DISTRIBUTION OVERSIGHT AND COMPLIANCE CANNOT BE UNDERESTIMATED UNDER MIFID II

By Raymond Groen in ‘t Woud, Product Director, KNEIP

Setting the scene
Distribution compliance and oversight are set to become the responsibility of manufacturers under MiFID II. This is not to be underestimated. It will require two-way communication of data between the manufacturer and their distribution network.

Previously, the manufacturer could delegate these responsibilities to a distribution partner or an intermediary through a distribution agreement. Under MiFID II, however, responsibility for distribution falls squarely with the manufacturer. They will be obliged to take all necessary steps to ensure that the distributor sells their fund(s) to the right investors.

Although under the MiFID II rules it appears that only those manufacturers who have a MiFID License will be affected, the need to have distribution oversight will affect all manufacturers whether its directly or through related responsible parties, i.e. the board of a fund, the management company, or the alternative investment fund manager (‘AIFM’).

Manufacturers currently underestimate the impact that distribution compliance will have on their operations.

ESMA has come up with five categories to define the target market and has described that limited negative target market events may occur. However, it does not describe how, and in what level of detail, data should be returned from the distributor to the manufacturer, in order to perform the oversight function.

Defining the challenge
Article 9 of MiFID II demands from the manufacturer that, apart from identifying target markets, they shall request adequate information from distributors for monitoring purposes. Article 10, meanwhile, says that the distributor must provide information, on an aggregate basis, to the manufacturer regarding the adequacy of target markets and the distribution strategy.

What that means, practically speaking, is that manufacturers will likely deal with a variety of distributor capabilities. On one end, there will be distributors who only raise alerts on negative target market events i.e. where a specific investor is deemed not to be suitable to invest in the fund.

At the other end, there will be distributors running advanced platforms that will send data back to the manufacturer on a regular (daily, weekly, monthly) basis, who will then need to do all the necessary slicing and dicing to check the distributor is doing everything correctly.

Only by having an effective two-way flow of data will manufacturers be able to perform their oversight role. That means that they receive enough information to determine that the distributor is performing their role correctly, rather than just be informed about negative target market events.

In addition, this will help achieve distribution compliance for all of a manufacturer’s fund products; both compliance with MiFID II and compliance with distribution legal agreements.

Thanks to the improved transparency that will come from two-way data flow, Manufacturers will be better able to identify if and when a distributor is falling foul of the agreement.

Take inspiration
The devil is in the detail. Rather than just read executive summaries and the RTS provided by ESMA, Manufacturers and distributors should consider Articles 9 and 10, and what type of data will need to be exchanged.

The good news is that a digital platform can act as a conduit to allow for that two-way flow of data. This will take the pressure off managers to remain compliant with the distribution agreement and, crucially, with the Directive.



NICSA: 8400 Westpark Drive, 2nd Floor McLean, VA 22102 • Tel: 508.485.1500 • Fax: 508.485.1560