This article first appeared on LinkedIn. It is republished here with the author’s permission.


Back in 2013 people in the UK and Ireland found the “beef lasagna” on their plates was “horse lasagna”. In countries where they like their horses for sport and not on their menu this was a shock! And this leads us onto the EU’s MiFID II Directive.

I must admit that the link between “horse lasagna” and the EU’s “Commission Delegated Directive 2017/593” might not be obvious, but we are dealing with the same issue.

In financial services, we have “producers” who design and manufacture products which aim to achieve various objectives, for example; pay a pension, fund the grandchildren’s school fees or pay-off a mortgage.

You would expect the producer of financial products to take great care in designing the product, test it to make sure it performed as expected and, if not, to take remedial action. Food and financial products are not so different.

Once financial products are manufactured they have to be distributed to consumers. You would expect the distributors to carefully assess the requirements of their clients, find the best products to meet those requirements and then make sure the products worked as expected.

In both the manufacture and distributor cases, financial services are no different to the manufacture and sale of beef lasagna.

MiFID II: product due diligence overview

For those of you that haven’t read the Directive, it is worth taking a quick skim over the main details.

The Directive differentiates between two types of financial firms, those that “produce” a financial product or service and those that “distribute” it, which means the seller. There can be an overlap where a firm is both a producer and a distributor of the same product, in which case they are covered by both sets of rules but, where a rule is duplicated they only need to perform the work once.

Producers: what is in the sausage/financial product?

Regulated firms that design and manufacture financial products are required to document what the product does, who it is suitable for and the associated risks. At a high level, there are three parts to the producer’s product due diligence:

  • Firm level – the management board must put in place the oversight and controls over producing and supporting their financial products
  • Product level – each product must be risk assessed, back tested and the necessary systems, controls, data and qualified people available to manage the product
  • Documentation – there must be full written documentation on each product covering topic including the: target consumer, risks and assumptions. This documentation must be shared with the distributor.

As with the horse meat in the beef lasagna, the producer is like the farmer who passes meat to the food processor. After the horsemeat saga, the food supply chain in the EU was tightened, both by national food regulators and by the producers. It was in the food industry’s financial interest to put their house in order.

Distributors: the supermarkets of financial services

Regulated firms that sell financial products to consumers have three fundamental requirements:

  • Clients – the firm must have undertaken a detailed “Know Your Client” (KYC) which covers topics like a client’s financial means, experience, investment objectives, risk appetite, etc.
  • Products – the firm must have undertaken a detailed “Product Due Diligence” (PDD) on each product they consider selling to their clients
  • Suitability – there must be evidence that a distributor has tried to match their clients’ requirements to the products they are offered

As you might expect, the EU Directive places most of the responsibility on the distributor to both know what their client’s need and what products work for them. The biggest liability lies with the distributor since they are the client facing party and regulators focus on protecting the consumers.As with the producer, the distributor has three levels of their product due diligence:

  • Firm level – the management board must put in place the oversight and controls over distributing financial products and supporting their clients
  • Product Level – each product must be assessed before it is offered to the distributor’s clients and then periodically reassessed to ensure it performs as specified (and it if doesn’t, then to take remedial actions)
  • Documentation – as well as documenting how the distributor selects products for their clients they also have to document the basis on which a recommended product was suitable for the client

The fallout of the horse meat saga in the UK and Ireland hit the retailers far harder than the producers because the retailers were where the public bought the mislabeled food. The producers were “anonymous” food processing firms who were rarely household names.

Supply chain complexities

The EU Directive acknowledges that there are complexities in the supply chain of financial products. It is possible for a producer to sell to an intermediary before the product gets to the distributor. Financial products can also be rebranded so the consumer doesn’t truly know who manufactured it. So, the EU Directive imposes requirements on each firm in the supply chain to ensure information is passed to the final distributors and back to the ultimate producer.

“You can run, but can’t hide” — former US President Reagan

Europe’s food chain which emerged during the horse meat crisis turned out to be far more complex than in financial services, partly because the meat that was unfit for human consumption was being laundered through intermediaries so that the ultimate source was obfuscated. Drawing on the analogy with money laundering would make an interesting article!

Impact outside the EU

Financial product/service firms outside the EU are going to be impacted by MiFID II. If your firm produces financial products or services which are distributed in the EU, the distributor is required to ensure the product/service is compliant before it is distributed.

Firms in the US, Hong Kong, Singapore and Australia, among others, can expect calls from their EU distributors requiring additional internal controls and documentation.

As with the food supply chain, standards have to be applied throughout the financial services supply chain. The EU won’t tolerate financial instrument/service producers moving outside their jurisdiction and distributing within EU without complying with equivalent standards!

EU Product Due Diligence

EU Directives get a bad press because they are onerous and deadly boring. But, the Directive, as it applies to Product Due Diligence, was drafted because of real world examples of consumers being let down by either producers or distributors.

Part of the EU Directive makes it clear that financial instrument producers must not dump unwanted investments into a financial product (or take bets against the products they manufacture). It is interesting that the horse meat scandal uncovered some food processors disposing of worthless meat by reprocessing it and then mislabelling it.

Beef lasagna should be beef. At a push, a beef lasagna could have lamb, but start putting in pork and you are going to offend two major religions. Put in horse meat in countries like the UK or Ireland where horses are ridden, not eaten, and you have a PR catastrophe.


The EU MiFID lays out in detail the expectations on and obligations of financial product producers and distributors. All firms impacted by the regulations are going to have to review their approach to production and distribution. It is likely that producers will have to scale back their product lines while distributors will cut back the number of products offered.

Although few people in financial services are going to welcome the EU Directive, we have to remember that retail customers trust us with their hard-earned money and we need to repay that trust by operating to, and evidencing that trust was not misplaced.


Adrian Pay is a UK qualified Chartered Accountant who has specialised in financial regulation for over 20 years, working in the UK, US, Hong Kong, Singapore, Japan and Luxembourg. Adrian was a co-founder of LatentZero (now Fidessa BuySide) and is a Director of Dynamic-GRC, a leading RegTech solution provider.