This week FinDatEx published the first version of the European Feedback Template (EFT). We take a closer look at the EFT: how it came about, what it is and most importantly: will it be adopted by manufacturers and distributors?
Ever since MIFID II came into place, distributors of financial products have had an obligation to give feedback to the manufacturers, so they didn’t have the luxury to wait for a standardized template to come out. Depending on the country a strong desire and need to give and receive feedback always existed, yet the market didn’t know how to fulfill that need and companies started to deal with this in two ways.
In the first scenario, distributors would send feedback only if distribution happened outside the target market, or within the negative target market. The other way was to simply send a NIL report, to prove that they had nothing to report (which gave more comfort to the asset manager).
Very quickly asset managers started to integrate feedback reporting as part of their on-going due diligence process. For the manufacturers, receiving feedback is important because it should be part of their product governance process, as it allows them to whether to tweak the product design, target market or the distribution strategy for a particular product.
It’s not only distributors and manufacturers: regulators quickly became interested to see how asset managers were monitoring the fact that they receive the necessary feedback to fulfill their product governance requirements. Regulators are starting to see this more as part of the ongoing oversight process, and so the EFT comes at the right time.
From the makers of the EMT 3.0
The EFT was defined by the Financial Data Exchange (FinDatEx), who incidentally recently released a new version of the EMT. Perhaps not surprisingly, a number of fields in the new EMT 3.0 have been included with the intention to support the EFT. For example contact fields, so that the recipient of an EMT can easily contact back the right person with the EFT as well as to raise questions on the content of the EMT as such.
FinDatEx published the EFT at the beginning of October, for a public consultation which closed on 31st of October, and on 1st of December, FinDatEx published the EFP version 1 on its website. “This template standardises the information to be sent back from the distributor to the manufacturer under the MiFID 2 target market requirements. This is the first European wide feedback template.”
In consequence, the EFT is now officially introduced to the market and distributors who should already be in a position to report negative target market sales of 2020.
The EFT in a nutshell
The EFT is a very simple template. It includes the general financial instrument information, the declaration of sales outside of the target market and the widening of distribution strategy. It serves two purposes: to report sales outside of the target market or within negative target market, and to channel the feedback should the distributor not agree with the target market set by the manufacturer in the EMT. This type of feedback is crucial for the manufacturer’s product review, and it’s also a regulatory obligation in some countries. At this stage the EFT does not include a NIL report.
The question of the NIL report
It is likely that MiFID II firms will send feedback, and likely that they will be using the EFT to do that. But a debate is still ongoing as to whether such a need exists for non-complex products, because there only very rare occasions where a distributor disagrees with the target market for such products, and thus there is nothing to report.
Initially distributors who were anxious to demonstrate compliance started to send NIL reports back to asset managers. This was quickly encouraged by asset managers, who felt re-assured by these reports and had the evidence that the target market was well set. We are now seeing more and more requests from asset managers for the NIL report from their distributors, and regulatory pressure is starting to build.
The EFT will be a great tool to report deviation, or discrepancy between the target market set by the manufacturer and the distributor, but there will still be a need for a general Nil report, as a confirmation that they have nothing to say – at least in the European countries where NIL reporting is required as part of the oversight and non-complex product had not been excluded from the negative target market reporting.
So why is the NIL report not part of the EFT?
When worked kicked off on the EFT earlier this year, it became obvious how very different each country had approach reporting on negative target market. Some have simply agreed that negative target market should not have to be sent if only non-complex products are sold and no reason exists for selling outside the target market. But then in countries like Luxembourg, a circular is in place to put obligation and requirements on the manufacturer.
These differences of approaches between countries is one of the reasons why the NIL report has been left out in the EFT, as its aim is to serve the vast majority of stakeholders. Some countries might also argue that the EFT lacks granularity of reporting, and that it may not be enough to fulfil their obligations. It may be true, but no matter the level of detail, the key question is: what do you do with that feedback, and how do you make it flow into the review of your product process.
Will asset managers request the EFT 1.0 feedback?
Asset Managers won’t necessarily request the EFT feedbacks, because they are being sent if there is a deviation. However there may be a demand to confirm if the Target Market is coherent with the view of their distribution network. That might push a demand from Asset managers for the EFT template (at least annually). And then in parallel a demand for the NIL report.