Feedback Statement on PARP Scenario Analysis Guidelines from a Customer Perspective

Feedback Statement Consultation on PARP Scenario Analysis Guidelines from a Customer Perspective 03-12-2024 AFM.nl

2 Feedback Statement Table of Contents Introduction 3 Nuances in the text to reflect the nature of the policy statement 4 Which enterprises must perform scenario analyses? 4 How does this guideline relate to the ESMA Guidelines on Product Governance Requirements? 4 Outcomes of scenario analyses and adjustments during the management phase 4 Is there still room for a custom interpretation of the open PARP norm? 4 How do life events relate to the role of the distributor? 5 What is meant by a 'standard product'? 5 Is it possible to pay more attention to sustainability? 5 Can the different distribution methods be taken into account when determining the required depth of scenario analyses? 5 What does a proportional application of the PARP norm mean for the different target markets? 6 Must developers share scenario analyses with distributors? 6 Scope of PARP with regard to AIFMD and UCITS managers who do not offer MiFID ancillary services 6

3 Feedback Statement Introduction On 23 April 2024, the Dutch Authority for the Financial Markets (AFM) consulted on its guideline on PARP scenario analyses from a customer perspective. The consultation period lasted until 7 June 2024. In this consultation, the AFM asked for feedback on the proposed guideline. The AFM received 18 responses, four of which were from industry associations. These responses enable us to clarify the guideline. We would like to thank the parties who responded for this. This feedback statement explains how the AFM has processed the responses to the consultation. For the sake of readability, the AFM has grouped the responses by topic. Next Step The guideline on PARP scenario analyses from a customer perspective will be published on the AFM website (www.afm.nl) and will enter into force on the day of publication. The AFM will also publish an English translation of the guideline on www.afm.nl and share it with EIOPA and ESMA.

4 Feedback Statement Nuances in the text to reflect the nature of the policy statement The wording and some examples in the guideline have been adjusted or nuanced on a few points to accommodate some responses from market parties. For example, the tone of the guideline has been nuanced in parts to reflect the nature of the policy statement. Which enterprises must perform scenario analyses? In the consultation responses, it was noted that there is no statutory obligation for the distributor to perform scenario analyses. This is correct; this obligation rests with the developer. The AFM has therefore adjusted the text in paragraph 1.3 of the guideline for clarification. The AFM wishes to indicate with the guideline how enterprises can deal with scenario analyses. The objective here is paramount: both developers and distributors must ensure that financial products meet the needs, characteristics, and objectives of the target group, and that the distribution strategy aligns with the respective target group. The AFM uses paragraph 1.3 to address the situation where a distributor may conclude that it does not have sufficient information about the product to gain a complete understanding of the product and to align the distribution strategy with the target group. In such a situation, it is up to the distributor which choices it makes, as long as the financial products are distributed to the target group and not (structurally) outside it. The distributor is then free to, for example, perform scenario analyses if it deems this necessary. How does this guideline relate to the ESMA Guidelines on Product Governance Requirements? In the consultation responses, it is stated that the AFM has no room to apply this guideline to investment services due to the ESMA Guidelines on Product Governance Requirements. Concern is also expressed that the guideline could lead to an uneven playing field in Europe. The AFM notes that this guideline provides guidance on the implementation of the product development norm and that this implementation does not deviate from the norms, including those in European Directives such as MiFID II. Furthermore, this guideline does not deviate from or add extra requirements to the ESMA Guidelines on Product Development Requirements, as these Guidelines do not concern scenario analyses. The AFM is also committed within Europe to promoting an even European playing field. The AFM finds it important to provide guidance on the implementation of scenario analyses via this guideline and therefore proceeds with the definitive publication of the guideline in its current form. We also refer to our explanation regarding the status of a guideline. Outcomes of scenario analyses and adjustments during the management phase Some parties indicated that the guideline underrepresents that already concluded products are bound by legislation and regulations, including contractual agreements made with customers. As a result, modifying a product as a result of scenario analyses is not always possible. Following these responses, the AFM has clarified the guideline by stating that an enterprise must examine in the PARP how it can best address risks within the product (to the extent possible), the intended target group, or the distribution strategy. Is there still room for a custom interpretation of the open PARP norm? In the consultation responses, it is indicated that the AFM explicitly prescribes the manner of using scenario analyses in the guideline, and the question is raised as to what extent there is still room for a custom interpretation of the open PARP norm. With this guideline, the AFM provides guidance that enterprises can use in the execution of scenario analyses. This does not mean that there is no room for enterprises to provide their own interpretation of the execution of scenario analyses. The AFM clarifies this through some textual adjustments. It is important that scenario analyses provide enterprises with insight into their products and how they behave under different circumstances, so that this does not detract from the objectives of the target group and foreseeable disappointments are prevented. We also refer to the explanation regarding the status of the guideline. How do life events relate to the role of the distributor? In the consultation responses, it is stated that life events at the customer level are a relevant part of the advice and therefore fall under the responsibility of the distributor, and are therefore not relevant for the developer to include in the scenario analyses. The AFM would like to point out the distinction between the ex ante development phase and the advice phase. In the ex ante phase, it is up to the developer to identify risks and determine how these risks can be mitigated. In the advice phase, it is then up to the distributor to map these risks specifically per customer. Paragraph 3.2 and the example regarding household insurance have been adjusted. This should make it clearer what role the developer and what role the distributor have in the different phases of product development. What is meant by a 'standard product'? The AFM reads in the consultation responses that some parties wonder what is meant by a 'standard product' in relation to the necessity and depth of performing scenario analyses. The AFM indicates that it aligns here with the term 'simple product' in the Explanatory Memorandum to the BGfo Wft. For clarification, these terms have been equated in the text of the guideline. In several responses, a definition of a simple product is requested. The AFM indicates that the difference between simple and complex in this context must be explained granularly. This means that a product is not per definition simple or complex. There is a continuum in the degree of complexity. As already set out in the guideline, a savings account can also have complex characteristics. A granular application entails that a liability insurance is not per definition considered simple. It is up to the financial enterprise to determine the degree of complexity of a product and to align its scenario analyses accordingly. Is it possible to pay more attention to sustainability? In the consultation response, a request is made to pay more attention to sustainability scenarios. The AFM has therefore added a specific paragraph on this to paragraph 3.2.

Can the different distribution methods be taken into account when determining the required depth of scenario analyses? In the AFM's expectation, the method of distribution has no direct relationship to the depth of scenario analyses. In each situation, the enterprise must assess how in-depth the scenario analyses must be. This must be done proportionally. Generally, as the complexity or impact of the product increases, more depth is expected.

5 Feedback Statement What does a proportional application of the PARP norm mean for the different target markets? In the consultation responses, the question is raised what a proportional application of the PARP norm means for the different target markets. This can be thought of in terms of consumers, SMEs, and large corporate clients. The AFM indicates that the PARP norm may be applied proportionally, depending on the complexity and impact of the product and the extent to which publicly available information can be obtained, taking into account among other things the characteristics of the target market. This could mean, for example, that the application of scenario analyses on products distributed exclusively to large corporate clients is less in-depth than the application of scenario analyses for products that can also be purchased by consumers. That the target market consists of business clients, however, does not mean that less in-depth scenario analyses can always suffice. It is up to the enterprise to determine when a proportional approach is appropriate. Must developers share scenario analyses with distributors? The question is asked whether developers must share the scenario analyses with distributors if requested to do so. The AFM states in paragraph 1.3 of the guideline that the distributor must determine whether it needs information about the scenario analyses performed by the developer. It is important that the distributor gains a complete understanding of the products it intends to offer to its customers. The goal of this is that the distributor can ensure that the financial products meet the needs, characteristics, and objectives of the target group and to ensure that the distribution strategy aligns with the respective target group. If the distributor needs information from the developer about the performed scenario analyses for this, it is logical to request this from the developer. The manner in which the information exchange takes place is up to the developer and distributor. If the distributor concludes that the necessary information is insufficient, it is free to perform scenario analyses itself or to refrain from offering the product. Scope of PARP with regard to AIFMD and UCITS managers who do not offer MiFID ancillary services It is noted that not all investment institutions fall under the MiFID II PARP rules. It is correct that AIFMD and UCITS managers who do not provide MiFID ancillary services do not fall under MiFID II. However, Article 32 of the BGfo Wft is applicable to licensed AIFMD managers. Furthermore, PARP applies regardless to investment firms that distribute products on which no PARP has been applied by the developer of that product.

6 Feedback Statement Authority for the Financial Markets Postbus 11723 | 1001 GS Amsterdam Telephone 020 797 2000 www.afm.nl Data Classification AFM-Public Follow us: → The AFM is committed to fair and transparent financial markets. As an independent conduct supervisor, we contribute to sustainable financial well-being in the Netherlands. The text of this publication has been compiled with care and is of an informative nature. You cannot derive any rights from it. Due to changing legislation at the national and international level, it is possible that the text is not up to date at the moment you read it. The Authority for the Financial Markets (AFM) is not liable for any possible consequences – for example, incurred loss or lost profit – arising from or in connection with actions taken as a result of this text. © Copyright AFM 2024