Post-Brexit there have been a number of events that highlight just why the regulators across many jurisdictions see product governance as one of the most important aspects of MiFID II, along with suitability, appropriateness, conflicts of interest, inducements and disclosure.
The relevant detail is set out in articles 9 and 10 of the Commission Delegated Directive that was issued a few months ago. Article 9 covers the product governance responsibilities for manufacturers/providers with article 10 covering the obligations for distributors, typically intermediaries.
As we know, the relationship between providers – whether they are investment firms, insurance companies, banks, platforms or lenders – and those firms engaging directly with the customer is of critical importance to the regulator. The recent concerns raised by the FCA over illiquid investments and unauthorised introducers, particularly in the pension space, demonstrates the current lens focused on interactions between parties in the fair treatment of customers. This relationship has been brought to the industry’s attention in respect of more mainstream investments as a result of the liquidity issues around property funds and the current concerns over the bond market and the “riskiness” of bond funds.
When a product does not behave as expected all parties potentially suffer, but it is the end customer that ultimately the regulator is most concerned about out. So how do firms make sure that their customers do not have any surprises? The familiar refrain of documentary evidence and audit trail remains as pertinent today as ever in evidencing that important features of a product have been adequately communicated and disclosed. Given past failings the regulator is likely to have less patience with firms that are not revisiting how they engage with other parties and considering end customers in the product sales chain.
What level of interaction do firms have with each other ahead of promoting or advising on a particular investment? What level of information is accepted and what is challenged? We are seeing an increasing amount of activity in these areas.
What is certainly an interesting development is the extent to which the interaction between parties in a product supply chain leading to the end customer are asking about each other’s approach. MIFID II requires a greater level of enquiry to ensure that all parties are competent in understanding the end service. Whilst providers are stopping short of reviewing the advice provided by the advisers recommending their products, there is increased awareness of the systems and controls in place at the advisory firms and a desire to ensure the product reaches only the target market.
Do firms discuss the target market and agree the approach? Does the adviser firm review scenarios where the investment may not perform as it is intended? Are the risks and attributes adequately understood internally before they reach the customer interface and are disclosed and communicated as part of the advice and sales process?
Ahead of Brexit did firms anticipate what might happen to their various funds and investments and was the level of communication proactive or reactive? Was it clear to the customer at outset where the potential risks such as illiquidity might arise? The benefit of hindsight is of little comfort. Brexit was a surprise to most people but situations such as this are when attention will turn to what was communicated about risk at outset.
The message we are seeing overall is that there is increased expectation on the product governance process to be robust through from design to sale and on this basis the customer is able to make a fully informed decision.