, transactins and services fr which the client has been classified as prfessinal regardless f the service. The rule nly distinguishes between elective and per se prfessinals in case f investment advice regarding the ability t bear investment risks. The guidelines shuld respect the apprach at Level 2 and thus reflect the same distinctin. Q8: D yu have any further cmment r input n the draft guidelines? Timing is crucial: We urge ESMA t publish the final reprt as sn as pssible. Fr implementatin f the prduct gvernance and target market requirements majr IT changes/amendments will be required. A perid f less than nine mnths will prve t be extremely challenging fr market participants and will again jepardise an effective and standardised implementatin f the target market regime. This als ties in with sme f the afrementined cmplexities in the cncept and ESMA s understanding f the distributr s requirements t redefine the target market. Bth manufactures and distributrs will have t implement IT systems in rder t be able t align their set-ups t the new requirement. In additin, the manufacturers will have t define the target market fr all their prducts (which in case f a management cmpany will nt be a regulatry requirement), and distributrs will have t assess hw the target market f the prducts they intend t ffer will be cmpatible with the circumstances f their clients. Q9: What level f resurces (financial and ther) wuld be required t implement and cmply with the Guidelines (market researches, rganisatinal, IT csts, training csts, staff csts, etc., differentiated between ne ff and nging csts)? It is difficult t identify specifically the csts fr the implementatin f these guidelines in the cntext f the general MiFID II implementatin csts. Hwever, csts fr implementing these guidelines will cmprise csts fr systemic changes in particular fr IT systems, peratinal resurces as well as the use f shared services such as legal, cmpliance, risk, prduct management. Any requirement f additinal target market identificatin by the distributr and/r a lk-thrugh apprach fr prtfli management wuld significantly increase csts.