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Concerns around understanding and compliance with the product governance regime were given greater weight in the findings of a recent FCA report. The regulator has started using its powers under the regime, and it’s not long before they will be looking to set an example. For firms across the investment value chain, it’s vital to understand who is responsible for providing what information.
Report finds asset managers not compliant with product governance rules
In February, the FCA published a report concluding there was significant scope for asset managers to improve their product governance arrangements. The report: MiFID II: product governance review examined how a sample of asset management firms, as product providers (manufacturers), took into account the product governance rules in its Product Intervention and Product Governance sourcebook (PROD). The review found that several asset managers were not fully complying with the regime.
The sentiment behind the product governance rules from the FCA – that both the manufacturer and distributor are responsible for who buys the investment – is well-founded. There is an obligation on the side of the manufacturer to understand how the financial product is being distributed right through value chain, and similarly the distributor needs enough information, so they understand the product they’re selling. However, in practice, the report demonstrates the rules aren’t yet working properly.
For now, the FCA is still gathering information and asking questions, but it will not be long before they take action and set an example. The FCA has recently used its Product Governance powers to prevent ICC Intercertus Capital Limited from offering Contracts for Difference (CFDs) to UK customers. Whilst the circumstances of this action are specific to the failings of this firm, it is important that all FCA regulated businesses review their PROD compliance now.
Product governance must include the whole value chain
Two key issues come in to play when it comes to compliance with PROD – allocation of responsibility, and understanding what information is required and how to present it
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Allocation of responsibility
The first is the allocation of responsibility between manufacturers and distributors. Distributor firms struggle to get their heads around why they should send information to manufacturers about their customers, with some concerned manufacturers will bypass them and sell direct. Manufacturers, on the other hand, question why they need to trawl through large amounts of information on the end customer when there is a regulated firm who is responsible for the advice given.
Ultimately this is a question of who is responsible for suitability. Many might expect this to be the last person in the value chain – the distributor or financial adviser. However, if the final person in the chain is not provided with adequate, or in some cases complete, information about the product they cannot make the judgement of whether a product is suitable for a client.
The two sides would benefit from being less sceptical and working more closely together to understand why this information sharing is so important. We’ve seen some instances of manufacturers asking for too much information and therefore not receiving anything meaningful, and on the other hand distributors who are not willing to share enough.
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Understanding the information requirements
The second issue is a lack of understanding from both sides about what information they need and how to present it. We have encountered FCA regulated firms who don’t realise that the product governance rules apply to them. For example, we have seen Independent Financial Advisers asking platform firms to add funds to the platform but the platform provider hasn’t documented any assessment of how they deemed it was appropriate to add the fund. Many assume that because the financial adviser is FCA regulated they must understand the product. However, even if the adviser understands what the product is, there is still a responsibility on the platform provider to evidence that it also understands the product and has made an informed decision to allow it to be distributed on its platform. This is an issue particularly prevalent with mini-bonds and CFDs (Contract for Differences).
One reason for the confusion is that the language used by the FCA is sometimes inconsistent. Guidance makes reference to firms applying the product governance rules in a ‘proportionate’ manner and some firms have interpreted this to mean applying the bare minimum, whilst others interpreted it as doing nothing.
The largest financial firms are more advanced in their thinking around PROD compliance because the FCA has already scrutinised them heavily, particularly those firms in the banking sector. Asset and wealth managers will have more work to do. There is also some concern around product governance in terms of marketing and distribution in the insurance industry and the FCA is now looking closely at the funeral plan market.
Given the number and frequency of questions asked by asset management and wealth management clients, it’s apparent that many have not yet adopted product governance to an appropriate level. Whilst the investment market has been quite buoyant of late, and investors are seeing positive returns, this issue may slip under the radar. However, as is always the case, if clients start to lose money they raise complaints and this can ultimately lead to FCA intervention.
Brokers, IFAs, Asset Managers, platform providers – every single part of the value chain needs to have a rethink about their PROD responsibilities. This is a difficult topic for firms to get their head around, but it is also a problem that is not going away. Firms should take action now.
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With specialist teams covering every part of the financial services ecosystem we can give you advice on how product governance affects you and what you can expect from other firms in your value chain.
