MiFID II Product Governance: making sense of uncertainty

21 February 2017

By Philip Raines and Naveed Rajput

Market participants have woken up to the significant amount of change that MiFID II Product Governance will enforce on banks and financial institutions. The regulatory text is broad, complex and left open to interpretation. If banks are to be compliant with European Securities and Markets Authority’s (ESMA) intentions, there is a lot to do in a short space of time.

The deadline is 3rd January 2018. To have designed, socialised, signed-off, implemented and demonstrated operational effectiveness across a large, complex, financial institution is a tall order in what is now less than 10 months.

In addition to the regulatory compliance challenges, Product Governance will impact client and product strategy and revenue lines, so getting it right will be essential.

So what is Product Governance under the MiFID regime?

Product Governance is a part of the MiFID II Investor Protection requirements covering articles 9 and 10 of the European Commission Delegated Directive. It’s about considering market transparency and fair outcomes for investors: it covers the entire product lifecycle from start (product manufacture) to finish (distribution of the product and monitoring of performance), for all investment products.

It aims to bring together different regulatory responses to mis-selling and market stability since the financial crisis. For example, the Product Governance & Oversight (POG) framework from European Banking Authority (EBA), the Thematic Review of the Structured Products by Financial Conduct Authority (FCA) UK, and other similar responses by Financial Industry Regulatory Authority (FINRA) US, Securities and Futures Commission (SFC) Hong Kong, Autorité des marchés financiers (AMF) France, Financial Services and Markets Authority (FSMA) Belgium, and Financial Services Agency (FSA) Japan, to name a few.

The latest regulatory text was published on 07 April 2016. It is light on detail but heavy on commercial and operational implications, and has had the industry in a buzz ever since publication in peer-to-peer and industry wide forums.

How will it impact financial institutions?

This is more than just an update to existing ‘new product’ governance processes and controls. It is not only about being compliant for new products post 2018; firms will also need to think about how they apply the Product Governance requirements to their current ‘back-book’ of products that they manufacture and/or distribute today.

In our experience, banks will need to consider whether they manufacture or distribute a product, or both. Full and transparent arrangements are required between manufacturers and distributors (even within the same institution) to avoid conflicts of interest. Banks will need to select an appropriate ‘target (client) market’ and ‘distribution strategy’ for their products and justify what they are selling, to whom, and why. They will also need to perform ‘scenario analysis’ on expected client outcomes and have the ability to monitor the product once ‘live’ to check it remains appropriate for the target market.

PG Lifecycle (1)

These ideas may seem simple, but the challenge is being able to design, implement and operate this in practice. Ask yourself:

  • Who is the manufacturer and the distributor(s) for all of the investment products that your bank offers? Are you clear on their product governance responsibilities?
  • Do you know the criteria and sub-criteria you want to use to define your target market framework?
  • Do you know the different needs of all your counterparties well enough to select an appropriate target market for any new product?
  • Do you have clear information-sharing agreements with your distributors that will let you know when a product stops being ‘appropriate’ for that market or that strategy?
  • Do you know how many active distributor legal agreements you have across your business?
  • When re-papering distributors, have you considered how to align with other MiFID II requirements such as inducements, suitability and appropriateness, or complex products?
  • How are you leveraging and aligning with other non-MiFID regulation such as Packaged Retail and Insurance-based Investment Products (PRIIPS) to reduce the transformation burden and operational complexity? Are you a part of the industry consultations - get your point of view across?
  • How have you aligned existing new product approval owners, the business / product owners, risk, compliance, and legal to ensure what you are designing for MiFID II product governance is compliant without disrupting your business?

Our Product Governance blog series

In this series of blogs, we will be exploring each one of the 6 areas highlighted in our Product Governance Framework and will offer our insights and views on the Product Governance requirements and how best to deliver a MiFID II compliant solution.

Look out for our first blog on conduct, which will include the target market and conflict of interest topics. We will cover areas such as what should your Target Market criteria look like when you deal only with Professional and eligible counterparty (ECP) clients  on a non-advisory basis ?

Framework

Key contacts: Philip Raines - partner, Seema Bhatnagar - director and Naveed Rajput - senior manager

Philip Raines: View Phil Raines profile on LinkedIn   Seema Bhatnagar: View Seema Bhtnagar profile on LinkedIn   

Naveed Rajput: View Naveed Rajput’s profile on LinkedIn

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