While significant efforts have been deployed by investment firms and credit institutions offering investment services to comply with MiFID II product governance obligations, particular attention should also be paid to circular letter 18/692 of 11 June 2018 (the Circular) by which the Luxembourg regulator of the financial sector, the Commission de Surveillance du Secteur Financer (the CSSF) formally endorsed the EBA Guidelines on product oversight and governance arrangements for retail banking products (EBA/GL/2015/18). On such basis, certain actors of the financial sector must comply with product governance obligations when offering certain types of identified products – which are “non-MiFID products” – to consumers (i.e. natural persons acting for purposes outside their trade, business or profession).

1. Which actors are concerned?

The obligations apply to all the entities under the CSSF supervision acting as manufacturers or distributors of retail banking products offered to consumers. In particular, the following types of Luxembourg institutions and the Luxembourg branches of the following types of EU and non-EU institutions (the Concerned Entities) are covered:

• credit institutions,

• CRR investment firms,

• payment institutions,

• e-money institutions, and

• mortgage lenders and intermediaries.

2. Which retail banking products are in scope?

The obligations apply when a Concerned Entity offers any of the following types of retail banking products to consumers:

• credit agreements relating to residential immovable property,

• deposits (excluding structured deposits within the meaning of MiFID II),

• payments accounts/instruments/services,

• electronic money,

• other forms of credit for consumers; and

• other means of payment (e.g. travellers’ cheques)

(together, the Products).

3. What are the obligations?

The obligations can be divided into six main categories (although there are some differences in terms of content depending on whether the obligations apply to manufacturers or distributors). They are largely inspired from the product governance obligations applicable to manufacturers and distributors of financial instruments under MiFID II:

• Internal governance: the Concerned Entities must establish, implement and review effective Product oversight and governance arrangements, involving as appropriate their management body, senior management and internal control functions, to ensure that the interests, objectives and characteristics of consumers are taken into account, to avoid potential consumer detriment and to minimise conflicts of interest;

• Target market and distribution channels: the Concerned Entities must define/identify the group of end-consumers to whom a Product will be offered (and update it when necessary) in order to ensure that such Product will be appropriately distributed in view of the interests, objectives and characteristics of the identified target market. In this regard, the Concerned Entities are also required to identify a negative target market to which the Product can be sold only on a justified basis. Manufacturers must therefore further select appropriate distribution channels for the target market;

• Product testing: before a Product is brought to the market or an existing Product is sold to a new target market or in case of significant change to an existing Product, a manufacturer must assess how the Product may affect consumers under a wide range of (stressed) scenarios and, based on the outcome of that analysis, make appropriate changes to the Product or adjust the target market;

• On-going Product monitoring and remedial actions: once a Product has been launched, the Concerned Entities must monitor the Product in order to ensure that the interests, objectives and characteristics of consumers continue to be appropriately taken into account. Manufacturers must further monitor the appropriateness of the selected distribution channels. Where a problem is identified in relation to a Product, the Concerned Entities must take the necessary remedial actions to mitigate the situation and avoid re-occurrence;

• Information flows: appropriate communication channels must be implemented between the manufacturer and the distributors of a Product in order to ensure that:

  • distributors are provided with all necessary information (i) on the Product (in particular concerning the target market) or (ii) on remedial actions taken by the manufacturer triggering changes to the Product or that need to be taken into account by the distributors;

  • the manufacturer receives the necessary feedback from distributors to comply with its on-going monitoring obligations (including in case of problems with a Product);

• Disclosure obligations: distributors must provide consumers with a description of the main characteristics of and risks associated with a Product and the total price to be paid for it as well as any relevant information/marketing material supplied by the manufacturer.

These obligations apply without prejudice to the governance and internal control requirements set out in the CSSF circular letters 12/552 and, where relevant, 17/651.

4. Entry into force

These obligations apply to the Concerned Entities since 11 June 2018 and retroactively affect the Products which have been brought to the market after 3 January 2017 as well as to all existing Products which have been significantly changed after that date.