It’s nearly two years since the introduction of MIFID II, and although the new directive brought with it a set of product governance rules, regulators have been mainly concerned with the disclosure of costs and charges. Until now, that is.
As the chief executive of the Financial Conduct Authority revealed in January, they would soon be shifting focus towards product governance, with a thematic review due to begin later in the year.
What are these regulations about?
To remind you just how broadly defined the product governance element of MIFID II is , it’s aimed at making sure firms design, approve, market, manage and retire investment products that are appropriate for customers’ current and future financial goals.
Investment funds should meet the needs of one or more target markets, be sold through proper distribution channels, and deliver appropriate client outcomes.
The rules don’t just apply to the product providers and manufacturers either; distributors such as financial advisers must also be seen to be treating customers fairly and safeguarding their interests under these regulations.
What will regulators be looking for?
There’s more to product governance than simply identifying and tending to the financial needs of your target market.
You must have evidence of:
- Product strategy, development and sign off
- Risk assessment and information given to customers
- A clear and effective distribution strategy
- Periodic reviews of the product, target market and distribution channel
- Effective management at committees and boards
Failure to provide evidence of the above in the case of an FCA investigation could result in a heavy fine.
What you need to do to respond to the regulations
To ensure you meet the FCA’s expectations around product governance, you’ll want to do following:
- Where necessary, create product governance teams to run product lifecycle reviews, value assessment and allow product governance MI to reach the committees and boards.
- Update your committee structures and terms of reference to reflect a holistic approach to product governance throughout the product lifecycle.
- Enhance your product review and value assessment processes to ensure products still meet the needs of their target market, their features or expected outcomes haven’t changed, and that the distribution strategy is right for the target market.
- Develop a process for evidencing investor outcomes in decision making by specifically tasking senior committee and board members with safeguarding the interests of investors.
- Define a clear set of MI on the investor outcomes of products and make sure it’s regularly reviewed at committees and boards.
- Ensure that oversight of your distributors continues after the due diligence process and MI is collected both on target market criteria and flows.
- Clearly evidence how the balance of commercial and investor interests is managed through governance processes.
By taking these steps, you’ll be putting your business in the best possible position to meet the product governance requirements, ready for the increased regulatory scrutiny that’s expected over the coming months.
If, having read this, it sounds too complex to handle in-house, or you simply don’t know where to begin, get in touch.
We’d be happy to explain how we can help you successfully respond to the product governance requirements and keep your business safe.