What do Mifid II product governance rules really mean for managers?

chrismartin

Product governance is a key priority for the FCA. Its importance is set to rocket as the regulator concludes its Thematic Review into investment funds meeting the needs of investors and the Mifid II implementation deadline approaches. This is an area where further clarification is needed. As the industry awaits further guidance on best practice, there are a number of key considerations for asset management firms to adhere to when carrying out an effective product governance review, to ensure that products are operated in line with investors’ expectations.

Mifid II, with its remit to strengthen investor protection, requires product manufacturers to have effective oversight throughout the product lifecycle. These requirements compel product providers to understand and disclose its target markets and then conduct post-sale analysis. This is done to ensure that products are only being sold to those investors they were intended for.

The requirements may expand upon and be more explicit than the FCA’s existing guidance within the Responsibilities for Providers and Distributors for the Fair Treatment of Customers and what has been published in previous Thematic Reviews into structured products. However, the requirements are ultimately the same and firms should already have these processes and controls in place.

Robust governance is dependent upon clear and accountable oversight at board level across the product lifecycle, from concept to post-sale analysis. To ensure the commitments made by decision-makers effectively filter down to product design, marketing and distribution, firms should have a product governance policy in place with clearly defined processes and responsibilities. In order to determine whether oversight is adequately robust, boards have a number of considerations to keep in mind.

The first consideration is to ensure that products are designed to meet an identified investor need. This means that prior to commencing the design of a product, firms should be undertaking suitable market analysis to assess the intended target market and the likely consumer need for the product.

It is imperative that firms are able to provide evidence that investors are at the heart of all decisions made regarding new products, with any potential risks identified, managed and disclosed. This may include modeling whether the stated performance is likely to be achieved and whether the proposed distribution channels are appropriate for the target market.

Asset management firms are responsible for ensuring investors are adequately supported in choosing suitable funds, particularly if they are available on a non-advised basis. To achieve this, firms should have a clear launch strategy for new products and all communication with investors and their advisers should be conducted in a clear, fair and non-misleading manner, with appropriate transparency and disclosure.

Product providers should consider the risks to the end consumer when producing marketing materials and selecting distribution channels. Once again, achieving this successfully and compliantly relies on having conducted robust market analysis and understanding how and why investors choose or have certain funds recommended to them.

Effective product governance cannot be achieved if asset managers do not undertake regular reviews of their products to check whether they are performing in line with their stated objectives. A review should include relevant product stress testing to assess whether the risk to consumers is as stated in the product documentation. It should include an analysis of whether the stated objectives of the fund are being met along with a review of all distribution channels and their performance. Lastly it should also include a review of marketing materials to ensure they are up-to-date and provide investors and their advisers with clear information to assess the product.

In addition to internal product governance reviews, consideration should also be given to a wider compliance review examining conduct risk within the firm’s business model, culture, product governance and distribution process. This will be most effective and meaningful if carried out in partnership with an independent consultancy. 

Chris Martin is senior regulatory consultant at the Consulting Consortium.