By Harrison Folland
The FCA has published its MiFID II Product Governance Review. The review looked at how asset management firms consider MiFID II’s product governance regime when creating and providing products for end clients.
The FCA visited 8 asset managers with AUMs ranging from £2bn to £100bn. All of the products assessed were UK authorised collective investment schemes, available to retail investors through platforms on both an advised and execution-only basis.
The review’s findings are grouped into four key areas:
- Product design – how well firms assess the negative target market and conflicts of interest;
- Product testing – focusing on scenario and stress testing, as well as the disclosure of costs;
- Distributors – considering firms’ due diligence, the information they seek from distributors and use of management information by firms;
- Governance & oversight – looking at second line of defence and product governance committees, obligations of the Authorised Fund Manager board, how firms approached record keeping and training on product governance.
According to the FCA, its review suggests that some asset managers are not undertaking activities in line with MiFID II’s PROD regime. Consequently, there is an increased risk of investor harm, particular where investors buy products that may not be appropriate for them. The FCA believes that there is “significant scope for asset managers to improve their product governance arrangements”.
The FCA also notes that the reliance on intermediated services in the market also means that manufacturers commonly rely on distributors to give them relevant information on the end consumer. However, distributors rarely pass this information on to asset managers, which hinders their ability to effectively meet best practice on product governance. The FCA concludes that asset managers and distributors need to prioritise effective cooperation and information sharing to address the potential harm to consumers caused by poor product design and distribution processes.
The FCA says that it will continue to focus on product governance and that this will include considering whether it needs to make further changes to its product governance rules and guidance for both asset managers and distributors.