Product Governance and Investor Protection

MiFID II is looming and the entire industry is still grappling with some of the additional obligations - some of them unusually burdensome and costly to implement - the recast directive will impose on market participants.

In particular, MiFID II introduced a new set of product governance rules designed to increase the level of investor protection. As stated in the ESMA Consultation Paper on Draft Guidelines on MiFID II product governance requirements, these new rules aim at ensuring that product manufacturers of financial instruments and structured deposits, as well as distributors, have at all times the best interests of the investors in mind. The new product governance requirements under MiFID II are introduced having in mind the best interests of investors. When it comes to presenting a client with an investment product or solution, according to the new rules this will have to be perfectly suitable for their best needs and interests, which should at all times prevail over commercial or funding needs of investment firms.

Whilst the importance of clients’ best interests - boldly emphasized throughout MiFID II both in the first level directive as well as secondary level delegated directive - is not necessarily new, the approach now adopted in the European legislation on financial services with regards to investor protection appears to be innovative, at least at a first glance. It was felt - as also stressed in the Draft Guidelines - that the mere existence of conduct of business rules was not always sufficient to ensure investor protection. Efficiently and effectively enhancing such protection required that the consideration of the needs of the investor was not only anticipated at the very moment when a specific investment product is manufactured, rather than simply at the time it is offered or sold, but also maintained during the life-cycle of the product.