1For the purposes of PROD 3, references to financial instruments include structured deposits.

1. (1)

   A firm must, when manufacturing financial instruments or deciding on the range of financial instruments and investment services it intends to distribute to clients, comply, in a way that is appropriate and proportionate, with the requirements set out in this chapter.

2. (2)

   In complying with these requirements, a firm must take into account:

   1. (a)

      the nature of the financial instrument or investment service; and

   2. (b)

      the target market for the financial instrument.

[Note: articles 9(1) and 10(1) of the MiFID Delegated Directive]

1A manufacturer must:

1. (1)

   ensure that the financial instruments it manufactures are designed to meet the needs of an identified target market of end clients within the relevant category of clients (see COBS 3 for client categories);

2. (2)

   ensure that the strategy for distribution of the financial instruments is compatible with the identified target market; and

3. (3)

   take reasonable steps to ensure that the financial instrument is distributed to the identified target market.

[Note: article 24(2) of MiFID]

A manufacturer must maintain, operate and review a process for the approval of:

1. (1)

   each financial instrument, and

2. (2)

   significant adaptations of existing financial instruments,

in each case before they are marketed or distributed to clients.

[Note: article 16(3) of MiFID]

For each financial instrument the product approval process must:

1. (1)

   specify an identified target market of end clients within the relevant category of clients (see COBS 3 for client categories);

2. (2)

   ensure that all relevant risks to the identified target market are assessed; and

3. (3)

   ensure that the intended distribution strategy is consistent with the identified target market.

[Note: article 16(3) of MiFID]

Where firms collaborate to manufacture a financial instrument, only one target market needs to be identified.

[Note: article 9(9) of the MiFID Delegated Directive]

Where firms collaborate, including with entities which are not authorised and supervised in accordance with MiFID or third countryinvestment firms, to create, develop, issue and/or design a financial instrument, they must outline their mutual responsibilities in a written agreement.

[Note: article 9(8) of the MiFID Delegated Directive]

Manufacturers must identify the potential target market for each financial instrument at a sufficiently granular level and must:

1. (1)

   specify the type or types of client for whose needs, characteristics and objectives the financial instrument is compatible; and

2. (2)

   identify any group or groups of client for whose needs, characteristics and objectives the financial instrument is not compatible.

[Note: article 9(9) of the MiFID Delegated Directive]

Manufacturers must determine for each financial instrument they manufacture, whether it meets the identified needs, characteristics and objectives of the target market, and in doing so must include an examination of the following elements:

1. (1)

   whether the financial instrument’s risk/reward profile is consistent with the target market; and

2. (2)

   whether the design of the financial instrument is driven by features that benefit the client and not by a business model which relies on poor client outcomes to be profitable.

[Note: article 9(11) of the MiFID Delegated Directive]

Manufacturers of financial instruments that are distributed through other firms must determine the needs and characteristics of the clients for whom the product is compatible based on:

1. (1)

   their theoretical knowledge of, and past experience with, the financial instrument or similar financial instruments;

2. (2)

   the financial markets, and

3. (3)

   the needs, characteristics and objectives of potential end clients.

[Note: article 9(9) of the MiFID Delegated Directive]

Manufacturers must undertake a scenario analysis of their financial instruments to assess:

1. (1)

   the risks of poor outcomes for end clients posed by the financial instrument; and

2. (2)

   in which circumstances those poor outcomes may occur.

[Note: article 9(10) MiFID Delegated Directive]

In conducting the scenario analysis manufacturers must assess their financial instruments under negative conditions covering what would happen if, for example:

1. (1)

   the market environment deteriorated; or

2. (2)

   the manufacturer or a third party involved in manufacturing and/or the functioning of the financial instrument experiences financial difficulties or other counterparty risk materialises; or

3. (3)

   the financial instrument fails to become commercially viable; or

4. (4)

   demand for the financial instrument is much higher than anticipated, putting a strain on the firm’s resources and/or on the market of the underlying financial instrument.

[Note: article 9(10) MiFID Delegated Directive]

Manufacturers must consider the charging structure proposed for each financial instrument, including examination of the following:

1. (1)

   whether the financial instrument’s costs and charges are compatible with the needs, objectives and characteristics of the target market;

2. (2)

   whether the charges undermine the financial instrument’s return expectations, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a financial instrument; and

3. (3)

   whether the charging structure of the financial instrument is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand.

[Note: article 9(12) of the MiFID Delegated Directive]

Manufacturers must consider whether the financial instrument may represent a threat to the orderly functioning, or to the stability, of financial markets before deciding to proceed with the launch of the financial instrument.

[Note: article 9(4) of the MiFID Delegated Directive]

A manufacturer must make available to any distributor of that financial instrument:

1. (1)

   all appropriate information on the financial instrument;

2. (2)

   all appropriate information on the product approval process;

3. (3)

   the identified target market of the financial instrument, including information about the target market assessment undertaken;

4. (4)

   information about the appropriate channels for distribution of the financial instrument;

and must ensure that the information is of an adequate standard to enable distributors to understand and recommend or sell the financial instrument properly.

[Note: article 16(3) of MiFID II and 9(13) of the MiFID Delegated Directive]

1. (1)

   A manufacturer must regularly review the financial instruments it manufactures taking into account any event that could materially affect the potential risk to the identified target market.

2. (2)

   In doing so, a manufacturer must assess for each financial instrument at least the following:

   1. (a)

      whether the financial instrument remains consistent with the needs, characteristics and objectives of the identified target market;

   2. (b)

      whether the intended distribution strategy remains appropriate;

   3. (c)

      whether the financial instrument is being distributed to the target market; and

   4. (d)

      whether the financial instrument is reaching clients for whose needs, characteristics and objectives the financial instrument is not compatible.

[Note: article 16(3) of MiFID II and article 9(14) of the MiFID Delegated Directive]

Manufacturers must:

1. (1)

   review financial instruments prior to any further issue or re-launch if they are aware of any event that could materially affect the potential risk to clients; and

2. (2)

   identify crucial events that would affect the potential risk or return expectations of the financial instrument.

When a crucial event affecting the potential risk or return expectation of the financial instrument occurs, a manufacturer must take appropriate action, which may consist of:

1. (1)

   the provision of any relevant information on the event and its consequences on the financial instrument to the clients or distributors of the financial instrument if the manufacturer does not offer or sell the financial instrument directly to the clients;

2. (2)

   changing the product approval process;

3. (3)

   stopping further issuance of the financial instrument;

4. (4)

   changing the financial instrument to avoid unfair contract terms;

5. (5)

   considering whether the sales channels through which the financial instrument is sold are appropriate where the manufacturer becomes aware that the financial instrument is not being sold as envisaged;

6. (6)

   contacting the distributor to discuss a modification of the distribution process;

7. (7)

   terminating the relationship with the distributor; or

8. (8)

   informing the relevant competent authority.

Manufacturers must review financial instruments at regular intervals to assess whether they function as intended.

Manufacturers must determine how regularly to review their financial instruments based on relevant factors including factors linked to the complexity or the innovative nature of the investment strategies pursued.

[Note: article 9(15) of the MiFID Delegated Directive]

Manufacturers must establish, implement and maintain procedures and measures to ensure the manufacture of financial instruments complies with the requirements on proper management of conflicts of interest (see SYSC 10.1.7R), including remuneration.

Manufacturers must ensure that the design of each financial instrument, including its features, does not:

1. (1)

   adversely affect end clients; or

2. (2)

   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 firm already holds the underlying assets on own account.

[Note: article 9(2) of the MiFID Delegated Directive]

Each time a financial instrument is manufacturedmanufacturers must analyse potential conflicts of interests.

In analysing potential conflicts of interest manufacturers must assess whether the financial instrument creates a situation where end clients may be adversely affected if end clients take:

1. (1)

   an exposure opposite to the one previously held by the manufacturer itself; or

2. (2)

   an exposure opposite to the one that the manufacturer wants to hold after the sale of the product.

[Note: article 9(3) of the MiFID Delegated Directive]

Manufacturers must ensure that their management bodies have effective control over their product governance process.

The development and periodic review of product governance arrangements must be monitored by the person allocated the compliance oversight function of a firm in order to detect any risk of failure by the manufacturer to comply with applicable provisions of PROD.

[Note: article 9(6) and article 9(7) of the MiFID Delegated Directive]

All relevant staff involved in the manufacturing of financial instruments must possess the necessary expertise to understand the characteristics and risks of the financial instruments they intend to manufacture.

[Note: article 9(5) of the MiFID Delegated Directive]

Compliance reports to the management body must include information about the financial instruments that the firm has manufactured, including information on the distribution strategy.

Manufacturers must make the compliance reports available to their competent authority on request.

[Note: article 9(6) MiFID Delegated Directive]

1A distributor must:

1. (1)

   understand the financial instruments it distributes to clients;

2. (2)

   assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services, taking into account the manufacturer’s identified target market of end clients; and

3. (3)

   ensure that financial instruments are distributed only when this is in the best interests of the client (see COBS 2.1.1R(1)).

[Note: article 24(2) of MiFID]

Distributors must obtain from MiFIDmanufacturers information to gain the necessary understanding and knowledge of the financial instruments they intend to distribute in order to ensure that the financial instruments will be distributed in accordance with the needs, characteristics and objectives of the target market.

[Note: article 16(3) MiFID and article 10(2) MiFID Delegated Directive]

1. (1)

   Distributors must take all reasonable steps to comply with PROD 3.3 when distributing financial instruments manufactured by any firm to which MiFIDmanufacturer product governance requirements (PROD 3.2 or equivalent requirements of another EEA State) do not apply.

2. (2)

   As part of this, distributors must put in place effective arrangements to ensure that they obtain sufficient, adequate and reliable information from the manufacturer about the financial instruments to ensure that they will be distributed in accordance with the characteristics, objectives and needs of the target market.

3. (3)

   This rule applies to financial instruments sold on either the primary or secondary market.

The obligation to obtain adequate and reliable information applies proportionately depending on:

1. (1)

   the degree to which publicly available information is obtainable; and

2. (2)

   the complexity of the financial instrument.

[Note: articles 10(1) and 10(2) of the MiFID Delegated Directive)

Where information relevant to the obligation in PROD 3.3.5R is not publicly available, distributors must take all reasonable steps to obtain such relevant information from the manufacturer or its agent.

Distributors must determine the target market for the respective financial instrument, even if the target market was not defined by the manufacturer.

[Note: article 10(1) of the MiFID Delegated Directive]

Distributors must identify the target market and their distribution strategy using:

1. (1)

   the information obtained from manufacturers; and

2. (2)

   information they have on their own clients.

Where a firm acts both as a manufacturer and a distributor, only one target market assessment is required.

[Note: article 10(2) of the MiFID Delegated Directive]

1. (1)

   Distributors must have in place adequate product governance arrangements to ensure that:

   1. (a)

      the financial instruments and investment services they intend to distribute are compatible with the needs, characteristics and objectives of the identified target market; and

   2. (b)

      the intended distribution strategy is consistent with the identified target market.

2. (2)

   Distributors must appropriately identify and assess the circumstances and needs of the clients they intend to focus on to ensure that their clients’ interests are not compromised as a result of commercial or funding pressures.

3. (3)

   Distributors must identify any groups of end clients for whose needs, characteristics and objectives the financial instrument or investment service is not compatible.

[Note: article 10(2) of the MiFID Delegated Directive]

Distributors must periodically review their product governance arrangements under PROD 3.3.15R and must take appropriate actions where necessary to ensure they remain robust and fit for their purpose.

[Note: article 16(3) of MiFID and article 10(4) of the MiFID Delegated Directive]

Distributors must have in place procedures and measures to ensure that when deciding the range of financial instruments and investment services to be distributed, and the target market, all applicable rules are complied with, including but not limited to:

1. (1)

   disclosure (see COBS 4 and COBS 14.3A);

2. (2)

   suitability (see COBS 9A);

3. (3)

   appropriateness (see COBS 10A);

4. (4)

   inducements (see COBS 2.3A); and

5. (5)

   conflicts of interest (see SYSC 10.1).

The development and periodic review of product governance arrangements must be monitored by the person allocated the compliance oversight function of a firm in order to detect any risk of failure by the distributor to comply with applicable provisions of PROD.

[Note: article 10(6) of the MiFID Delegated Directive]

The management body of a distributor must have effective control over the firm’s product governance process to determine:

1. (1)

   the range of financial instruments the firm offers or recommends; and

2. (2)

   the investment services provided to the respective target markets.

[Note: article 10(8) of the MiFID Delegated Directive]

All relevant staff must possess the necessary expertise to understand:

1. (1)

   the characteristics and risks of the financial instruments that the firm intends to distribute;

2. (2)

   the investment services provided by the firm; and

3. (3)

   the needs, characteristics and objectives of the identified target market.

[Note: article 10(7) of the MiFID Delegated Directive]

Compliance reports to the management body must include information about the financial instrumentsdistributed by the firm and the investment services provided.

A distributor shall make the compliance reports available to competent authorities on request.

[Note: article 10(8) of the MiFID Delegated Directive]

Distributors must regularly review the financial instruments they distribute and the investment services they provide, taking into account any event that could materially affect the potential risk to the identified target market.

In carrying out the review in PROD 3.3.26R, distributors must assess at least:

1. (1)

   whether the financial instrument or investment service remains consistent with the needs, characteristics and objectives of the identified target market; and

2. (2)

   whether the intended distribution strategy remains appropriate.

If a distributor becomes aware that it has wrongly identified the target market for a specific financial instrument or investment service, or the financial instrument or investment service no longer meets the circumstances of the identified target market, it must take appropriate steps, including at least:

1. (1)

   reconsidering the target market; and/or

2. (2)

   updating its product governance arrangements.

To support the reviews carried out by manufacturers under PROD 3.2.19R to PROD 3.2.26R, a distributor must provide to the manufacturer of each financial instrument it distributes:

1. (1)

   information on sales; and

2. (2)

   where appropriate, information on the reviews carried out under PROD 3.3.26R to PROD 3.3.28R.

1. (1)

   A firm which distributesfinancial instruments or investment services to end clients is responsible for ensuring that the obligations in this chapter are met in respect of any financial instrument or investment service it distributes to an end client.

2. (2)

   A firm which distributes financial instruments to clients which are not end clients must, in addition to complying with the rules in this chapter, consider if they are also undertaking a manufacturing role and, if they are, also apply PROD 3.2.

A distributor which distributesfinancial instruments to other distributors must:

1. (1)

   ensure that relevant product information is passed from the manufacturer to the final distributor in the chain; and

2. (2)

   if the manufacturer requires information on product sales in order to comply with its obligations under PROD 3.2, enable them to obtain it.

[Note: article 10(10) of the MiFID Delegated Directive]