Fund manufacturers are urged to think like customers when they evaluate the complexity of products under the MiFID II regime.
Funds Europe recently reported how industry body, Tisa, had put out guidelines for fund management firms and distributors to use when assessing the appropriateness of funds for potential clients under the Markets in Financial Instruments Directive II, or MiFID II as it is more widely known.
The directive requires products considered to be “complex” (which does not include Ucits funds) and sold on a non-advised basis to be subject to an appropriateness assessment.
Tisa advises that fund manufacturers take responsibility for determining whether a product is complex even though it is distributors that EU regulators would hold responsible. Tisa’s reasoning is to avoid distributors making different rulings on the same products – in other words, Tisa is heading off even more complexity in the distribution activity.
In its guidance, Tisa says: “Although the responsibility to conduct the appropriateness assessment for all complex products falls on the distributor, it would not be desirable for different distributors to treat the same product in different ways; that is if the criteria set out in the Delegated Regulation were inconsistently applied.”
Tisa’s guidance continues: “The onus is therefore on the product’s manufacturer to determine and communicate whether a product is complex or not.”
Tisa recommends that disclosures about complexity sit alongside the ‘target market’ disclosures that are also required for MiFID II. Target market refers to the identification of client types that a product is aimed at.
“The view of the manufacturer may, then, be reasonably relied upon by the distributor, so long as reasonable due diligence is undertaken by them,” the Tisa guidance adds.
A good assessment should be written in plain English and avoid the use of industry jargon, unless jargon is explained.
Tisa essentially calls for more empathy when it says that firms should “address complexity and risk factors from the customer perspective and not that of the firm”.
Tisa – the Tax Incentivised Savings Association – is a non-profit UK trade body with over 150 member firms.
Product appropriateness is a topic familiar to UK fund managers, though Jeffrey Mushens, technical director at Tisa, in a recent Funds Europe article about MiFID II product governance, said: “Under MiFID II, most suitability tests to be carried out by the distributor are sensible but are more prescriptive than what has been done in the UK before.”
Product governance in general for distributors and manufacturers might “not be so much of a change for UK firms, but it will be more structured and firms will have to formalise procedures and report on them more”, Mushens said.
©2016 funds europe
