Mifid II  

EU product distribution rules are unworkable

EU product distribution rules are unworkable

Concerns have been raised about the proposed rules set out by Europe’s financial watchdog, claiming they fail to take into account how most financial products are distributed by advisers.

The European Securities & Markets Authority, or ESMA, has set out proposed guidelines focused on the governance of financial products, which could come under the Markets in Financial Instruments Directive (MiFID II).

But the European Federation of Financial Intermediaries and Financial Advisers (FECIF), an association representing 250,000 advisers across Europe, has branded the guidance “unworkable”.

The trade body has accused ESMA of having little consideration or understanding of ‘open architecture’ platforms.

The problem, it said, was the proposed guidance failed to recognise that advisers and asset managers largely interact through platforms.

According to FECIF, the financial regulator has introduced a new definition for the concept of a “distribution strategy”, which was not the one intended in the MiFID II text.

The proposal states that for each financial product intended to be sold to clients, asset managers must define the distribution strategy and target market.

Distributors, or advisers, must gather all the information about the strategy and the target market.

Johannes Muschik, the chairman of FECIF, said: “ESMA is obviously assuming that there is always a direct relationship between manufacturers and distributors. However, this is not the case”.

Mr Muschik pointed out that most manufacturers and distributors cooperate through platforms, which often work with many different manufacturers and distributors at the same time. 

“It seems apparent that the concept of ‘distribution strategy’ introduced by ESMA will never work within the world of open-architecture,” he added.

“Manufacturers are simply physically unable to foresee or oversee the individual distribution strategies of so many distributors, who are usually totally unknown to them as both parties are solely contracting with the platform and never have any direct interaction at all. 

“This appears to show a lack of understanding of how the market works”.

Paul Stanfield, FECIF secretary general, questioned what would happen if the adviser defined a target market and the asset manager determined a different target market at some later stage. 

He warned the adviser could then be deemed to have provided inappropriate advice.

Industry professionals have until tomorrow (5 January) to give their feedback on the proposed rules.

katherine.denham@ft.com