Since January 1, 2013, the Dutch Authority for the Financial Markets (AFM) has heightened its supervision over the product development process in financial institutions. Adherence to the Product Approval & Review Process (PARP) is crucial to prevent reputational, operational, and financial risks. This vigilance became even more pronounced following high-profile cases involving interest rate derivatives and endowment policies.
Legal Framework of PARP
The AFM's supervision is grounded in the standards laid out in Sections 32 to 32c of the Decree on Conduct of Business Supervision of Financial Undertakings Wft (BGfo). For entities under MiFID II, which came into effect on January 3, 2018, additional regulations apply, including Articles 16 and 24 of MiFID II, Articles 9 and 10 of delegated EU Directive 2017/593, and ESMA's product governance guidelines. Insurance distributors also face specific rules under the Insurance Distribution Directive (IDD).
Regardless of the type of financial firm, the essential principle of PARP remains consistent: ensuring client interests are central in product development and distribution. It emphasizes that financial products should only be offered to suitable clients.
Organizations subject to MiFID II face stringent PARP requirements. These include detailed determinations of target groups, understanding the necessary knowledge and experience for evaluating products, assessing clients' financial situations, objectives, and risk tolerance.
PARP is a regulatory process that financial institutions follow to ensure their products meet compliance standards and are aligned with client interests.
PARP is essential for mitigating risks related to product development, ensuring that products are suitable for clients and fully compliant with regulatory requirements.
PARP is governed by the Decree on Conduct of Business Supervision of Financial Undertakings (Wft), MiFID II regulations and the Insurance Distribution Directive, depending on the type of institution.
MiFID II imposes stricter PARP obligations, including more detailed assessments of target groups, product risks and client suitability.
Yes, financial institutions can work with regulatory compliance experts to properly implement and manage the Product Approval & Review Process.