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Industry Updates

MiFID II: ESMA Clears a Path for a Simple Form of Identified Target Market for UCITS

28 Jul 2017

Following a set of draft guidelines issued in October 2016 as part of a public consultation, ESMA has now issued final guidelines on MiFID II product governance (the "PG Guidelines") available here.

This update considers specifically how this may impact sponsors and distributors of UCITS. For these purposes, the focus is on UCITS other than structured UCITS (i.e. "Non-Complex UCITS").

Identified Target Market

ESMA outlines five factors for product manufacturers to consider in assessing the Identified Target Market ("ITM") for a particular investment product, as follows:

  1. Type of client;

  2. Knowledge and experience;

  3. Financial situation and ability to bear loss;

  4. Risk tolerance and risk compatibility; and

  5. Client objectives.

There were six factors in the draft guidelines – the category Client Needs has been dropped.

The PG Guidelines also state that the ITM identification should consider the characteristics of the product including its complexity (including costs and charges structure), risk-reward profile or liquidity or its innovative character.

In addition, consideration should be given to (i) identifying any groups of investors who should not invest (i.e. the negative target market); and (ii) the appropriate distribution channel, to determine what is the optimal distribution channel for the product in light of the analysis on the target market.

The criteria above and how they should apply to UCITS are considered further in the Appendix.

UCITS as Simple Products and Proportionality

A new section has been added to the PG Guidelines acknowledging that simple, more common products may identify the target market with less detail. It is also suggested that a generic target market could apply consistently across a range of products of one type with sufficiently comparable features.

The PG Guidelines also indicate, as an example, that shares in Non-Complex UCITS may be suitable for distribution in mass retail markets and may have a widely defined target market that includes both retail and professional clients (based on MiFID categorisations). It follows that the product governance rules as they relate to Non-Complex UCITS can be applied in a proportionate manner and are therefore "relatively simple".

Collaboration on Identification of the Target Market

A new section has been added to the PG Guidelines on the identification of the target market by the distributor. The relevant extract is as follows:

"Usually, the target market assessment of the distributor will occur after the manufacturer has communicated its target market to him. However, it is possible that manufacturer and distributor could define both the manufacturer’s target market and the distributor’s target market, including any review and refinement process, at the same time. This could, for example, occur where the manufacturer and the distributor jointly develop a common target market standard for the products they usually exchange… A manufacturer has still to take reasonable steps to ensure that products are distributed to the identified target market and a distributor has to ensure that products are offered or recommended only when this is in the interest of clients. "

This is helpful from a practical perspective for product manufacturers and distributors who wish to work collaboratively on the process to formulate the ITM, jointly developing an understanding of both the investment products and the investors' needs.

Non-Complex UCITS Considered: A Case Study

The PG Guidelines include a new case study indicating how the product governance requirements should be applied in respect of Non-Complex UCITS. The Appendix summarises the case study details as they relate to the ITM and distribution channel criteria.


The PG Guidelines clearly characterise Non-Complex UCITS as capable of being simple products and thus acceptable for the mass retail market without a thorough assessment of ITM. Accordingly, the ITM for most Non-Complex UCITS will be capable of being quite widely framed, on the basis of generic specifications.

Further Information

We are engaged in a range of projects for our clients considering the impact of MiFID II on Irish investment funds. Should you have any questions relating to MiFID II from a funds perspective or would like to discuss the above, please contact your usual Maples and Calder contact in the Irish Funds Group.


Identified Target Market Criteria - Summary of UCITS Case Study

Identified Target Market Criteria  Details  Case study – ESMA's suggestion of how this might be applied to UCITS (other than structured UCITS) 
Type of client This can be based on the MiFID categories of retail, professional and eligible counterparty and may also include others such as high net worth individuals. Given the nature of non-complex UCITS funds: retail, professional clients and eligible counterparties.
Knowledge and experience What does the product manufacturer expect of an investor in terms of their understanding of the product? Do they require the investor to have a minimum amount of market experience, for example? Clients with basic capital markets knowledge or experience (about funds’ and bonds’ characteristics and risks).
Financial situation and ability to bear loss Will the product manufacturer need to seek additional payments (for example, on a CFD margin call)? Will the appetite for loss need to be ability to incur total loss, for example? Or minor losses? Clients that can bear a [x] % capital loss (with the firm specifying the percentage figure based on the characteristics of the product).
Risk tolerance and risk compatibility Details of the general attitude that target clients should have in relation to the investment risk. Due to the volatility of the bond market, the product has an [x] risk & reward profile [based on the SRRI in the UCITS KIID] and is therefore compatible with clients need to have a low to medium* risk tolerance. They should be willing to accept price fluctuations in exchange for the opportunity of possible higher returns.
*In line with paragraph 20 of the guidelines, firms should clearly define concepts and terminology used.
Client objectives Any particular client objectives, for example, for liquidity or for retirement. Depending on the duration of the product, the UCITS may be suitable for clients who seek capital growth and have a medium-term investment horizon (at least 3 years).*
*The firm should quantify the investment horizon based on the specific duration of the product.
Client needs Any particular client needs. For example, country registrations, tax treatment, ESG specifications. N/A – omitted from the final version of the PG Guidelines.
The negative target market Any groups of investors who should not invest. This product is deemed incompatible for clients which (i) require full capital protection and / or seeking on-demand full repayment of the amounts invested; or (ii) are fully risk averse/have no risk tolerance.
Distribution channel What is the optimal distribution channel for the product in light of the analysis on the target market? Eligible for all distribution channels (e.g. investment advice, portfolio management, non-advised sales and pure execution services).

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