Round Up Spring 2019

Getting to grips with product governance It’s almost 15 months since the introduction of MiFID II, yet the fallout continues. Intermediaries are still getting to grips with the implementation of aggregated costs and charges disclosure requirements.

What is product governance and what do you need to do? Product governance is the term used to describe the process of designing, approving, marketing and providing ongoing management of a financial product throughout its life cycle. Formal rules for product governance were initially introduced with MiFID II. The obligations apply to MiFID investment products such as, unit trusts, OEICS (as well as structured products) and investment trusts and services, such as investment advice and portfolio management. The Insurance Distribution Directive (IDD) also introduced product governance requirements for all insurance products, including insurance based investment products, such as investment bonds. It’s the responsibility of product manufacturers to ensure their products are designed to meet the needs of an identified target market, and that their distribution strategy is consistent with this. This target market information must be communicated to distributors of these products.Manufacturers must also identify, and communicate to distributors, any client groups for which their products are not compatible. This is known as the negative target market. To present their target market information, product manufacturers should identify and assign broad categories for each fund or product, such as; investor type, knowledge and experience, ability to bear losses, risk tolerance and client objectives and needs, to assign each fund or product.

Issues with transaction reporting, and tighter rules on inducements linger, whilst other matters expected to have caused debate, such as the new definition of independent advice, and the introduction of telephone recording, appear to have passed by with little comment. Initially it seemed the introduction of formal product governance rules had also slipped under the radar, but in recent months, they’ve come to the fore. The regulator is expected to be sharpening its focus in this area during 2019 for manufacturers and distributors alike. There has been some confusion over how product governance obligations can be met by intermediary firms, and how the concept fits with existing investment processes, the running of an investment committee and individual client suitability requirements. Which firms are manufacturers and which are distributors? Product manufacturers are firms that design, create, develop and issue financial instruments or insurance products. In simple terms, product and fund providers. Distributors are firms that offer, or sell, investment or insurance products, or services to clients. Advisory firms and discretionary managers will be distributors in this context, although the latter could also be classed as a manufacturer. Where the DFM service is wrapped within a product structure (for example, a unitised model portfolio service) the requirements for product manufacturers will apply to the product in question.

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