FECIF Board Member & ANASF Executive Committee Member
Product governance requirements will lead to greater quality of advice
Product governance requirements represent one of the most outstanding innovations of MiFID II, aiming at ensuring that firms which manufacture and distribute financial instruments act in the clients’ best interests during all the stages of the product life-cycle. While these new requirements cover a broad range of topics, on 2nd June 2017 ESMA has adopted specific guidelines which mainly address the “target market assessment”, considering this issue one of the most important aspects in order to ensure a consistent application of MiFID II provisions. Prior to the adoption of these guidelines, ESMA published a Consultation Paper, to which both FECIF and Anasf (the national association representing financial advisors in Italy) responded.
The ESMA guidelines are an important step in the direction of enhanced investor protection and regulatory convergence. In this sense, we can completely subscribe to the new guidelines when they establish that target market identification should not solely rely on quantitative criteria, but needs to be based on sufficient qualitative considerations as well (e.g. customer satisfaction). Similarly, the list of five categories to be used as a basis for identifying the target market can be read as a synopsis of good market practices. Firms will thus be required to specify to which clients the product is targeted, the knowledge and experience that target clients should have, their financial situation (with a focus on the ability to bear losses), their risk tolerance (considering the risk/reward profile of the product) and their objectives and needs.
From the point of view of financial advisors, the principle, acknowledged by ESMA, that distribution strategies shall be consistent with the identified target market is of utmost importance. What does this mean in practice? If I consider my personal experience as a financial advisor, the achievement of investors’ best interests requires clarity. Distribution strategies are not all the same: if we compare the provision of investment advice by a personal financial advisor with the execution-only regime – in particular, Internet-based services for trade execution without the client receiving any advice about the merits of the investment – it is evident in itself that the former grants a higher degree of protection than the latter. Indeed, by establishing a personal relationship with the investor, financial advisors are in a “privileged position” to assess and understand personal needs, objectives and characteristics before recommending an investment product.
The guidelines recently adopted by ESMA also include specific new provisions relating to portfolio management, which were not explicitly included in the Consultation Paper. The Authority has recognized that, when investment advice is provided adopting a portfolio approach, products can be distributed outside the identified target market. That is to say, in certain cases deviations between the target market identification and the individual eligibility of the client are admitted if the product still fulfils the suitability requirements conducted with a portfolio view. Consider, for example, the case of an investment advisor advising a client who is prepared only to take risks regarding a limited part of his portfolio, which consists of 90% very conservative, low risk investments. Even though the client would not be within the target market for a certain very risky product, the advisor may nonetheless recommend this product for diversification purposes, provided that it meets the suitability assessment conducted with a portfolio view. In this sense, the ESMA guidelines may be interpreted as the acknowledgement of our activity as personal financial advisors; thanks to their professional skills and experience – and also adding up the proper degree of insightfulness – financial advisors convey services of enhanced quality to achieve portfolio optimization. Broadly speaking, I firmly believe that this is the real added value of human advisors, the ultimate stronghold which will enable them to resist the soon-to-be disruptive surge of internet-based solutions and robo-advisors. In other words, quality in the best interests of clients will be the only driver for the success of our professional activity in the future.