The new product governance requirements under MiFID II are designed to ensure that manufacturers and distributors of financial instruments act in the clients’ best interests during all stages of the product / service life-cycle. One of the most important – and difficult – aspects of this is the target market assessment.

According to ESMA’s guidelines for manufacturers, target market identification should consider, among other points, product characteristics including: complexity, risk-reward profile, liquidity, or even the innovative nature of the product. Identifying the precise target market is therefore especially challenging for collectives, structured products, and packaged products. But the bigger conundrum comes with the need to communicate that target market data from the manufacturer down to the distributor.

This data is required to help distributors fulfill their MiFID II product governance requirements, which are even more detailed than those placed on manufacturers. While this data is not sensitive per se, and can therefore be routed through market data vendors, the challenge is how manufacturers can disseminate the data down to hundreds of intermediaries in an efficient, standardized manner. As such, both parties need to carefully assess what their target market data needs are, and investigate solutions that enable this data to be disseminated by manufacturers and collected by distributors – in one place.

MiFID II also requires distributors to provide clients, and potential clients, with appropriate details of all costs and charges within ‘good time’. From a data perspective, this requires an effective means of communicating costs and charges data – both ‘ex-ante’ (pre-sale) and ‘ex-post’ (post-sale) – to be established across the distribution chain, including manufacturers.

There are multiple challenges here, not least the timeline. The ex-ante costs will be required as of 3rd January 2018 – and the ex-post costs will be disclosed before the end of 2018 utilizing data of actual costs over the previous year. Given the volumes involved, distributors ideally need to be receiving costs data from their manufacturers at least two months before year-end in order to feed it into their systems. If not, they risk missing the deadline. Many firms are therefore looking to data vendors to assist with this.

There may, however, be a handful of instruments that fall beyond the reach of vendors, such as non-European products. A distributor with a US mutual fund in its portfolio, for example, may have no other option but to ascertain the product cost from published information sources in the US.

With this in mind, firms urgently need to identify any instruments in their portfolio where MiFID II data is required but the characteristics of the instrument mean that the data many not be readily available from an existing provider. Firms also need to engage with their vendors sooner rather than later around onboarding the full requirements of their portfolio to ensure coverage from all their manufacturers.

Nothing is, or will be, mandated in MiFID II regarding the format in which data should be transferred from manufacturers to distributors. Yet standardization is clearly required.

The good news is that the EFAMA European Working Group’s European MiFID Template (EMT) has been ‘unofficially’ adopted to help solve this issue for target market information – and now costs and charges. Nevertheless, there are likely to be instruments which are not covered by the EMT template during the bedding down period, so firms should be prepared to deal with outliers.

Moreover, while product data on an EMT template should in theory look the same, data must be inspected by distributors to ensure consistency. It is a risk to assume that each manufacturer has completed the template in the same way – and that the data is ‘good’ by default.

Under MiFID II, manufacturers of products will also need to collect information from their distributors confirming whether products have been sold to a suitable investor – i.e. according to the target market information. One aspect that remains unclear, however, is how distributors will accurately define sales as being ‘inside the target market’, ‘outside the target market’, or ‘in the negative target market’.

Also uncertain is whether distributors will report every transaction back to the manufacturer, thereby shifting the burden for determining where the sale fell in terms of the target market, or whether distributors will only report exceptions upstream. In addition, the protocol for remediation, in instances where a manufacturer receives an adverse report, is unclear.

What is clear, however, is that distributors are taking their responsibilities around sales suitability reporting extremely seriously. Although it has traditionally been carried out in-house, 44% of webinar attendees are now using intermediaries for sales reporting. And while 22% are as yet undecided on their sales suitability reporting strategy, anecdotal evidence suggests that they are searching for a one-stop-shop arrangement, plugging them in to all the necessary manufacturers in a way that keeps their sensitive data secure.

While it may not be data challenge as such, another significant hurdle facing the industry right now is the lack of working groups targeting the above issues – at least ones that represent the interests of both manufacturers and distributors equally – and setting out to find common solutions.

Ultimately, manufacturers and distributors both have significant obligations to meet under MiFID II’s new investor protection regime. And with many other regulatory, operational, and financial burdens to contend with, a dialogue to help both parties meet their obligations with the minimum amount of upheaval can only be beneficial.