Product governance review - a wake up call for asset managers?

The new product governance regime introduced under MiFID II has been a hot topic for asset managers in recent years. With the Financial Conduct Authority (FCA) now kicking off supervisory work on this -  and given the links it has with wider initiatives such as the value assessment and LIBOR transition - now is the time to take another look at your end-to-end product governance framework. We expect the regulator to closely scrutinise the communication between ‘manufacturers’ and ‘distributors’, particularly given the challenges that this posed in the run up to 3 January 2018. In this blog, we consider what this means, together with wider areas firms would be wise to revisit.       

To recap, MiFID II introduced a new EU-wide product governance regime for manufacturers and distributors of financial products, to ensure that products are sufficiently robust and deliver good investor outcomes. The regime governs the entire product lifecycle, spanning design/approval, development, marketing and monitoring/review, complaints and withdrawal. Since the FCA has had product governance rules in place for several years, the key change from a UK perspective is the focus on distributors. Asset managers are classified as product manufacturers if they create, develop, issue and/or design financial products. They are required to ensure their products are designed to meet the needs of an identified target market by carrying out a ‘target market assessment’. Firms must define and approve the target market and ensure that their distribution strategy is consistent with this, communicating that information to distributors. They need to monitor, on an ongoing basis, distribution activities to ensure that the product is being sold to the appropriate target market. 

This communication flow with distributors, which is a central feature of the MiFID II regime, has been a particularly challenging area for asset managers. Many have been finding that distributors are not always forthcoming with information on their own target market assessment and final sales, despite having shared appropriate information prior to distribution. Manufacturers and distributors should anticipate this to be a core area of focus during the FCA’s upcoming supervisory review, and would be wise to proactively review the processes, systems and controls they have in place to deliver their distribution strategy.

Asset managers also need to ask themselves whether they face any data quality issues. Several firms rely on legacy systems or paper-based records to pull in data, which raises questions around whether the correct data is being accessed to effectively meet their obligations. The regulator will want to see that firms have in place systems and processes that are sufficiently robust to support product governance and smooth information flows between manufacturers and distributors, in consistent formats. 

Given the FCA’s focus on governance more broadly, asset managers will face scrutiny on their approach to governance around the product manufacturing process. Are they ensuring that the right expertise across the business is involved in oversight across the product lifecycle? How are decisions recorded? We have, for example, seen evidence that some firms’ compliance functions are placing too much reliance on the business to ensure the requirements are being met, and are not prioritising product governance as an area for post-implementation reviews. Firms should use the upcoming FCA work as an opportunity to ensure structures and mechanisms are in place for oversight and challenge at each stage of the product lifecycle from a broad range of functions.

The FCA may also use its product governance work as a platform to look at how manufacturers are aligning their approach with wider initiatives impacting the sector. For example, asset managers should get comfortable that their centralised value proposition across their funds is aligned with target markets when refining their approach to the new obligations on the assessment of fund value. Moreover, product governance will be particularly relevant when moving existing funds and underlying instruments away from LIBOR to an alternative risk free rate, since doing so could have the potential to alter the original target market assessment, and scenario analysis assumptions for the fund, given the pricing differences with LIBOR. Any changes to a firm’s target market assessment stemming from LIBOR transition would also impact the distribution strategy of a fund, which would need to be communicated with other intermediaries in the distribution chain.

As we await the FCA’s supervisory output on product governance, the more prepared firms will already be on the front foot, having progressed their internal post-implementation reviews. Firms that have not already done so need to get comfortable that their approaches in this area will satisfy the regulator’s expectations. Some of the areas considered above would be a good place for them to start.    

Lucas  Penfold

Lucas Penfold | Manager, PwC United Kingdom
Profile | Email | +44 (0)7483 407581

Catherine Crouch | Manager, PwC United Kingdom
Profile | Email | +44 (0)7841 071959

Vasco Vicini | Manager, PwC United Kingdom
Profile | Email | +44 (0)7561 788953

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