Fund suspensions – product governance and conflicts management under pressure

25 June 2019

Retail investors are once again being told that, because of a gated product, they don’t have the instant liquidity they thought they had. As a result of the Woodford headlines this month, the FCA are even more likely to challenge product governance processes as part of a forthcoming review. There are more cases starting to appear at other managers, so it’s worth getting your house in order now to avoid painful consequences.

It’s been more than ten years since the AIG Premier Access Bond mis-selling allegations. Woodford Equity Income’s woes mean the blame game is beginning once again. There are various factors that are particular in the Woodford Equity Income case. But the lessons will no doubt be picked up by the FCA when carrying out this year’s promised product governance supervisory work. The regulator will challenge the product governance and suitability processes of investment advisors and managers. They have also said that they will be looking at Best Buy tables, so there will be scrutiny over conflicts management as well.

Making sure product governance isn’t form over substance

At Bovill, we see a lot of product governance processes. Many appear simply to demonstrate  compliance with rules rather than properly considering and conveying the risks to the end investor within a certain product or service. This box-ticking approach will not be tenable in this post MIFID II world of transparency and increased fiduciary duties.

Six ways you can get ahead of the FCA’s review

The Woodford incident highlights a whole host of issues. But here are five steps you should consider to get ahead of the regulatory curve:

  1. Pay attention to the detail of the target market and liquidity needs
    If there is an increased risk of suspension or gating then this needs to be clear to investors and explicitly considered by advisors. Should you have discussed this risk at your products and services committee or other governance forum? Take care to compare apples with apples. When considering a FTSE100 tracker against a less liquid fund the investment horizon is crucial. The Woodford Equity Income fund is a long term investment and has a weighting to early stage technology – any advisor should include that factor in their decisions around target market and tactical suitability decisions. The target market says 3-5 years as the minimum investment horizon it also mentions potential liquidity constraints*. If there is a heavy weighting for a client who has immediate liquidity needs, does your investor put a priority always on immediate liquidity? How will you test and monitor this?
  2. Negative target markets affect appropriateness
    Firms are not required by the black letter rules to test appropriateness for vanilla UCITS funds. But The Woodford Equity Income Fund said that it would not be suitable for “Self-directed investors who are not able to evaluate the risks and merits of the fund”* – if a fund has an increased risk of suspension, how will convey this to your platform users so that they can make an informed choice? How do you test investor’s understanding of this point? The principle of customers interests must be considered here – should you be carrying out more detailed work amongst E/O clients?
  3. Beware ‘Top Pick’ lists
    ‘Top Pick’ lists are not advice, but they do involve an element of subjectivity and so need to have careful consideration and positioned with your E/O clients. Consider any conflicts, actual or potential, that need to be managed or avoided.
  4. Check your gifts and entertainments register
    Assess why you might have more entries with one manufacturer or distributer – does it indicate an overly cosy relationship? Are there any potential conflicts indicated? If so, look to the conflicts register and how you might avoid them – especially if you have a top pick list or buy list.
  5. Review your product shelf regularly
    Products change over time and the understanding of them changes, so you should review all products and services regularly and on trigger events. Responsibility for these reviews needs to be clearly allocated in the firm and tracked by the products and services governance forum.

 

Bovill can help

We can help you in any area of product governance. For example by:

  • assessing your product governance process and improving it to help put the client at the centre
  • assessing individual products and services to make sure that they meet the needs of you clients
  • reviewing past sales to ensure that they are within the target market
  • reviewing product literature to ensure that it meets the FCA’s expectations.
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