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Cyprus: Product governance requirements

The new Investment Services and Activities and Regulated Markets Law 87(I)/2017 (the IS Law), which implements the revised EU Markets in Financial Instruments Directive (Mifid II) in Cyprus, will enter into force on January 3 2018. In preparation, the Cyprus Securities and Exchange Commission (CySEC) has issued guidance to regulated entities advising them of the more rigorous product governance requirements which will apply under the new law. The product governance requirements under Mifid II are set out in articles 17(3) and 25(2) of the IS Law, chapter III of Commission Delegated Directive (EU) 2017/593 and European Securities and Markets Authority (Esma) guidelines document Esma35-43/620.

Under the Mifid II nomenclature, investment firms which create, develop, issue or design financial instruments, including advising corporate issuers on the launch of new financial instruments, are manufacturers, and investment firms which offer or sell financial instruments and services to clients are distributors. Some product governance requirements under Mifid II and the IS Law apply specifically to manufacturers or distributors, and some apply to both.

The main product governance requirements for investment firms manufacturing financial instruments cover procedures for approval of new financial instruments or significant changes to existing financial instruments, procedures for managing conflicts of interest, allocation of responsibilities between joint developers of products, risk assessment, board supervision of the development process and provision of information to distributors.

For investment firms distributing financial instruments, the main product governance requirements relate to identification of the target market for the product, ensuring that products and services are compatible with the target market and that they have the necessary understanding and knowledge of the products they intend to recommend or sell.

Investment firms must have in place effective procedures to ensure compliance with all requirements of the IS Law, including those relating to disclosure, assessment of suitability or appropriateness, inducements and proper management of conflicts of interest. They must periodically review and update their product governance arrangements, and take action when necessary in order to ensure that they remain effective. The board of directors must exercise effective control over the product governance process and the firm's compliance function must exercise oversight of product governance arrangements in order to ensure they are effective.

When the new requirements become effective, on January 3 2018, they will apply to products developed before that date. Distributors will be required to comply with the product governance requirements applicable to them, treating the manufacturer as if it were a non-Mifid entity. Both the manufacturer and the distributor will have to comply with the regulatory requirements in any product review process cycle after January 3 2018.

Dimitris Papoutsis and Daniel Sakellariou
Elias Neocleous & Co

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