SRP MIFID 2 distributor obligations to complete product provider due diligence and distributor feedback

The MiFID II regime has been live since 2018 and represented a challenge for both manufacturers and distributors to put a framework in place to meet their respective obligations. Some four years on a


Oliver has 18 years’ experience in financial services gained as a management consultant and then investment banking COO for global tier 1 institutions.

Oliver Perry
Head of Due Diligence

The MiFID II regime has been live since 2018 and represented a challenge for both manufacturers and distributors to put a framework in place to meet their respective obligations. Some four years on and it’s clear from the new guidance and regulations emerging from across Europe that regulators are increasing the scrutiny on evidence – and supporting data and MI – of parties meeting their obligations. This month we focus on the distributors’ obligations.

Article 16(3) and 24(2) of MiFID II supported by ESMA guidelines, sets out to ensure firms that manufacture products for sale to clients or distribute products to clients shall maintain, operate and review adequate product governance arrangements. This includes identifying a target market of end clients, a distribution strategy, and periodically reviewing them.

For distributors there is a clear expectation that they obtain information from manufacturers’ on their approach to product approval, stress testing and target market definition. All of which are required for the distributor to understand and ensure the product is suitable for distribution to its own target market. From our experience across the industry, we see a spectrum of approaches employed by distributors ranging from reactive and informal with minimal evidence to proactive, formal and well-documented processes that capture clear and actionable data and MI.

In fact, this year has seen a number of regulatory and supervisory publications that increase the expectation on manufacturers and distributors to be capturing and exchanging data and MI to further strengthen investor protections. Culminating in ESMA publishing a Consultation Paper on certain aspects of the MiFID II product governance requirements with a view to publish a final report, and final guidelines, in Q1 2023.

MiFID II Timeline

Since 2017, regulators aim to continuously ensure financial instruments and structured deposits (“products”) are only manufactured and/or distributed when this is in the interest of clients and to strengthen investor protection.

Themes from ESMA’s recent Consultation Paper continue to build out the responsibilities of the Manufacturer and Distributor, further defining the roles and expectations of the regulator and challenging the current status quo.

A clear example of this is the distribution chain where it is required that Manufacturers consider their responsibilities to the ultimate end client rather than treating Distributors as their clients. At the same time, Distributors need to ensure that relevant product information flows down along the distribution chain to their intermediaries.

The direction of travel in the UK goes even further with the FCA making clear – through the Consumer Duty guidelines going live 31st July 2023 and implementation plans to be agreed by 31st of October 2022 – that they expect to see data and MI proactively exchanged up and down the distribution chain to ensure that products continue to meet consumer needs and are in fact delivering good consumer outcomes. More data exchanged at an increased frequency through the year will become the best practice.

Returning to Europe, ESMA helpfully sets out good practice seen in the market, to help firms further understand their responsibilities to ensure robust processes for the design of financial products and services, the identification of target investors (the “target market”) and the ongoing monitoring of distribution activities to fulfil the requirements.

How Delta Capita can help

Delta Capita managed services and proprietary technology supports Manufacturers, Distributors and Intermediaries to efficiently deliver on their obligations and create an evidencable record of the activities undertaken. This includes due diligence over all parties in the distribution chain, enabling the exchange of the required data and MI for Consumer Duty, ESG and MIFIDII more broadly, and providing product and distributor governance framework consulting services to all parties.

Delta Capita’s inSPire Due Diligence service offers a digital platform and managed service supporting Know Your Distributor, Distribution Agreement Drafting, Know Your Counterparty data collection and adverse news screening. This service proposition is unique to Delta Capita and comes with our powerful expertise in standardisation; technology; managed services; and information exchange. Get in touch to find out more.

*European Commission’s Capital Markets Recovery Package and subsequent Amending Directive; the sustainability-related amendments to the MiFID II Delegated Directive; the recommendations on the product governance guidelines by ESMA’s Advisory Committee on Proportionality (ACP); and the findings of ESMA’s 2021 Common Supervisory Action on product governance have all identified areas that can further strengthen investor protection.