The purpose of product governance requirements in the EU financial market legislation is to enhance the level of protection of investors by way of requiring firms to take responsibility, from the beginning, that products and the related services are only offered in the interest of clients, which should not be prejudiced by firms' own commercial, funding or prudential needs.





The objective of the product governance requirements is to ensure that firms, which manufacture and distribute financial instruments and structured deposits, act in the clients' best interests during all the stages of the life-cycle of products or services.

Directive 2014/65/EU on markets in financial instruments (MiFID II) in Article 16(3) and Article 24(2), introduced product governance obligations for manufacturers and distributors, which were further specified in Articles 9 and 10 of the Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.

The MiFID II requirements on product governance cover the separate legal set-ups for:
- firms to adopt when manufacturing products ('product governance obligations for manufacturers'); and
- firms to adopt when deciding the range of products and services they intend to offer to clients and when offering or recommending such products to clients ('product governance obligations for distributors').

These requirements are introduced for the first time since they were absent in MiFID I.

Requirements on product governance apply without prejudice to any assessment of appropriateness or suitability to be subsequently carried out by the firm in the provision of investment services to each client, on the basis of their personal needs, characteristics and objectives.

Guidelines on certain aspects of the MiFID II product governance requirements were proposed by ESMA in the Consultation Paper of 5 October 2016, Draft guidelines on MiFID II product governance requirements, ESMA/2016/1436.

The said document concentrates mainly on the 'target market assessment', as this aspect was identified as the most important.
Further modifications of the regulatory framework have been proposed by the ESMA Consultation Paper of 8 July 2022 (Review of the Guidelines on MiFID II product governance requirements, ESMA35-43-3114). They 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 Consultation Paper also includes good practices identified in the 2021 CSA to complement the existing guidelines, as well as an additional case study. ESMA believes that these practical examples will help firms comply with the relevant product governance requirements.

The final document - Guidelines on MiFID II product governance requirements (ESMA35-43-3448) - the ESMA adopted on 3 August 2023.


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