Order on Product Approval Procedures

Order on Product Approval Procedures 1)

Pursuant to Section 96, paragraph 2, and Section 270, paragraph 1, of Act No. 1155 of 8 June 2021 on securities firms and investment services and activities, and Section 7, paragraph 6, and Section 26, paragraph 4, of the Act on financial advisers, investment advisers and mortgage credit intermediaries, cf. Act Consolidation No. 2016 of 1 November 2021, it is hereby prescribed:

Chapter 1 Scope and Definitions

Scope

Section 1. This Order applies to the following undertakings, subject to paragraphs 2-7:

1. Credit institutions, mortgage credit institutions and securities firms that provide or perform investment services and activities as mentioned in Annex 1 to the Act on securities firms and investment services and activities.

2. Management companies for alternative investment funds and managers of alternative investment funds that provide investment services as mentioned in Annex 1 to the Act on securities firms and investment services and activities.

3. Branches in this country of credit institutions and investment firms that have been granted permission to provide or perform investment services or activities with or without ancillary services in a country outside the European Union, with which the Union has not concluded an agreement in the financial sector.

Paragraph 2. Section 6, paragraph 3, Section 7, paragraph 2, and Sections 14-19 apply to investment advisers and financial advisers covered by the Act on financial advisers, investment advisers and mortgage credit intermediaries.

Paragraph 3. Sections 4 and 14 apply to investment firms and credit institutions that have been granted permission to provide investment services or activities in another country within the European Union or in a country with which the Union has concluded an agreement in the financial sector, and which carry on business in this country through a branch or a tied agent established in this country.

Paragraph 4. Sections 4 and 14 apply to management companies that have been granted permission to provide investment services in another country within the European Union or in a country with which the Union has concluded an agreement in the financial sector, and which carry on business in this country through a branch.

Paragraph 5. Sections 4 and 14 apply to cross-border services with investment services and activities with or without ancillary services carried on in this country by investment firms and credit institutions that have been granted permission in a country outside the European Union, with which the Union has not concluded an agreement in the financial sector.

Paragraph 6. The Order does not apply when the investment services provided by an undertaking relate to bonds without any embedded derivatives other than a make-whole clause.

Paragraph 7. The Order does not apply when the financial instruments are exclusively marketed or distributed to eligible counterparties.

Definitions

Section 2. In this Order, the following definitions apply:

1. Undertaking: The undertakings mentioned in Section 1, paragraphs 1-5.

2. Distributor: An undertaking that offers or recommends a financial instrument, a structured deposit or a service to a customer.

3. Product Developer: An undertaking that creates, develops or issues a financial instrument or a structured deposit, including when advising undertakings on the launch of new financial instruments or structured deposits.

4. "Make-whole clause": A clause intended to protect the investor by ensuring that the issuer, in the event of early redemption of a bond, is obliged to pay the investor holding the bond an amount equal to the sum of the net present value of the expected remaining coupon payments until maturity and the principal of the bond to be redeemed.

5. Sustainability factors: Sustainability factors as defined in Article 2, point 24, of Regulation (EU) 2019/2088 of the European Parliament and of the Council.

Chapter 2 General Requirements for Product Approval Procedures and Product Governance Arrangements

Section 3. A product developer shall establish and apply a procedure for the approval of a financial instrument or a structured deposit and material modifications of existing financial instruments or structured deposits before these are offered to customers.

Paragraph 2. The product approval procedure shall be designed so that it reflects the potential risk to the customer from the use of the financial instrument or the structured deposit and their complexity.

Section 4. A product developer shall ensure that the financial instruments or structured deposits are designed in such a way that they meet the needs of a defined target group of customers and ensure that the distribution strategy for the financial instruments or structured deposits is consistent with the defined target group.

Paragraph 2. The product developer shall take reasonable steps to ensure that the financial instruments or structured deposits are distributed to the defined target group.

Section 5. The product approval procedure shall specify a defined target group of customers for each financial instrument or structured deposit and ensure that all relevant risks for this target group are assessed and that the intended distribution strategy fits the defined target group.

Section 6. An undertaking shall establish and apply a product governance arrangement whereby the undertaking regularly, and taking into account factors that may significantly affect the potential risk of the product for the defined target group, reviews the financial instruments and structured deposits offered by the undertaking and assesses whether these products continue to meet the needs of the target group and whether the intended distribution strategy remains appropriate.

Paragraph 2. The undertaking shall regularly re-evaluate its product approval procedures and product governance arrangements, update them and take appropriate measures so that the arrangements remain robust and fit for purpose.

Paragraph 3. Paragraphs 1 and 2 also apply to a distributor providing services in connection with the offering of or advice on financial instruments and structured deposits.

Section 7. A product developer shall make all relevant information about the financial instrument or structured deposit available to any distributor of the instrument or deposit, including information on appropriate distribution channels, the product approval procedure and the assessment of the target group.

Paragraph 2. The sustainability factors of the financial instrument and the structured deposit shall be presented in a transparent manner and provide distributors with the relevant information for due consideration of the customer's or potential customer's sustainability-related objectives.

Paragraph 3. A distributor that offers or recommends a financial instrument or a structured deposit that it has not itself produced shall obtain and use the information mentioned in paragraph 1 from the product developer.

Chapter 3 Special Rules for Product Developers

Organisational Requirements etc.

Section 8. A product developer shall ensure that:

1. the product developer's employees involved in the production of a financial instrument or structured deposit have the necessary qualifications to understand the characteristics and risks of the product in question,
2. the product developer's management body has actual control over the undertaking's product governance arrangements,
3. the product developer's compliance function monitors the development and periodic review of product governance arrangements to reduce the risk that the product developer does not comply with its obligations under Chapter 2 and this Chapter, and
4. the compliance reports to the product developer's management body systematically include information about the financial instruments and structured deposits produced by the product developer.

Paragraph 2. A product developer that collaborates with others to produce a financial instrument or structured deposit shall draw up a list of the parties' respective areas of responsibility in a written agreement.

Section 9. A product developer shall ensure that there are procedures to prevent, identify and handle conflicts of interest in the production of a financial instrument or a structured deposit.

Paragraph 2. In designing a financial instrument or a structured deposit, the product developer shall ensure that the design of the financial instrument, including its characteristics, does not have negative effects on end customers or cause problems with market integrity by allowing the product developer to mitigate or dispose of its own risks or exposure to the product's or deposit's underlying assets, if the product developer already holds the underlying assets for its own account.

Paragraph 3. The product developer shall analyse potential conflicts of interest and in particular assess whether the financial instrument or the structured deposit creates a situation where there may be negative effects on end customers if they:

1. are exposed to the opposite of the exposure that the product developer previously had itself, or
2. are exposed to the opposite of the exposure that the product developer wishes to have after the sale of the product.

Paragraph 4. Before launching the financial instrument or structured deposit, the product developer shall assess whether the instrument or deposit will threaten the orderly functioning or integrity of financial markets.

Target Group Definition

Section 10. The product developer shall define the target group for each financial instrument and structured deposit with sufficient detail and specify the types of customers whose needs, characteristics and objectives, including any sustainability-related objectives, the financial instrument or structured deposit is compatible with.

Paragraph 2. The product developer producing financial instruments or structured deposits that are distributed via other undertakings shall carry out the target group definition mentioned in paragraph 1 on the basis of the product developer's theoretical knowledge of and previous experience with the instrument or deposit or similar products, the financial markets and the needs, characteristics and objectives of potential end customers. As part of this target group definition, the product developer shall also define any group of customers whose needs, characteristics and objectives are not compatible with the product. In cases where the financial instrument or structured deposit includes sustainability factors, this definition shall not take sustainability into account.

Paragraph 3. If several product developers collaborate on the production of a financial instrument or structured deposit, it is only necessary to define one target group for the instrument or deposit in question.

Paragraph 4. The product developer shall determine whether a financial instrument meets the identified needs, characteristics and objectives of the target group, inter alia by investigating:

1. Whether the risk and return profile is consistent with the target group's.
2. Whether the financial instrument's or structured deposit's potential sustainability factors are consistent with the target group's.
3. Whether the design of the financial instrument or structured deposit is motivated by elements that are in the customer's interest and not by a business model that relies on poor customer results to be profitable.

Fee Structure

Section 11. A product developer shall consider a fee structure for the financial instrument or structured deposit that at a minimum ensures that:

1. the costs and fees for the instrument or deposit are compatible with the target group's needs, objectives and characteristics,
2. the fees do not undermine the expected return of the instrument or deposit, and
3. the fee structure for the instrument or deposit is sufficiently transparent for the target group.

Scenario Analysis

Section 12. A product developer shall conduct a scenario analysis of its financial instruments or structured deposits with a view to assessing the risk of poor results for end customers that the instrument or deposit may cause, and the circumstances under which such results may occur.

Paragraph 2. The product developer shall assess the product based on negative scenarios, cf. paragraph 1, including in relation to the following circumstances:

1. Market conditions deteriorate.
2. The product developer or a third party involved in the construction or functioning of the instrument or deposit faces financial difficulties, or other counterparty risks materialise.
3. The instrument or deposit is not commercially viable.
4. Demand for the instrument or deposit is much higher than expected, putting pressure on the product developer's resources or on the market for the underlying instrument.

Ongoing Assessment of Financial Instruments or Structured Deposits

Section 13. A product developer shall regularly re-evaluate the financial instruments or structured deposits that the product developer constructs, taking into account events that may materially affect the potential risks for the defined target group. The product developer shall in this context assess whether the product continues to meet the target group's needs, characteristics and objectives, including any sustainability-related objectives, and whether it is distributed to the target group or reaches customers whose needs, characteristics and objectives are not compatible with the product.

Paragraph 2. The product developer shall re-evaluate a financial instrument or structured deposit before further issuance or relaunch of the instrument or deposit if the product developer has knowledge of events that may materially affect potential risks for customers, and the product developer shall regularly re-evaluate whether the financial instrument or structured deposit functions as intended. The product developer determines how regularly it re-evaluates its financial instruments or structured deposits based on relevant factors, including the complexity and innovative nature of the investment strategies used.

Paragraph 3. The product developer shall identify key events that will affect the potential risks or the expected return of the financial instrument or structured deposit, including:

1. Exceeding a threshold that will affect the instrument's or deposit's return profile, or
2. The solvency situation of certain issuers, whose securities or collateral may affect the instrument's or deposit's performance level.

Paragraph 4. If events as mentioned in paragraphs 1-3 occur, the product developer shall take appropriate measures, which may include:

1. Providing all relevant information about the event and its consequences for the financial instrument or structured deposit to customers or to distributors of the financial instrument or structured deposit, if the product developer does not itself offer or recommend the product directly to customers.
2. Changing the product approval procedure.
3. Ceasing further issuance of the financial instrument or structured deposit.
4. Changing the financial instrument or structured deposit to avoid unfair contractual terms.
5. Assessing whether distribution channels are appropriate if the product developer becomes aware that the financial instruments or structured deposits are not sold as planned.
6. Contacting the distributor to discuss a change in the distribution process.
7. Terminating the relationship with the distributor.
8. Informing the Danish Financial Supervisory Authority.

Chapter 4 Special Rules for Distributors

Section 14. A distributor shall understand the financial instruments or structured deposits and assess their fulfilment of the needs of the customers to whom the distributor provides investment services, inter alia taking into account the defined target group.

Paragraph 2. The distributor shall ensure that it only offers or recommends financial instruments or structured deposits when this is in the customer's interest.

Organisational Requirements

Section 15. A distributor distributing financial instruments or structured deposits shall ensure that:

1. relevant employees have the necessary qualifications to understand the characteristics and risks of instruments or deposits that the undertaking offers or recommends, the services that the undertaking provides, and the defined target group's needs, characteristics and objectives,
2. the distributor's management body has actual control over the distributor's product governance arrangements,
3. the distributor's compliance function monitors the development and periodic review of product governance arrangements to reduce the risk that the distributor does not comply with its obligations under Section 5 and this Chapter, and
4. the compliance reports to the distributor's management body systematically include information about the products that the distributor offers or recommends and the services that the distributor provides.

Section 16. If several undertakings collaborate on the distribution of a financial instrument, structured deposit or service, the undertaking that has the direct customer relationship has the final responsibility for fulfilling the obligations set out in this Chapter on product approval and product governance, subject to paragraph 2.

Paragraph 2. An undertaking acting as an intermediary shall:

1. ensure that relevant product information is sent from the product developer to the distributor with direct customer contact,
2. make information available to the product developer about product sales for use in the product developer's compliance with its product governance arrangements, and
3. include product developers in the product governance obligations to the extent that this is relevant in relation to the service provided.

Target Group Definition

Section 17. A distributor shall establish appropriate product governance arrangements to ensure that the financial instruments, structured deposits and services that the distributor wishes to offer or recommend are compatible with a defined target group's needs, characteristics and objectives, including any sustainability-related objectives, and that the intended distribution strategy is consistent with the defined target group.

Paragraph 2. In the assessment, cf. paragraph 1, the distributor shall appropriately identify and assess the circumstances and needs of the customers that the distributor intends to focus on, to ensure that customers' interests are not compromised as a result of commercial pressure or financing pressure.

Paragraph 3. The distributor shall define the target group for the financial instrument or structured deposit in question, even if the target group is not defined by the product developer.

Paragraph 4. The distributor shall define any group of customers whose needs, characteristics and objectives the financial instrument, structured deposit or service is not compatible with. In cases where the financial instrument, structured deposit or service includes sustainability factors, this definition shall not take sustainability into account.

Paragraph 5. The distributor shall regularly re-evaluate the investment products it offers or recommends and the services it provides, taking into account any events that could materially affect the potential risks for the defined target group. The distributor shall at a minimum assess whether the product or service continues to be consistent with the defined target group's needs, characteristics and objectives, including any sustainability-related objectives, and whether the intended distribution strategy remains appropriate. The distributor shall reconsider the target group and/or update the product governance arrangements if it becomes clear that it has misdefined the target group for a specific product or service, or that the product or service no longer matches the defined target group, e.g., if the product becomes illiquid or very volatile as a result of market changes.

Paragraph 6. A distributor that both produces and offers or recommends a financial instrument or structured deposit may only carry out one target group assessment.

Exchange of Information

Section 18. A distributor shall obtain information about the instrument, deposit or service that the distributor wishes to offer or recommend from product developers for the purpose of defining the target group and distribution strategy for the financial instrument, structured deposit or the service in question.

Paragraph 2. The distributor shall take all reasonable precautions to obtain appropriate and reliable information from other product developers than those mentioned in paragraph 1, to ensure that the instrument or deposit is distributed in accordance with the target group's needs, characteristics and objectives.

Paragraph 3. The distributor shall use information obtained in accordance with paragraphs 1 and 2 and the distributor's information about its own customers to define the target group and distribution strategy.

Section 19. A distributor shall make information available to product developers about sales and relevant information about the distributor's ongoing assessments.

Chapter 5 Penalties

Section 20. An undertaking that fails to comply with an order to perform or refrain from performing certain actions with a view to complying with the provisions of this Order shall be liable to a fine.

Paragraph 2. The undertaking that violates Section 9, paragraph 2, shall be liable to a fine.

Paragraph 3. Companies etc. (legal persons) may be subject to criminal liability in accordance with the rules of Chapter 5 of the Criminal Code.

Entry into Force

Section 21. This Order enters into force on 13 March 2023.

Paragraph 2. Order No. 1175 of 11 August 2022 on product approval procedures is repealed.

Danish Financial Supervisory Authority, 7 March 2023 Jesper Berg / Sean Hove

1. The Order contains provisions implementing parts of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II), Official Journal of the European Union 2014, No. L 173, p. 349, and Commission Delegated Directive 2017/593/EU of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and the conditions for the issuance and reception of financial instruments and client assets, product governance obligations and the rules applicable to the acceptance or payment of fees, commissions or any monetary or non-monetary benefits, Official Journal of the European Union 2017, No. L 87, p. 500, and Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 amending Directive 2014/65/EU as regards disclosure requirements, product governance and position limits, and amending Directives 2013/36/EU and (EU) 2019/878 as regards their application to investment firms, with a view to contributing to recovery from the COVID-19 crisis, Official Journal of the European Union 2021, No. L 68, p. 14, and Commission Delegated Directive (EU) 2021/1269 of 21 April 2021 amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into product governance obligations.

Law Gazette A 2023 Published on 9 March 2023 7 March 2023. No. 245. Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, ref. no. 23-003657 CQ002490