As of January 1, 2013, the AFM started to supervise product development. If a company pays insufficient attention to product governance, this can have major consequences. These consequences can be reputational, operational and financial. The interest rate derivatives files and endowment policies are unfortunately convincing examples of this. How do you make sure your PARP (Product Approval & Review Process) meets the AFM’s expectations?
The legal framework
As of January 1, 2013, the AFM started supervising the product development process of financial companies. The basic legal framework is formed by the standards included in Sections 32 through 32c of the Decree on Conduct of Business Supervision of Financial Undertakings Wft (BGfo). Since January 3, 2018, specific standards have come into force for institutions that fall under the MiFID II legislation. They are subject to the requirements set out in Articles 16 and 24 of MiFID II, Articles 9 and 10 of delegated EU Directive 2017/593 and the product governance guidelines developed by ESMA. Specific product governance rules have also been established for insurance distributors. These can be found in the Insurance Distribution Directive (IDD).
Client interests at heart
While the rules for different types of financial firms are set out in different places in the law, the core requirements for product development, distribution and review are always the same. The key is to ensure that client interests are taken into account in a balanced way when developing and distributing a product. Products should not end up with clients for whom they are not suitable.
Stricter requirements for MiFID II firms
As indicated earlier, additional strict requirements apply to organisations subject to MiFID II. Among other things, the requirements to determine the target group have been elaborated in more detail. When developing and distributing a product, a MIFIID II organization must consider not only the type of investor to whom the product is offered, but also the knowledge and experience that the target group needs in order to make a proper assessment of the product and its risks. Furthermore, it is necessary to map out the objectives and needs of the target audience, the required financial situation in relation to the product, and the risk tolerance a customer must have for the product to be suitable.
How can we help?
Want to know more? Our specialists are happy to advise you on how to implement the Product Approval and Review Process in your organisation. Please feel free to reach out to us.