DISTRIBUTION OVERSIGHT AND COMPLIANCE CANNOT BE UNDERESTIMATED UNDER MIFID II
[vc_row][vc_column][vc_column_text el_class=”collaborate”]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 via 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. We can facilitate, via our digital platform, the communication of confirmed negative target market events all the way through to receiving daily data, including information on target markets.
Only by having an effective two-way flow of data will manufacturers be able to perform its oversight role. That is, that they receive enough information to determine that the distributor is performing its role correctly, rather than just be informed about negative target market events.
The manufacturer, via our digital platform, will be able to perform distribution oversight as required by the MiFID II regulations.
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. Using our digital platform, they will see if something is inside or outside the scope of target markets, and take the necessary steps.
The platform solution
KNEIP’s digital platform solution offers enormous potential for efficiency gains. Moreover, improved operational effectiveness can be achieved by combining and connecting the data:
Efficiency gains: A single platform approach will pave the way to leaner and more cost effective operations. The potential automation ability is greatly escalated, resulting in reduced operational headcount and cost.
Operational effectiveness: Unifying data on one platform covering all essential output requirements can unlock unchartered territories of operational efficiency. Cross sharing of overlapping data from a single source improves consistency and quality of output data and accelerates time to market without compromising standards.
Risk mitigation: Whereas other providers use junior staff and a number of manual processes, the platform leverages the full expertise of KNEIP’s experienced people in combination with automation.
Sustainable compliance: One source of data, managed and shared on one platform opens new potential for governance and compliance activities and improvements.
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 our 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. We are providing a solution to enable them to create a robust framework for distribution oversight.[/vc_column_text][/vc_column][/vc_row]