MiFID II Product Governance in Luxembourg: The Article 9 Distributor Control Point
The Grand-ducal Regulation of 30 May 2018 contains the Luxembourg distributor control rule in Article 9. Article 9 applies when credit institutions and investment firms decide which financial instruments and services they intend to offer or recommend to clients. Under the ESMA Guidelines, manufacturers create, develop, issue or design products. Distributors offer, recommend or sell products and services to clients. CSSF Circular 23/840 also covers structured deposits where firms sell or advise clients on them.
Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (“MiFID II“) sets the European framework. Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplements it. The European Securities and Markets Authority (the “ESMA“) issues product governance guidelines. The Commission de Surveillance du Secteur Financier (the “CSSF“) integrated them through CSSF Circular 23/840. The Guidelines apply from 3 October 2023. They do not apply where financial instruments are marketed or distributed exclusively to eligible counterparties. Under Article 30 of MiFID II, eligible counterparties include investment firms, credit institutions, insurance companies, UCITS and their management companies, pension funds and their management companies, other authorised or regulated financial institutions, national governments, central banks and supranational organisations.
MiFID II product governance: three distributor controls
First: identify the target market. Map the product to client needs, characteristics, and objectives. Identify the negative target market. The sustainability carve-out applies where relevant, meaning that sustainability-related objectives and preferences should be considered when assessing whether a product is appropriate for a particular client group. Where environmental, social, or governance (ESG) features form part of the product design, distributors should ensure that these characteristics are reflected in the target market assessment and distribution approach.
Second: control the distribution strategy. This means deciding how the product will be offered to clients. The distribution channel should match the type of clients identified in the target market. The way the firm provides the service should also suit the product. For example, a product sold with investment advice generally offers more investor protection than a product sold on an execution-only basis, where the client makes the investment decision without receiving advice.
Third: review the product. Keep governance arrangements current. Reassess when product conditions, market risk, or client profiles change.
Article 9 of the Grand-ducal Regulation of 30 May 2018 is not a one-off label. It is a standing legal control. A defensible approval file should cover six areas: product manufacturer information, target market, authorised distribution channels and any restrictions on how the product may be offered, the service model used to distribute the product (such as advised, discretionary, or execution-only services), evidence of compliance review and oversight, including the rationale for approving the product for the identified target market, and next review trigger.
References:
• Article 9 of the Grand-ducal Regulation of 30 May 2018 on the protection 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 (https://legilux.public.lu/eli/etat/leg/rgd/2018/05/30/a447/jo)
• Consolidated version as of 17 January 2025 of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II”) (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02014L0065-20250117)
• Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and rules on fees, commissions and monetary or non-monetary benefits (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32017L0593)
• CSSF Circular 23/840 of 14 September 2023 on the application of the ESMA Guidelines on MiFID II product governance requirements (https://www.cssf.lu/wp-content/uploads/cssf23_840eng.pdf)
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