The FCA has published the results of its review into UK asset managers’ implementation of the MiFID II product governance rules. The FCA found that some asset managers are failing to comply with the requirements in respect of their retail investors. Specifically, the FCA found that some disclosures to investors could be misleading and that some asset managers are exercising insufficient due diligence and foresight in the distribution of their products. It will come as no surprise to asset managers that the difficulties of obtaining end-client data from distributors especially for nominee accounts is also noted by the FCA. The FCA insists that asset managers need to do more to challenge (and document their challenge) of distributors and not allow commercial sensitivities to take precedence when they struggle to obtain data from distributors.
In general, the FCA provides firms with useful guidance about their expectations for compliance.
- Target market: the FCA found that most managers did not consider the negative target market for their products (i.e. the investor base for whom the product is not intended). Firms are encouraged to consider this and to ensure that the negative target market, if one is given, is consistent with the positive target market. Furthermore, managers must obtain information from their distributors in order to undertake product assessments and to refine their views of the target market. The FCA believes that firms can do more to obtain this information. Firms should also undertake better due diligence of their distributors to ensure that they are effective and that they are complying with the target market in their sales and recommendations to their clients.
- Stress testing: the FCA noted the variability of different firms’ approach to stress testing and reiterated that the primary purpose is to assess how a product might perform under volatile market conditions.
- Costs and charges: the FCA emphasise that disclosures to investors must be “fair, clear and not misleading” and that the disclosures should be consistent with, for example, the UCITS key investor information document when relevant.
- Conflicts of interest: while most firms had a conflicts framework, not all were deemed to be effective. The FCA states that compliance is judged based on the outcomes in identifying and managing risks.
- Governance and MI: the review found that many product oversight committees have poorly defined terms of reference and little evidence of effective challenge. The FCA notes that good records must be kept demonstrating committees’ challenges and decisions, and that developing good processes around MI is critical to understanding key trends and mitigating risks. The weaknesses in MI are flagged as a concern for senior managers who are accountable for this activity.
While MiFID II’s product governance rules are under review in the EU, the UK has no immediate plans to scale back the rules in PROD (many of which were developed with significant input from the FCA in the original MiFID II legislation). The FCA’s review highlights the importance that the supervisor places on compliance with the rules in the best interests of retail investors. The FCA review also serves as a reminder that firms which are not obliged to comply with PROD must nevertheless have regard to the Responsibilities of Providers and Distributors for the Fair Treatment of Consumers or “RPPD”.
The FCA’s study did not consider product governance in relation to professional and eligible investors. However, the FCA notes that while some asset managers do not have obligations under MiFID II, they should nonetheless treat the product governance provisions as guidance to help firms meet the requirement to act in the best interests of their investors. Consequently, managers of funds with non-retail investors should consider which, if any, of the MiFID II provisions are relevant to their products. Implementation can and should be tailored to the needs and sophistication of the firm’s client base.
All managers should use the FCA’s guidance to review their product governance framework as the key message is that “simply having a framework in place is not enough; the ultimate outcomes are fundamental”. The FCA states that it expects to undertake further work in this area, which could include opening investigations where it identifies breaches in rules.