Background

Since 2013, statutory requirements apply for the manufacturing and distributions of financial products by financial undertakings to the appropriate target market ('product governance'). Product governance is often referred to as the Product Approval and Review Process (PARP). Financial undertakings are expected to organise and implement their PARP with due care in accordance with Article 32 et seq. of the Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Bgfo) and as further outlined in sectorial legislative. The PARP requirements apply to (among others) investment firms, insurance companies, offerors of credit offering financial products to in-scope clients, and distributors of insurance products (i.e., insurance intermediaries).

PARP 

General

The AFM devotes constant attention to product development and evaluation by financial undertakings. An important part of this process is the scenario analysis (as further discussed below). Investment firms, insurance companies and offerors of credit who offer or create financial products and make them available in the market to in-scope clients are obliged to conduct such analysis. Exemptions do however also apply. For example, the product governance obligations do not apply to investment firms that only distribute financial instruments to eligible counterparties. The product governance rules are considered an important aspect of business operations: non-compliance with the relevant provisions has resulted in administrative fines in the not-too-distant past. 

AFM research

The AFM's research shows that financial undertakings have difficulty in designing their scenario analyses and using the results of the analyses in the balanced weighing of interests that is required as part of the PARP. Additionally, it has shown that financial undertakings often conduct scenario analyses from the firm's perspective rather than from consumer’s perspective. To provide financial undertakings with tools to better implement scenario analysis, the AFM has established guidelines on the ‘Scenario analyses from a customer perspective’.

Guidelines

Scope

The Guidelines are applicable to financial undertakings offering or creating financial products and making these available in the market (i.e., (co-)developers). We note that the Guidelines do not apply to per se distributors (such as intermediating financial service providers, including insurance intermediaries). According to the AFM, distributors may nevertheless carry out additional analyses for their distribution strategy for which the Guidelines may also be relevant.

Scenario analysis

Financial undertakings should use scenario analyses to examine the operation of the product in various circumstances (scenarios). This provides financial undertakings visibility on the operation of the product and enables them to check whether it continues to fulfil the target market's objectives in the specific circumstances. Based on the results of the analysis, financial undertakings can then consider adjusting the target market, distribution strategy or financial product.

The Guidelines furthermore give guidance on how, which, and when scenario analyses can be used. The Guidelines also contain several examples of scenario analyses and follow-up measures based on the analysis for various product groups including insurance, credit and investments products. Relevant scenarios include life events of clients, changing regulation but also sustainability. As an example, the AFM refers to sustainability scenarios for insurances in the context of climate change.

The AFM emphasises that the Guidelines do not provide an exhaustive overview of all requirements regarding scenario analyses and do not serve as a substitute for sectoral legislation. However, the AFM expects that with the Guidelines, financial undertakings will be able to perform adequate development and evaluation of financial products, which will contribute to better consumer protection and more trust in the financial sector.

Contact

We recommend financial undertakings to evaluate whether their current PARP, and specifically the scenario analyses included therein, comply with the new guidance from the AFM. If you have questions in this respect or require assistance, please contact our Financial Regulatory Team.