SSRN Id3206731

Product governance and product intervention
under MiFID II/MiFIR

Danny Busch1
I. INTRODUCTION
Some of the financial products sold in recent years have not been in the interests of the client,
such as interest rate swaps sold to small and medium-sized enterprises in many European
countries. This is why consideration has been given to ways of nipping this problem in the bud,
in other words by preventing harmful products from even reaching the market. Under MiFID
II this has taken the form of a mandatory product approval process. But, as usual, firms will
look for ways around these requirements. It would be naive to think that product approval
schemes could in practice guarantee that harmful products are no longer marketed. This is why
there must be a safety net. This safety net takes the form of a power for the national competent
authorities (NCAs) and also for ESMA and EBA to remove harmful products from the market
– a system known as product intervention. In this chapter, the new MiFID II/MiFIR rules on
product governance and product intervention are analysed and discussed.
II. PRODUCT GOVERNANCE
1. Scope
The product governance rules apply first and foremost to investment firms and banks that may
provide investment services.2 However, they also apply to other entities which can provide
investment services, in particular managers of undertakings for collective investment in
transferable securities (UCITS) and alternative investment funds (AIFs):
‘when such entities are authorised to perform MiFID investment services (pursuant to Article
6(3) of UCITS3 and Article 6(4) of [the Alternative Investment Fund Managers Directive, or
AIFMD]4 respectively) and only in connection to the performance of such services. Such UCITS
management companies or alternative investment fund managers that distribute or manufacture
UCITS or AIFs to investors will only be directly subject to the requirements applicable to the
investment services they provide.’5
1
Professor Dr Danny Busch, LLM (Utrecht), MJur (Oxon), Chair for Financial Law and Director of the Institute
for Financial Law (IFL), University of Nijmegen, the Netherlands. E-mail: d.busch@jur.ru.nl. Website IFL:
http://www.ru.nl/ifl/.
2
See Article 9(3)(b); Article 16(3), second to seventh subparagraphs; Article 24(2) (non-bank investment firms)
in conjunction with Article 1(3)(a) and (b) MiFID II (banks which also act as investment firms).
3
Directive 2009/65/EC, OJ L 302, 17 November 2009, pp. 32-96 (UCITS IV), as amended by Directive
2014/91/EU, OJ L 257, 23 July 2014, pp. 186-213 (UCITS V). UCITS V should have been implemented in the
national laws of the Member States of the EU/EER from 18 March 2016 (Article 2(1), second paragraph, UCITS
V).
4
Directive 2011/61/EU, OJ L 174, 1 July 2011, pp. 1-73.
5
ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19
December 2014), p. 52 (no. 9).
Electronic copy available at: https://ssrn.com/abstract=3206731

In short, the product governance rules apply to these managers only in connection with the
provision of investment services. This means that UCITS management companies and AIF
managers which offer investors units in UCITS or AIFs managed by them (without also
providing them with investment services) are not subject to the product governance rules of
MiFID II as a result of making such an offer. It follows that UCITS management companies
and AIF managers which provide no investment services at all will therefore not be subject in
any way to the product governance rules of MiFID II. ESMA rightly states that it would be
preferable for the UCITS and AIFM directives to be amended in such a way that these managers
too are subject to the product governance rules under MiFID II.6
Nonetheless, many managers will also be bound de facto by the product governance rules under
MiFID II as the unit rights are often marketed through intermediaries – investment firms. These
investment firms will qualify as distributors.7 To be able to comply with their product
governance obligations, the distributors are reliant on cooperation with the manufacturer of the
product, in this case the UCITS management company or AIF manager. Although managers
are admittedly not bound by the product governance rules, it seems to me that they have every
interest in ensuring that their distributors comply with the rules. It follows that they must
determine the target market properly so that distributors can offer the units to the correct
investors.8 In the remainder of this chapter I will disregard the situation in which a UCITS
management company or AIF manager provides investment services.
Finally, it should be noted that the product governance rules apply not only to financial
instruments but also to selling and advising on structured deposits.9 A party that offers or
advises on structured deposits may be a bank which does not provide investment services. The
product governance rules therefore do not apply solely to investment firms, banks, UCITS
management companies and AIF managers that may provide investment services, but also to
‘ordinary’ banks. Below I will often use the more neutral terms ‘firm’ and ‘product’.
2. Manufacturers and distributors
2.1 General
MiFID II distinguishes between firms that manufacture the product (manufacturer) and those
that distribute the product (distributor). Each of these categories has its own responsibility in
respect of product governance. In practice, a firm can naturally be both a manufacturer and a
distributor. In such a case, it must comply with both sets of product governance rules.10
6
December 2014), p. 52 (no. 9).
7
See § II.3, below.
8
See § II.6.3.
9
It is evident from Article 1(4), opening words and (a) and (b), MiFID II, as well as from Article 1(2), Draft
Commission Delegated Directive, C(2016) 2031 final, 7 April 2016, that the product governance rules also apply
to structured deposits. A structured deposit is a deposit on which the interest to be paid is not determined by
reference to an interest rate (such as Euribor), but is instead dependent, for example, on the position of the AEX
index. See the definition of structured deposit in Article 4, paragraph 1 (43) MiFID II in conjunction with Article
2(1)(c) of Directive 2014/49/EU (Deposit Guarantee Schemes Directive). On the subject of structured deposits,
see ESMA/2015/610, Consultation Paper, Draft guidelines on complex debt instruments and structure deposits
(24 March 2015).
10
See Recital (17), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also
December 2014), p. 51.

2.2 Manufacturers
Following ESMA’s technical advice, the Draft Commission Delegated Directive published on
7 April 2016 makes it clear that the term ‘manufacturer’ must be interpreted broadly.
Manufacturing of products ‘encompasses the creation, development, issuance and/or design of
financial instruments.’11 This includes firms ‘advising corporate issuers on the launch of new
financial instruments’.12 In short, if an investment firm advises a company on the issue of shares
or bonds, it must complete the product approval process.13 It has been argued in the literature
that is going rather far,14 but we must bear in mind that the product governance requirements
should be complied with in an appropriate and proportionate manner, ‘taking into account the
nature of the financial instrument, the investment service and the target market for the
product.’15 ESMA also recommends that the product governance obligations should apply to
all financial instruments, e.g. ordinary shares and bonds, even if the term ‘manufacture’ perhaps
does not seem (linguistically) applicable to them.16 Nonetheless, ESMA’s approach seems to
me to be correct in view of the object of investor protection and the text of MiFID II and the
Draft Commission Delegated Directive which both provide, after all, that the product
governance rules apply to all financial instruments (and structured deposits).
In practice, it is naturally quite conceivable that two or more manufacturers collaborate to create
a new product. In such a case, following ESMA’s technical advice, the Draft Commission
Delegated Directive stipulates that they outline their mutual responsibilities in a written
agreement.17
2.3 Distributors
The Commission also chooses a broad approach in the case of distributors. In response to the
previous consultation, various market participants had requested that the obligations for
distributors should not be extended to investment firms which distribute financial instruments
on an execution-only service basis. However, ESMA saw no cause for such a restriction,18 and
11
See Article 9(1), first paragraph, Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016;
December 2014), p. 51, 55 (no. 2). And the same obviously applies to structured deposits, see Article 1(2), Draft
Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.
12
See Recital (15), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016; ESMA/2014/1569,
Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 51.
And the same obviously applies to structured deposits, see Article 1(2), Draft Commission Delegated Directive,
C(2016) 2031 final, 7 April 2016.
13
See below at § II 6.2.
14
L.J. Silverentand, MiFID II – Product Governance, Tijdschrift voor Financieel Recht (2015), p. 63.
15
See Article 9(1), second paragraph, Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.
C(2016) 2031 final, 7 April 2016.
16
December 2014), pp. 53-54 (no 12). Cf. L.J. Silverentand, MiFID II – Product Governance, Tijdschrift voor
Financieel Recht (2015), p. 63.
17
See Article 9(8), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016; ESMA/2014/1569,
Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), pp. 56
(no. 9).
18
December 2014), p. 56 (no. 9).

this approach is followed by the Commission, which seems to me to be correct. See Recital (18)
of the Draft Commission Delegated Directive:
‘In light of the requirements set out in [MiFID II] and in the interest of investor protection,
product governance rules should apply to all products sold on primary and secondary markets,
irrespective of the type of product or service provided and of the requirements applicable at
point of sale. However, those rules may be applied in a proportionate manner, depending on the
complexity of the product and the degree to which publicly available information can be
obtained, taking into account the nature of the instrument, the investment service and the target
market. Proportionality means that these rules could be relatively simple for certain simple,
products distributed on an execution-only basis where such products would be compatible with
the needs and characteristics of the mass retail market.’19
In practice, there is quite often likely to be a chain of distributors. According to the

Commission (following ESMA’s technical advice), the final distributor in the chain (i.e. the
party with the direct client relationship) has ultimate responsibility for meeting the
product governance obligations that apply to distributors.20 But the intermediate
distributors too have responsibilities. They must ensure that relevant product information is
passed from the manufacturer to the final distributor in the chain.21 Similarly, if the product
manufacturer requires information on product sales in order to comply with its own product
governance obligations, the intermediate firm must enable him to obtain it.22 And, finally, an
intermediate distributor must apply any relevant product governance obligations for
manufacturers in relation to the service they provide.23 This provision is as opaque as it
is remarkable. After all, an intermediate distributor is only a manufacturer if it has
‘manufactured’ the product or, for example, has itself made modifications to the product,
whether or not in cooperation with one or more other manufacturers (for this purpose,
the term ‘manufacturer’ should be broadly interpreted24). If that is not the case, I can see
no good reason why an intermediate distributor should be bound by the product
governance rules for manufacturers.
19
See Recital (18), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also Recital
(15), in fine, Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016, stipulating that firms ‘that
offer or sell financial instruments and services to clients should be considered distributors.’ That product
governance obligations for distributors must be applied in an appropriate and proportionate manner, is also
apparent from Article 10(1), first paragraph, Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.
See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR
(19 December 2014), p. 55 (no. 1).
20
See Article 10(10), first sentence (financial instruments), in conjunction with Article 1(2) (structured deposits),
Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569, Final
Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 61 (no.
31, first sentence).
21
See Article 10(10)(a) (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft
Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569, Final Report –
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 61 (no. 31 sub (i)).
22
See Article 10(10)(b) (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 61 (no. 31 sub (ii)).
23
See Article 10(10)(c) (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 61 (no. 31 sub (iii)).
24
See above, § II 2.2.

3. Three perspectives
MiFID II approaches the subject of product governance from three perspectives: (1) corporate
governance, (2) investor protection, and (3) organisational requirements.
4. Corporate governance
From the corporate governance perspective, it is apparent that the management body has final
responsibility for product governance. MiFID II provides that the management body defines a
policy as to products (and other matters) which is in accordance not only with the risk tolerance
of the firm but also with the characteristics and needs of the clients of the firm to whom they
will be offered or provided, including carrying out appropriate stress testing. The management
body is also responsible for approving this policy and overseeing its implementation.25 In other
words, firms must ensure that the management body has effective control over the firm’s
product governance process. The provision applies both to firms that manufacture products
(manufacturers) and to firms that offer or recommend those products (distributors).26
Firms must ensure that the compliance reports to the management body systematically include
information about (1) the products they manufacture, including information on the distribution
strategy, if they are manufacturers, and (2) the products they offer or recommend and the
services provided, if they are (also) distributors. Firms must make the reports available to their
NCA on request.27
5. Investor protection
From the investor protection perspective the ultimate goal of product governance is apparent,
namely protection of both professional and non-professional clients. The relevant provisions
distinguish between the duties of care of firms which manufacture products (manufacturers)
and parties which offer or recommend those products (distributors).
Manufacturers must ensure that (1) products are manufactured which meet the needs of an
identified target market of end clients within the relevant category of clients, (2) the strategy
for distribution of the products is compatible with the identified target market, and (3) they take
reasonable steps to ensure that the product is distributed to the identified target market.28
Distributors must (1) understand the products they offer or recommend, (2) assess whether the
products are compatible with the needs of the clients to whom they provide investment services,
25
Article 9(3)(b) (financial instruments) in conjunction with Article 1(4), opening words and (a) (structured
deposits) MiFID II.
26
Article 9(6) (manufacturers) and Article 10(8) (distributors) (financial instruments), in conjunction with Article
1(2) (structured deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also
December 2014), p. 56 (no. 7) (manufacturers), 60 (no. 28) (distributors).
27
Article 9(6), second and third sentence (manufacturers) and Article 10(8), second and third sentence
(distributors) (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft Commission
Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569, Final Report – ESMA’s
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56 (no. 7, second sentence)
(manufacturers), p. 60 (no. 28, second sentence) (distributors). See on the role of the compliance function also §
II 6.1.
28
Article 24(2), first paragraph (financial instruments) in conjunction with Article 1(4), opening words and (b)
(structured deposits) MiFID II. See also Recital (71) MiFID II.

and (3) ensure that the products are offered or recommended only when this is in the interests
of the client.29 This requirement applies both to firms which sell products they have
manufactured themselves (distributors-cum-manufacturers) and to firms which sell or
recommend products manufactured by others (pure distributors).
6. Organisational requirements
6.1 General
Finally, from the perspective of the organisational requirements it can be seen how product
governance must be firmly embedded within the firm’s organisation. The compliance
departments of manufacturers and distributors play an important role in this connection. It is
their responsibility to ensure that the product governance obligations are implemented and
complied with within the organisation.30
6.2 Product approval process for manufacturers
Each manufacturer must have put in place a product approval process. Through this process
each newly manufactured product (and each significant adaptation of an existing product) must
be approved before it is marketed or distributed to clients.31
A product is always assessed in relation to the intended target market, for example retail or
wholesale (or naturally a more specific target market). The approval process must ensure that
all risks to such identified target market are assessed. The process must also ensure that the
intended distribution strategy is consistent with the identified target market.32 As part of this
process, the manufacturer must also identify any groups of investors for whose needs,
characteristics and objectives the product is not compatible.33 Where firms collaborate to
manufacture a product, only one target market needs to be identified. 34
Manufacturers distributing their products through other parties (i.e. distributors) must
determine the needs and characteristics of clients for whom the product is compatible based on
29
Article 24(2), second paragraph (financial instruments) in conjunction with Article 1(4), opening words and (b)
(structured deposits) MiFID II. See also Recital (71) MiFID II.
30
See Article 9(7) (manufacturers) and Article 10(6) (distributors) (financial instruments), in conjunction with in
conjunction with Article 1(2) (structured deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7
April 2016. See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID
II and MiFIR (19 December 2014), p. 56 (no. 8) (manufacturers), 60 (no. 26) (distributors). See on the compliance
function also § II.4.
31
Article 16(3), second paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
(structured deposits) MiFID II.
32
Article 16(3), third paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
33
Article 9(9), first paragraph, second sentence (financial instruments), in conjunction with Article 1(2) (structured
deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569,
Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56
(no. 10).
34
Article 9(9), first paragraph, third sentence (financial instruments), in conjunction with Article 1(2) (structured
deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569,
Final Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56
(no. 10).

their theoretical knowledge of and past experience with the product or similar products, the
financial markets and the needs, characteristics and objectives of potential end clients.35
Various market participants indicated in the previous consultations that they would appreciate
guidance from ESMA on how to determine the target market for a new product. However,
according to ESMA this was not necessary:
‘ESMA considers that it would be inappropriate to specify in too much detail the level of
granularity that is required, since this will vary according to the specific circumstances. For
simpler, more mainstream investments, such as ordinary shares, it is likely that the target market
will be identified with less detail. In many cases, it is understood that such products can be
considered compatible with the mass retail market. For more complicated, less mainstream
products, such as contingent convertible securities or structured products with complicated
return profiles, the target market should be identified with more detail.’ 36
This approach is followed by the Commission, see Recital (19) of the Draft Commission
Delegated Directive :
‘The level of granularity of the target market and the criteria used to define the target market
and determine the appropriate distribution strategy should be relevant for the product and should
make it possible to assess which clients fall within the target market, for example to assist the
ongoing reviews after the financial instrument is launched. For simpler, more common products,
the target market could be identified with less detail while for more complicated products such
as bail-inable instruments or less common products, the target market should be identified with
more detail.’37
See also Article 9(9), first sentence, Draft Commission Delegated Directive, stipulating that
‘Member States shall require investment firms to identify at sufficiently granular level the
potential market for each financial instrument and specify the type(s) of client for whose needs,
characteristics and objectives the financial instrument is compatible.’38
What other aspects should the manufacturer take into account in the product approval process?
(1) Firms manufacturing products must ensure that the design of the product, including its
features, (a) does not adversely affect end clients or (b) does not lead to problems with market
integrity by enabling the firm to mitigate and/or dispose of its own risks or exposure to the
underlying assets of the product, where the investment firm already holds the underlying assets
on own account.39
35
Article 9(9), second paragraph (financial instruments), in conjunction with Article 1(2) (structured deposits),
Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569, Final
Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56-57 (no.
11).
36
December 2014), p. 51 (no. 5), p. 56-57 (nos. 10 and 11).
37
See Recital (19), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. And the same
obviously applies to structured deposits, see Article 1(2), Draft Commission Delegated Directive, C(2016) 2031
final, 7 April 2016.
38
C(2016) 2031 final, 7 April 2016.
39
Article 9(2), second sentence (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56 (no. 3).

(2) The manufacturers must prepare a conflict-of-interest analysis each time a product is
manufactured. In particular, firms must assess whether the product creates a situation where
end clients may be adversely affected if they take (a) an exposure opposite to the one
previously held by the firm itself, or (b) an exposure opposite to the one that the firm
wants to hold after the sale of the product.40
(3) Firms must consider whether the product may represent a threat to the orderly functioning
or to the stability of financial markets before deciding to proceed with the launch of the
product.41
(4) The manufacturer must also prepare a scenario analysis. This involves studying the risk of
poor end client outcomes posed by the product and in which circumstances these outcomes may
occur. The firm must assess the financial instrument under negative conditions (stress testing).
The following circumstances can be taken into account here: (a) the market environment
deteriorates, (b) the manufacturer or a third party involved in the manufacturing and/or
functioning of the product experiences financial difficulty or other counterparty risk
materialises, (c) the product fails to become commercially viable, or (d) demand for the product
is much higher than anticipated, putting a strain on the firm’s resources and/or on the market of
the underlying product.42
(5) The manufacturer must consider whether the product meets the identified needs,
characteristics and objectives of the target market. It is necessary to check, for example, whether
(1) the product’s risk/reward profile is consistent with the target market, and (2) the product
design is driven by features that benefit the client and not by a business model that relies on
poor client outcomes to be profitable.43
(6) Manufacturers need to consider the charging structure proposed for the product and check,
for example, that (a) product’s costs and charges are compatible with the needs, objectives and
characteristics of the target market; (b) charges do not undermine the return expectations of the
product. For example, where the costs or charges are equal, exceed or remove almost all the
expected tax advantages linked to a product, and (c) the charging structure of the product is
appropriately transparent for the target market (e.g. it must not be too complex to understand
and must not disguise charges).44
40
Article 9(3) (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft Commission
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56 (no. 4).
41
42
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 57 (no. 12). As regards stress
tests, see also Article 9(3)(b) (financial instruments) in conjunction with Article 1(4), opening words and (a)
(structured deposits) MIFID II, referred to in § II.4 above.
43
Article 9(11) (financial instruments), in conjunction with Article 1(2) (structured deposits) Commission
44
Article 9(12) (financial instruments), in conjunction with Article 1(2) (structured deposits), Commission

6.3 Product governance procedures for distributors
Distributors do not need an approval process, but, as noted above,45 they must, among other
things, (1) assess whether the products meet the needs of the clients to whom they offer
investment services, taking account of the identified target market of end clients, and (2) ensure
that products are offered or recommended only when this is in the interests of the client.46
This objective must be implemented within the firm’s organisation as follows. If a distributor
decides what products and services it wishes to provide or recommend, it must have
implemented adequate product governance procedures which ensure that (1) the products and
services it intends to offer are compatible with the needs, characteristics and objectives of the
identified target market, and (2) the intended distribution strategy is consistent with the
identified target market. Distributors must therefore determine the needs of the clients that they
intend to focus on, so as to ensure that clients’ interests are not compromised as a result of
commercial or funding pressures. As part of this process, distributors must identify any groups
of investors for whose needs, characteristics and objectives the product or service is not
compatible.47
A distributor must obtain from manufactures that are subject to MiFID II information to gain
the necessary understanding and knowledge of the products they intend to recommend or sell,
in order to ensure that these products will be distributed in accordance with the needs,
characteristics and objectives of the identified target market.48
A distributor must take all reasonable steps to ensure it also obtains adequate and reliable
information from manufacturers not subject to MiFID II to ensure that products will be
distributed in accordance with the characteristics, objectives and needs of the target market.
Where relevant information is not publicly available, the distributor must take all reasonable
steps to obtain such relevant information from the manufacturer or its agent. Acceptable
publicly available information is information which is clear, reliable and produced to meet
regulatory requirements, such as disclosure requirements under the Prospectus Directive49 or
the Transparency Directive.50 This obligation is relevant for products sold on primary and
secondary markets and applies in a proportionate manner, depending on the degree to which
publicly available information is obtainable and the complexity of the product. 51
45
At § II.5.
46
Article 24(2), second paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
47
Article 10(2), first paragraph (financial instruments), in conjunction with Article 1(2) (structured deposits),
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 59 (no. 21, first
three sentences).
48
Article 10(2), second paragraph (financial instruments), in conjunction with Article 1(2) (structured deposits),
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 60 (no. 29). See
Article 16(3), sixth paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
(structured deposits) MiFID II and Recital 71 MiFID II.
49
Directive 2003/71/EC.
50
Directive 2004/109/EC.
51
Article 10(2), third paragraph (financial instruments), in conjunction with Article 1(2) (structured deposits),
ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 60-61 (no. 30). See
also Article 10(1), second and third paragraph, Commission Delegated Directive, C(2016) 2031 final, 7 April
2016. See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID II and
MiFIR (19 December 2014), p. 59 (no. 20).

A distributor which has not itself manufactured a product is dependent on the manufacturer for
the provision of information on the product. This is why the manufacturer is obliged to provide
adequate information about the product and the product approval process to all distributors,
including the product’s identified target market.52 This includes information about the
appropriate channels for product distribution, the product approval process and the target
market assessment. The information should be of an adequate standard to enable distributors to
understand and recommend or sell the product properly.53 A distributor, in its turn, must use
the information obtained from manufacturers and information on its own clients to identify the
target market and distribution strategy.54 Where a firm is both manufacturer and distributor, it
is naturally necessary to determine the target market only once.55
6.4 Product governance requirements in respect of staff
Manufacturers must ensure that relevant staff involved in the manufacturing of products
possess the necessary expertise to understand the characteristics and risks of the products they
intend to manufacture.56
Distributors have a comparable obligation. However, they must ensure not only that relevant
staff understand the characteristics and risk of the products they are distributing, but also the
needs, characteristics and objectives of the identified target market.57
6.5 Monitoring obligation
(i) General
Product governance obligations do not only apply at the start of the process. A firm must
regularly review products which it ‘offers or markets’, taking into account any event that could
52
Article 16(3), fifth paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
53
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 57-58 (no. 15).
54
Article 10(2), third paragraph, first sentence, (financial instruments), in conjunction with Article 1(2) (structured
deposits) Commission Delegated Directive, C(2016) 2031 final, 7 April 2016. See also ESMA/2014/1569, Final
21, sentences four and five), where in sentence five reference is made to Article 16(3), fourth paragraph, MiFID
II. This is evidently an error, since ESMA intends to refer to Article 16(3), third paragraph, MiFID II.
55
Article 10(2), third paragraph, second sentence, and Recital (17), second sentence, (financial instruments), in
conjunction with Article 1(2) (structured deposits), Commission Delegated Directive, C(2016) 2031 final, 7 April
2016. See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID II and
MiFIR (19 December 2014), p. 59 (no. 21, sentence 6).
56
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 56 (no. 6). Cf. also the
corporate governance requirement that the management body should approve the internal organisation of the firm,
including criteria for the selection, training, knowledge, skills and experience of the staff. See Article 9(3)(a)
(financial instruments) in conjunction with Article 1(4), opening words and (a) (structured deposits) MiFID II; see
also Recital (54) MiFID II.
57
Article 10(7), (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft Commission
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), p. 60 (no. 27). See also Article
24(2), second paragraph, (financial instruments) in conjunction with Article 1(4), opening words and (b)
(structured deposits) MiFID II, which provides that ‘an investment firm shall understand the financial instruments
they offer or recommend’. See also § II.5 above.

materially affect the potential risk to the identified target market, in order to assess at least (1)
whether the product remains consistent with the needs of the identified target market and (2)
whether the intended distribution strategy remains appropriate (together known as the
monitoring obligation).58 Although the words ‘offers or markets’ are not crystal clear, this must
be read as meaning that both the manufacturer and the distributor have a monitoring obligation.
In any event, following ESMA’s technical advice, the Draft Commission Delegated Directive
subjects both manufacturers and distributors to a monitoring obligation.59
(ii) Monitoring obligation manufacturer
A manufacturer must review the products it manufactures on a regular basis, taking into account
any event that could materially affect the potential risk to the identified target market. A
manufacturer must consider if the product remains consistent with the needs, characteristics
and objectives of the target market and if it is being distributed to the target market, or is
reaching clients whose needs, characteristics and objectives the product is not compatible.60
A manufacturer must review (i) products prior to any further issue or re-launch, if it is aware of
any event that could materially affect the potential risk to investors and (ii) at regular intervals
to assess whether the products function as intended. A manufacturer must determine how
regularly to review its products based on relevant factors, including factors linked to the
complexity or the innovative nature of the investment strategies pursued.61
Manufacturers must also identify crucial events that would affect the potential risk or return
expectations of the product, such as (a) the crossing of a threshold that will affect the return
profile of the product, or (b) the solvency of certain issuers whose securities or guarantees may
impact the performance of the product.62 What happens if such an event occurs? The
manufacturer must take ‘appropriate action’. It is up to the manufacturer to determine what
action it will take, provided that this is appropriate. However, following the lead of market
participants, the following suggestions are made (the list is not exhaustive): (1) the provision
of any relevant information on the event and its impact on the product to (a) clients, or (b) the
distributors of the product if the manufacturer itself does not offer the product directly to the
clients; (2) changing the product approval process; (3) stopping further issuance of the product;
(4) changing the product to avoid unfair contract terms; (5) considering whether the sales
channels through which the products are sold are appropriate if it transpires that the product is
not being sold as envisaged (for example, if a product was designed for a niche market of
sophisticated investors, but is being sold to a much larger group of clients); (6) contacting the
58
Article 16(3), fourth paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
59
Article 9(14) and (15) (manufacturers) and Article 10(4) and (5) (distributors), (financial instruments), in
conjunction with Article 1(2) (structured deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7
April 2016. See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID
II and MiFIR (19 December 2014) on pp. 58 (Nos. 16-19) (manufacturers), 60 (Nos. 23 and 24) (distributors). As
to manufacturers see also Recital (71) MiFID II, making it clear that ‘[i]nvestment firms that manufacture [italics
DB] financial instruments (…) periodically review the identification of the target market of and the performance
of the products they offer.’
60
Delegated Directive, C(2016) 2031 final, 7 April 2016.
61
Article 9(15), first and second sentence (financial instruments), in conjunction with Article 1(2) (structured
deposits), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.
62
Article 9(15), third sentence (financial instruments), in conjunction with Article 1(2) (structured deposits), Draft
Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.

distributor to discuss a modification of the distribution process; (7) terminating the relationship
with the distributor; or (8) informing the relevant NCA .63
To be able to comply with its monitoring obligation, however, a manufacturer needs

information about its distributors. ESMA proposes that distributors must inform the
manufacturer periodically about their experience with the product. This proposal has
encountered resistance from the market. The criticism is that a reporting duty of this kind would
entail extra costs and be so disproportionate to the expected benefits that small distributors
would limit the number of manufacturers with which they work in order to minimise their
reporting obligations. Ultimately, this would also not be in the interests of investors since they
would have less choice. However, most consumer organisations consider that a reporting
obligation would be useful, particularly if feedback from clients were to be included in the
information supplied to the manufacturer. After considering all these comments, ESMA
decided to maintain its proposal, on the basis that such reporting can be beneficial for the
functioning of product governance obligations.64 The Draft Commission Delegated Directive
closely follows ESMA’s technical advice. See Recital (20):
‘For the efficient functioning of product governance obligations, distributors should periodically
inform the manufacturers about their experience with the products. While distributors should
not be required to report every sale to manufacturers, they should provide the data that is
necessary for the manufacturer to review the product and check that it remains consistent with
the needs, characteristics and objectives of the target market defined by the manufacturer.
Relevant information could include data about the amount of sales outside the manufacturer’s
target market, summary information of the types of clients, a summary of complaints received
or by posing questions suggested by the manufacturer to a sample of clients for feedback.’
See finally Article 10(9) Draft Commission Delegated Directive, stipulating that
‘[...] distributors provide manufacturers with information on sales and, where appropriate,
information on [...] reviews to support product reviews carried out by manufacturers.’65
(iii) Monitoring obligation distributor
But as the distributor too is subject to a monitoring obligation, it also has a responsibility.
Distributors must periodically review and update their product governance arrangements in
order to ensure that they remain robust and fit for their purpose, and take appropriate actions
where necessary.66
63
Article 9(15), fourth sentence, in conjunction with Article 1(2) (structured deposits), Draft Commission
Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), pp. 58-59 (np. 19). See also
pp. 54-55 (nos. 15-17).
64
December 2014), pp. 54 (no. 14) and 60 (no. 25).
65
See also ESMA/2014/1569, Final Report – ESMA’s Technical Advice to the Commission on MiFID II and
MiFIR (19 December 2014), p. 60 (no. 25). As for structured deposits, Article 10(9) must of course be read in
conjunction with Article 1(2), Draft Commission Delegated Directive, C(2016) 2031 final, 7 April 2016.
66

Distributors must also review the products they offer or recommend and the services they
provide on a regular basis, taking into account any event that could materially affect the
potential risk to the identified target market. Distributors must assess at least whether the
product or service remains consistent with the needs, characteristics and objectives of the
identified target market and whether the intended distribution remains appropriate. Distributors
must reconsider and/or update the product governance arrangements if they become aware that
(1) they have wrongly identified the target market for a specific product or service, or (2) that
the product or service no longer meets the circumstances of the identified target market (e.g.
where the product becomes illiquid or very volatile due to market changes).67
6.6 Relationship with KYC rules and other MiFID II/MiFIR provisions
The measures, processes and arrangements described above are without prejudice to all other
requirements of MiFID II and MiFIR, including those relating to disclosure, suitability or
appropriateness, identification and management of conflicts of interest and inducements.68 This
means, among other things, that the firm must still comply with the applicable KYC rules even
in relation to a client who comes within the product’s target group. In ESMA’s words:
‘[t]he analysis of the target market for the purposes of product governance arrangements is
distinct from and does not replace the suitability/appropriateness assessments which are conduct
of business rules that take place for each specific transaction concluded by a given investor in
relation to a given product.’69
III. PRODUCT INTERVENTION
1. Introduction and scope
This previous section dealt with the MiFID II rules on product governance. As noted in the
introduction to this chapter, it would be naive to think that these rules are watertight and
guarantee that harmful products will never again be marketed. It is therefore no more than
realistic to introduce (and enforce) ex-post product intervention provisions in addition to the ex-
ante product governance rules. A distinction is made in this connection between (1) product
intervention by NCAs, and (2) the intervention powers of ESMA and EBA. Like the product
67
68
Article 16(3), seventh paragraph (financial instruments) in conjunction with Article 1(4), opening words and (a)
(structured deposits) MiFID II, Recital 71 MiFID II. See in a similar vein Article 10(3) (financial instruments),
in conjunction with Article 1(2) (structured deposits), Draft Commission Delegated Directive, C(2016) 2031 final,
7 April 2016, with the addition that ‘[...] particular care shall be taken when distributors intend to offer or
recommend new products or there are variations to the services they provide.’ See also ESMA/2014/1569, Final
21, in fine).
69
December 2014), pp. 51 and 59-60 (no. 22).

governance rules, the product intervention rules apply to both financial instruments and
structured deposits (referred to collectively below as ‘products’).70
2. Product intervention by NCAs
2.1 Powers of NCAs under MiFIR
(i) General
The NCAs are the first in line to act. They may prohibit or restrict the following:
(1) the marketing, distribution or sale of (a) certain products or (b) products with certain
specified features;
(2) a type of financial activity or practice in or from the Member States concerned.71
The NCA may impose a prohibition or restriction on a precautionary basis before a product
has been marketed, distributed or sold to clients. A prohibition or restriction may apply in
circumstances, or be subject to exceptions, specified by the NCA.72 The NCA must publish on
its website notice of any decision to impose a prohibition or restriction.73
An NCA may impose a prohibition or restriction only if it is satisfied on reasonable grounds

that the below cumulative requirements have been complied with. Once the below conditions
are no longer all complied with (in so far as they are applicable), the NCA must revoke the
prohibition or restriction.74
(ii) ‘Significant concern’ or ‘threat’
(1) (a) a product, financial activity or practice gives rise to ‘significant investor protection
concerns’, poses ‘a threat to the orderly functioning and integrity of financial markets or
commodity markets or to the stability of whole or part of the financial system within at least
one Member State’; or (b) a derivative has a detrimental effect on the price formation
mechanism in the underlying market.75
But what exactly constitutes ‘a significant investor protection concern’? And when is there ‘a
threat to the orderly functioning and integrity of financial markets or commodity markets’ or a
threat to ‘the stability of whole or part of the financial system within at least one Member State’?
The Commission adopts delegated acts specifying criteria and factors to be taken into account
by NCAs in order to determine this. The criteria and factors comprise:
(a) the degree of complexity of a product and the relation to the type of client to whom it is
marketed, distributed and sold;
(b) the degree of innovation of a product, activity or practice;
(c) the leverage a product or practice provides;
70
See the text of the Articles 39-43, MiFIR and Articles 19-21, Draft Commission Delegated Regulation C(2016)
2860 final, 18 May 2016. See also Article 69(2)(s) and (t) (in conjunction with Article 1(4)(c)) MiFID II.
71
Article 42(1) MiFIR.
72
Article 42(2), second and third paragraphs, MiFIR.
73
Article 42(5) MiFIR. The notice must specify details of the prohibition or restriction, a time after the publication
of the notice from which the measures will take effect and the evidence upon which it is satisfied each of the
conditions are met. A prohibition or restriction applies only in relation to actions taken after the publication of the
notice.
74
75
Article 42(2)(a) MiFIR.

(d) in relation to the orderly functioning and integrity of financial markets or commodity
markets, the size or the notional value of an issuance of products.76
Article 21(2)(a)-(v) Draft Commission Delegated Regulation published on 18 May 2016

specifies the criteria and factors to be taken into account in a detailed manner.77 The NCAs
must assess the relevance of all factors and criteria listed in the Draft Commission
Delegated Regulation, and take into consideration all relevant factors and criteria in
determining when (1) the marketing, distribution or sale of (a) certain products or (b)
products with certain specified features or (2) a type of financial activity or practice,
creates ‘a significant investor protection concern’, ‘a threat to the orderly functioning and
integrity of financial markets or commodity markets or to the stability of the whole or
part of the financial system within at least one Member State.’78
In its technical advice, ESMA stated that for NCAs the listed factors and criteria ‘are not
intended to represent an exhaustive list.’79 It is not entirely clear whether this advice has
been followed by the Commission. First of all, the Draft Commission Delegated Regulation
provides that
‘[t]he factors and criteria to be assessed by competent authorities to determine whether

there is a significant investor protection concern or a threat to the orderly functioning and
integrity of financial markets or commodity markets or to the stability of the whole or part
of the financial system within at least one Member State shall include [italics added, DB]
the following (…).’80
In respect of ESMA and EBA, the Draft Commission Delegated Regulation uses the words
‘shall be the following’, instead of ‘shall include’.81 This provides strong evidence that for
NCAs the listed criteria and factors are not intended to represent an exhaustive list,
whereas for ESMA and EBA they are intended to represent such an exhaustive list.
But there are some doubts. The Draft Commission Delegated Regulation also provides that
an NCA may determine the existence of ‘a significant investor protection concern’, ‘a threat to
the orderly functioning and integrity of financial markets or commodity markets or to the
stability of the whole or part of the financial system within at least one Member State’ based
on ‘one or more’ of the factors and criteria specified in Article 21(2)(a)-(v) Draft Commission
Delegated Regulation, suggesting that for NCAs the listed criteria and factors are intended
76
77
Draft Commission Delegated Regulation C(2016) 2860 final, 18 May 2016. See also ESMA/2014/1569, Final
Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), pp. 191- 196
(no. 3).
78
Article 21(1), first paragraph, Draft Commission Delegated Regulation C(2016) 2860 final, 18 May 2016.
79
December 2014), p. 191 (no. 3, second sentence). EBA even seems to suggest that in respect of structured deposits
the list of criteria is non-exhaustive not only for the NCAs but also for EBA. See EBA/Op/2014/13, Technical
Advice on possible delegated acts on criteria and factors for intervention powers concerning structured deposits
under Articles 41 and 42 of Regulation (EU) No 600/2014 (MiFIR) (11 December 2014), p. 7 (no. 3): ‘In
accordance with the overall conditions for intervention specified under Title VII, Chapter 1 of MiFIR, EBA and
CAs should also be able to intervene in new instruments, services or activities that may not meet these factors or
criteria or, conversely, not necessarily intervene if given criteria are met but overall detriment is not foreseen or
detected, or the relevant proportionality test is not satisfied.’
80
Article 21(2), first paragraph, in fine, Commission Delegated Regulation C(2016) 2860 final, 18 May 2016.
81
Article 19(2), first paragraph, in fine (ESMA), Article 20(2), first paragraph, in fine (EBA), Draft Commission
Delegated Regulation C(2016) 2860 final, 18 May 2016.

to represent an exhaustive list.82 The exact same formulation is used for ESMA and EBA.83
See also Recital (19) Draft Commission Delegated Regulation:
‘The need to assess all criteria and factors that could be present in a specific factual
situation should not prevent however the temporary intervention power from being used
by competent authorities, ESMA and EBA where only one of the factors or criteria leads to
such a concern or threat.’
In relation to investor protection, reference is made to a ‘significant concern’, whereas in

relation to the orderly functioning and integrity of financial and commodity markets,
reference is made to a ‘threat’. Recital (18) Draft Commission Delegated Regulation
explains the difference:
‘The existence of a “threat”, one of the prerequisites of the intervention in the perspective
of the orderly functioning and integrity of financial or commodity markets or stability of
the financial system, would require the existence of a greater concern than a “significant
concern”, which is the prerequisite of the intervention for investor protection.’84
(iii) Other requirements
(2) The existing regulatory requirements under Union law applicable to the relevant product or
financial activity or practice do not sufficiently address the risks, and the issue would not be
better addressed by improved supervision or enforcement of existing requirements.85
(3) The action must be proportionate taking into account (a) the nature of the risks identified,
(b) the level of sophistication of investors or market participants concerned, and (c) the likely
effect of the action on investors and market participants who may hold, use or benefit from the
product, activity or practice.86
(4) The NCA has properly consulted NCAs in other Member States that may be significantly
affected by the action.87
(5) The action does not have a discriminatory effect on services or activities provided from
another Member State.88
(6) The NCA has properly consulted public bodies competent for the oversight, administration
and regulation of physical agricultural markets under Regulation (EC) No 1234/2007, where a
product or activity or practice poses a serious threat to the orderly functioning and integrity of
the physical agricultural market.89
82
Article 21(1), second paragraph, Draft Commission Delegated Regulation C(2016) 2860 final, 18 May 2016.
83
Article 19(1), second paragraph (ESMA), Article 20(1), second paragraph (EBA), Draft Commission Delegated
Regulation C(2016) 2860 final, 18 May 2016.
84
Draft Commission Delegated Regulation C(2016) 2860 final, 18 May 2016. See also ESMA/2014/1569, Final
Report – ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014), pp. 190-191
(no. 2).
85
Article 42(2)(b) MiFIR.
86
Article 42(2)(c) MiFIR.
87
Article 42(2)(d) MiFIR.
88
Article 42(2)(e) MiFIR.
89
Article 42(2)(f) MiFIR.

2.2 Consultation with other NCAs and ESMA/EBA
Before an NCA may impose a prohibition or restriction it must consult with the other NCAs
and ESMA/EBA. It is not entirely clear whether there must be consultation with all other NCAs
or only with NCAs in other Member States that may be significantly affected by the action. In
the latter case, the provision would to this extent seem to repeat cumulative condition (4) under
§ III 2.1(ii), above. Whatever the case, not less than one month before the measure is intended
to take effect, it must notify all other NCAs and ESMA in writing (or through another medium
agreed between the authorities) the details of:
(a) the product90 or activity or practice to which the proposed action relates;
(b) the precise nature of the proposed prohibition or restriction and when it is intended to take
effect; and91
(c) the evidence upon which it has based its decision and upon which it is satisfied that each of
the conditions at § III 2.1, above are met.92
The period of a month is naturally very long in cases where speed is of the essence. MiFIR
therefore provides for an exception in such cases: if the NCA deems it necessary to take urgent
action in order to prevent detriment arising from products, practices or activities, it may take
action on a provisional basis with no less than 24 hours’ written notice, before the measure is
intended to take effect, to all other NCAs and ESMA or, for structured deposits, EBA, provided
that all the criteria are met and that, in addition, it is clearly established that a one month
notification period would not adequately address the specific concern or threat. However, the
NCA may not take action on a provisional basis for a period exceeding three months.93
2.3 Coordinating role of ESMA and EBA
ESMA (for financial instruments) or EBA (for structured deposits) performs a facilitation and
coordination role in relation to action taken by NCAs. In particular they ensure that action taken
by an NCA is justified and proportionate and that where appropriate a consistent approach is
taken by NCAs.94
After receiving notification of any action that is to be imposed, ESMA or EBA will adopt an
opinion on whether the prohibition or restriction is justified and proportionate. If ESMA or
EBA considers that the taking of a measure by other NCAs is necessary to address the risk, it
will state this in its opinion. The opinion must be published on ESMA’s website (in the case of
financial instruments) or EBA’s website (in the case of structured deposits).95 Where an NCA
proposes to take, or takes, action contrary to an opinion adopted by ESMA or EBA or declines
to take action contrary to such an opinion, it must immediately publish on its website a notice
fully explaining its reasons for so doing (comply or explain).96
2.4 Powers of NCAs under MiFID II
90
Article 42(3)(a) MiFIR refers only to ‘financial instrument’ and not also to ‘structured deposit’. This seems to
me to be an error. In the body of the text, I have therefore assumed that Article 42(3)(a) MiFIR also relates to
structured deposits.
91
Article 42(3)(b) MiFIR.
92
Article 42(3)(c) MiFIR.
93
94
95
96

NCAs also have product intervention powers under MiFID II. First of all, the NCA may suspend
the marketing or sale of products where the firm (which may be a manufacturer or a distributor)
has not developed or applied an effective product approval process or has otherwise failed to
comply with the product governance rules.97 I assume that this provision relates to the situation
where the product governance rules have not been complied with in relation to a given product
and there is therefore no guarantee that the product is ‘safe’. To ensure this safety after all, the
NCA can then suspend the marketing and sale of the product. Another interpretation is also
possible, but seems less likely. If the product governance rules have not been observed in
relation to a given product, the NCA may also suspend trading in other products which are
marketed or sold by the firm in question, even if the product governance rules have been
adequately complied with in relation to such products. In such a case the power of suspension
would be more in the nature of a sanction.
Second, the NCA may suspend the marketing or sale of products where the conditions of
Articles 40, 41 or 42 MiFIR are not met.98 Articles 40 and 41 MiFIR relate to the temporary
intervention measures of ESMA and EBA.99 So should we interpret MiFID II as meaning that
the NCAs may suspend the marketing or sale of products in all cases in which ESMA and EBA
are unable to do so because the conditions of Articles 40 (ESMA) and 41 (EBA) MiFIR have
not been met? This would then constitute a very broad intervention power. And what about the
reference to Article 42 MiFIR? This provision relates to the intervention measures which the
NCAs can themselves take under MiFIR (see above100). On a literal interpretation of Article
69(2)(s) MiFID II, an NCA may, in all cases where it cannot prohibit or restrict the marketing
or sale of a product under Article 42 MiFIR because the conditions of application are not met,
still suspend the marketing or sale of products under Article 69(2)(s) MiFID II. Although
suspension is only a temporary measure and an outright prohibition or restriction under Article
42 MiFIR seems much more final, I cannot help but wonder whether Article 69(2)(s) MiFID II
is really intended to confer an unconditional power of suspension. Perhaps the provision should
be read as meaning that if a legal prohibition or restriction under Articles 40, 41 or 42 MiFIR
is not complied with by the firm concerned, the NCA may halt the actual marketing and sale.
3. Temporary intervention powers of ESMA and EBA
3.1 General
Besides the NCAs , ESMA and EBA may themselves also intervene. However, these powers
are secondary to those of the NCAs .
But let us first retrace a few steps. Under the ESMA and EBA Regulations, ESMA and EBA
have obtained tasks relating to consumer protection and financial activities.101 ESMA and EBA
supervise new and existing financial activities and can adopt guidelines and recommendations
with a view to promoting the safety and soundness of markets and convergence of regulatory
practice.102
97
Article 69(2)(t) (financial instruments) in conjunction with Article 1(4)(c) (structured deposits) MiFID II.
98
Article 69(2)(s) (financial instruments) in conjunction with Article 1(4)(c) (structured deposits) MiFID II.
99
See below, § III.3.
100
At § III 2.1.
101
Article 9, Regulation (EU) No 1095/2010, OJ 2010, L 331, 15 December 2010, pp. 84-119 (ESMA Regulation);
Article 9 Regulation (EU) No 1093/2010, OJ L 331, 15 December 2010, pp. 12-47 (EBA Regulation).
102
Article 9(2) ESMA Regulation; Article 9(2) EBA Regulation.

3.2 Powers under MiFIR
ESMA and EBA may temporarily prohibit or restrict certain financial activities that threaten
(1) the orderly functioning and integrity of financial markets or (2) the stability of the whole or
part of the financial system of the EU/EEA in the cases specified and under the conditions laid
down in further legislative acts.103 MiFIR is a further legislative act of this kind. MiFIR sets out
what activities may be prohibited and on what conditions.104 The powers of ESMA and EBA
are always identical, although ESMA is in each case the competent authority in relation to
financial instruments and EBA in relation to structured deposits. ESMA/EBA may prohibit or
restrict the following activities in the EU/EEA:
(1) the marketing, distribution and sale of (a) certain products or (b) products with certain
specified features;
(2) a type of financial activity or practice.
A prohibition or restriction may apply in circumstances, or be subject to exceptions, specified

by ESMA/EBA.105 ESMA/EBA may impose the prohibition or restriction on a precautionary
basis before a product has been marketed, distributed or sold to clients.106 ESMA/EBA
publishes on its website notice of any decision to take any action.107 In short, ESMA/EBA has
powers and duties of publication comparable to those of the NCAs (see above108), although the
powers relate to the entire EU/EEA and are not limited to a Member State, and any action taken
by ESMA/EBA will always be temporary. Before ESMA/EBA decides to take action, it must
notify the NCAs of the action it is proposing.109 ESMA/EBA must review a prohibition or
restriction at appropriate intervals and at least every three months. If the prohibition or
restriction is not renewed after that three-month period, it will expire.110 As the action under
MiFIR must be taken ‘in accordance with Article 9(5) [ESMA/EBA Regulations]’,111 a Member
State may request ESMA/EBA to reconsider its decision under MiFIR. In such a case
ESMA/EBA will decide whether to maintain its decision.112
ESMA/EBA may act only if the following cumulative conditions have been fulfilled.
(1) The proposed action addresses a ‘significant investor protection concern’ or a ‘threat to the
orderly functioning and integrity of financial markets or commodity markets or to the stability
of the whole or part of the financial system’ in the EU/EEA.
(2) Regulatory requirements under Union law that are applicable to the relevant product or
activity do not address the threat.
(3) An NCA or NCAs have not taken action to address the threat or the actions that have been
taken do not adequately address the threat.113
103
Article 9(5) ESMA Regulation; Article 9(5) EBA Regulation.
104
Article 40 (ESMA’s temporary intervention powers) and 41 (EBA’s temporary intervention powers) MiFIR.
105
Article 40(1) (ESMA); Article 41(1) (EBA) MiFIR.
106
Article 40(2), second paragraph (ESMA); Article 41(2), second paragraph (EBA) MiFIR.
107
Article 40(5) (ESMA); Article 41(5) (EBA) MiFIR. The notice must specify details of the prohibition or
restriction and a time after the publication of the notice from which the measures will take effect. A prohibition or
restriction will only apply to action taken after the measures take effect. Article 40(5) (ESMA); Article 41(5)
(EBA) MiFIR.
108
At § III 2.1.
109
110
Article 40(6) (ESMA); Article 41(6) (EBA) MiFIR. See also Article 9(5), third paragraph, ESMA/EBA
Regulations.
111
See Articles 40(1) (ESMA) and 41(1) (EBA) MiFIR.
112
Article 9(5), third paragraph, ESMA/EBA Regulations.
113
Article 40(2), first paragraph (ESMA); Article 41(2), first paragraph (EBA) MiFIR.

The first two of these conditions are virtually identical to those imposed in respect of product
intervention under MiFIR by NCAs.114 In the case of the second requirement, the Commission
(like in relation to the NCAs) must adopt delegated acts specifying criteria and factors to be
taken into account in determining when there is a ‘significant investor protection concern’, a
‘threat to the orderly functioning and integrity of financial markets or commodity markets or to
the stability of the whole or part of the financial system’ of the EU/EEA. This covers the same
criteria and factors as those which are relevant to NCAs.115 For ESMA and EBA there are no
doubts that the list of criteria and factors is intended to represent an exhaustive list.116
The size or the notional value of an issuance of products is mentioned separately in the case of
ESMA/EBA, whereas in the case of the NCAs this factor is explicitly related to the orderly
functioning and integrity of financial markets or commodity markets.117
It is apparent from the third condition that the powers of ESMA and EBA are secondary to
those of the NCAs . But if ESMA or EBA takes action, its measures prevail over those of an
NCA.118 I understand this provision to mean that supervised investment firms/banks which are
affected by the product intervention must be guided by the measures taken by ESMA/EBA and
can ignore any previous measures taken by NCAs. This would in any event seem to be the most
logical explanation, because in view of condition (3) above ESMA/EBA can act only once the
measures taken by NCAs have failed to deal with the threat adequately. If the national measures
are not adequate, it makes little sense for them to be complied with by the sector unless it is
assumed that cases can arise where the NCA’s action is not sufficient on its own but is sufficient
in combination with a measure taken by ESMA/EBA.
When taking action ESMA/EBA must ensure that the action:

(a) does not have a detrimental effect on the efficiency of financial markets or on investors that
is disproportionate to the benefits of the action;
(b) does not create a risk of regulatory arbitrage, and
(c) has been taken after consulting the public bodies competent for the oversight, administration
and regulation of physical agricultural markets under Regulation (EC) No 1234/2007, where
the measure relates to agricultural commodities derivatives.119
As we saw above,120 after receiving notification of any action that is to be imposed, ESMA/EBA
must adopt an opinion on whether the prohibition or restriction is justified and proportionate.
If ESMA or EBA considers that the taking of a measure by other competent authorities is
necessary to address the risk, it must state this in its opinion.121 However, if an NCA has already
taken a measure without awaiting the opinion, ESMA or EBA may itself take a corrective or
other measure without adopting the opinion.122
3.3 Power under ESMA/EBA Regulation: emergency situations
114
See above at § III 2.1.
115
Article 40(8) (ESMA); Article 41(8) (EBA) MiFIR. See also § III 2.1 above.
116
See above, § III 2.1(ii), and see Article 19(2), first paragraph, in fine (ESMA), Article 20(2), first paragraph, in
fine (EBA), Draft Commission Delegated Regulation C(2016) 2860 final, 18 May 2016.
117
Compare Article 40(8)(b) (ESMA) and Article 41(8)(b) (EBA) MiFIR with Article 42(7)(d) MiFIR (NCAs ).
118
119
Article 40(3), first paragraph (ESMA); Article 41(3), first paragraph (EBA).
120
At § III 2.3.
121
122
In any event, this is how I understand Article 40(3), second paragraph (ESMA); Article 41(3), second
paragraph (EBA) MiFIR.

Besides the intervention powers which ESMA/EBA has under MiFIR (see above) and
independently of any elaboration in further legislative acts, ESMA/EBA may also temporarily
prohibit or restrict certain financial activities in the case of an emergency situation in
accordance with and under the conditions laid down in Article 18 of the ESMA/EBA
Regulations.123 The requirements for intervention on this basis are strict. As the conditions for
exercise of the powers which ESMA/EBA has under MiFIR are more flexible, the power to
intervene in an emergency is expected to have little added value in practice.
IV. CONCLUSION
Both the ex-ante product governance rules and the ex-post product intervention rules are far-
reaching. The combination of these two approaches to preventing harmful products from
reaching the market is an important step forward in protecting investors. On the other hand,
compliance with the product governance rules is bound to entail costs for the firms concerned.
As seen above, the internal procedures must be configured and the arrangement requires a
considerable exchange of information between the firm that manufactures a product and the
firm that distributes it. All in all, I believe that these extra costs (which will undoubtedly be
discounted in the cost price) are acceptable. The social costs caused by marketing harmful
products are many times greater. In my view, the fact that MiFID II introduces not only product
governance rules but also far-reaching product intervention rules shows a sense of realism.
After all, as I noted in the introduction, it would be naive to think that the product governance
rules could in practice guarantee that harmful products are no longer marketed.
123
Article 9(5) ESMA Regulation; Article 9(5) EBA Regulation. See R.H. Maatman and M.H.J.M. ter Braak,
‘Financiële crisis en noodsituatie’, Ondernemingsrecht (2012), pp. 291-293.

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Product governance and product intervention

under MiFID II/MiFIR

II. PRODUCT GOVERNANCE

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2. Manufacturers and distributors

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In practice, there is quite often likely to be a chain of distributors. According to the

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6.2 Product approval process for manufacturers

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6.4 Product governance requirements in respect of staff

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(ii) Monitoring obligation manufacturer

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To be able to comply with its monitoring obligation, however, a manufacturer needs

(iii) Monitoring obligation distributor

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III. PRODUCT INTERVENTION

1. Introduction and scope

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2. Product intervention by NCAs

2.1 Powers of NCAs under MiFIR

An NCA may impose a prohibition or restriction only if it is satisfied on reasonable grounds

(ii) ‘Significant concern’ or ‘threat’

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Article 21(2)(a)-(v) Draft Commission Delegated Regulation published on 18 May 2016

‘[t]he factors and criteria to be assessed by competent authorities to determine whether

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In relation to investor protection, reference is made to a ‘significant concern’, whereas in

(iii) Other requirements

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2.3 Coordinating role of ESMA and EBA

2.4 Powers of NCAs under MiFID II

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3. Temporary intervention powers of ESMA and EBA

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A prohibition or restriction may apply in circumstances, or be subject to exceptions, specified

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When taking action ESMA/EBA must ensure that the action:

3.3 Power under ESMA/EBA Regulation: emergency situations

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