Distribution Agreement MiFID II: What You Need to Know
The second iteration of the Markets in Financial Instruments Directive, MiFID II, has brought significant changes to the financial industry. One of the key areas impacted by this legislation is the distribution of financial products. Under MiFID II, firms are required to implement new procedures aimed at ensuring that the distribution of financial products is in the best interests of clients.
A distribution agreement is an important tool in the process of distributing financial products. It outlines the responsibilities of all parties involved in the distribution, including manufacturers, distributors, and intermediaries. The agreement sets out the terms and conditions of the distribution and ensures that all parties understand their roles and obligations.
Under MiFID II, there are specific requirements that must be met when drafting a distribution agreement. These include:
1. Identification of the target market: The distribution agreement must clearly define the target market for the financial product. This includes identifying the types of clients for which the product is suitable, as well as any restrictions on the distribution of the product.
2. Responsibilities of distributors: The agreement must outline the responsibilities of distributors, including their obligations to ensure that the product is suitable for the target market, as well as their obligations to provide accurate and clear information to clients.
3. Inducements: The agreement must address any inducements that may be offered to distributors in exchange for the distribution of the financial product. MiFID II places restrictions on the types of inducements that can be offered, and any such inducements must be disclosed to clients.
4. Conflicts of interest: The agreement must address any potential conflicts of interest that may arise in the distribution of the financial product. This includes conflicts between the manufacturer and the distributor, as well as conflicts between the distributor and the client.
5. Termination of the agreement: The agreement must specify the circumstances under which the agreement may be terminated, as well as the notice period required for termination.
MiFID II places significant emphasis on ensuring that the distribution of financial products is in the best interests of clients. As such, it is important for firms to carefully consider the requirements of the legislation when drafting distribution agreements. Failure to comply with MiFID II requirements can result in significant penalties and reputational damage.
In conclusion, the distribution agreement is a key element of the distribution of financial products under MiFID II. It is important for firms to ensure that their agreements comply with the requirements of the legislation, including the identification of the target market, the responsibilities of distributors, inducements, conflicts of interest, and termination of the agreement. By doing so, firms can help to ensure that the distribution of financial products is conducted in a transparent and fair manner that protects the interests of clients.