The European Securities and Markets Authority (ESMA) is consulting on reviewed guidelines on MiFID II product governance.

ESMA proposes updating the 2017 product governance guidelines following several recent regulatory and supervisory developments, including the outcome of the 2021 common supervisory action (CSA) on product governance.

The main proposals in the draft guidelines relate to:

• the specification of any sustainability-related objectives a product is compatible with;
• the practice of identifying a target market per cluster of products instead of per individual product (“clustering approach”);
• the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales;
• the periodic review of products, including the application of the proportionality principle.

The product governance requirements introduced by MiFID II form part of the MiFID II investor protection framework, aiming at ensuring that firms act in their clients’ best interests during all stages of the investment product’s life cycle and preventing mis-selling. As part of the product governance requirements, a target market of end clients must be identified and periodically reviewed for each product, as well as a distribution strategy that must be consistent with the identified target market.

The consultation closes on 7 October 2022. ESMA will consider the feedback it receives to the consultation in Q4 2022 and expects to publish a final report in Q1 2023.