Regulation: Building Mifid II on solid foundations

After years of hand-wringing and discussion, Mifid II will finally be implemented in early January 2018. Product governance requirements under the new directive will impact providers and distributors, both large and small, who must make sure they are putting the appropriate building blocks in place now to meet the FCA’s expectations in this area.

Ensure solid foundations
The overarching and most important factor for an effective product governance framework is a firm’s culture. If culture is truly aligned to appropriate customer outcomes, the framework will operate seamlessly within the business. If it isn’t, the product governance model will simply become a papering exercise and will have little impact on ensuring customers receive products and services that are designed for their needs. The latter will certainly not satisfy regulatory
expectations.

It is important that firms form an objective view of their culture before embarking on building or enhancing their framework. The assessment should be at both the leadership level and the lower operational level, with a core consideration being on whether both are aligned to providing the right solution to the right customers.

Build a robust framework
A robust and objective product governance framework requires the dedication of both time and resources. This commitment should be seen as an investment rather than a cost. The key building blocks of an effective product governance model include product design, distribution, maintenance and life cycle review.

When looking at product design, firms need to ensure that the end product is aligned with the firm’s strategy and business model, and that the target market is clearly defined and supported by robust end-customer research. It’s also important to understand how the fund will perform in different scenarios, and what could happen to stop it operating as anticipated.

Another important factor to consider is value for money and how transparent and simple the charges are.

When it comes to product distribution, firms need to ensure they have an appropriate distribution proposition that captures how the fund should be sold and the associated risks.

It’s also important that the supporting documentation clearly articulates the nature of the fund and that the distributors have been made aware of the fund’s key aspects, and who it is suitable for.

As part of product maintenance, firms should consider whether there are any explicit or implicit exit barriers, penalties or charges and if there is a clearly articulated proposition about how the fund will be serviced. Another question to ask is whether the firm is appropriately resourced and competent to assess any complaints received in relation to the fund.
The last building block is the life cycle review. It’s important to consider whether an appropriate suite of Management Information (MI) has been designed to capture whether the fund is delivering appropriate customer outcomes, and if it’s being sold to the identified target market. Are MI, complaints, servicing issues and distributor feedback objectively analysed to identify whether any underlying trends indicate that intervention is required? And does the firm conduct regular and robust governance on all current funds to ensure they remain appropriate?

All structures need good mortar. In this case, the framework should be underpinned by clear, objective and constructive governance throughout, with appropriate representation across the business.

Employ a good foreman
The company’s board has overall accountability for the product governance process. It is recommended that an appropriate senior manager takes responsibility for the changes required within the process and continues responsibility following roll out of the Senior Managers and Certification Regime (SMCR).

Most of the Mifid II product governance requirements should be nothing new for a well-run firm. Firms that have good culture will find that much of the product governance framework is likely to take care of itself. Another reason, if one was needed, on why culture should remain a top priority.

Phil Deeks is a technical director at TCC