2018 will be another summer of sport with The Commonwealth Games in Australia, Ryder Cup in France and of course the football World Cup in Russia. Those of us in Financial Services might be ready for some R&R by then, as MiFID II and the Senior Manager Regime extension to all FS firms (c. 60,000) will have been implemented earlier in that year. To make sure our colleagues in Asset Management have the chance to sit back and enjoy the sport, what should they be focusing on to prepare for 2018?
New rules for product governance will require investment firms to identify the potential target market for each product as well as the type of client for whose needs, characteristics and objectives it meets.
One aspect might be the delegated acts supplementing MiFID II, which are due to come into effect on 1st January 2018. New rules for product governance will require investment firms to identify the potential target market for each product as well as the type of client for whose needs, characteristics and objectives it meets.
The delegated act states: “Member States shall require investment firms to ensure that the provision of information about a financial instrument to distributors includes information about the appropriate channels for distribution of the financial instrument, the product approval process and the target market assessment and is of an adequate standard to enable distributors to understand and recommend or sell the financial instrument properly.”
This is significant not just to Asset Managers but also their distributors (financial advisers/wealth managers) who will be required to provide asset and investment management houses with information on sales activity and how they propose to carry out product reviews. The manufacturers will require the information on sales to ensure they too comply with their product governance obligations and this means advisers will have to provide it.
Should the manufacturers suspect their products are not being sold in accordance with the rules, they must either contact the adviser to change the distribution processes or targeted client type or terminate the relationship with the distributor or inform the FCA.
This, in some cases I suspect, means a radical rethink on the part of product providers as they need to be seen to have a clear line of sight across their distribution channels to make sure their products are being sold to the right clients. Equally, distributors will have to pass on details of sales processes and target market strategy, something which is unlikely to have happened in the past.
Is this the “For whom the bell tolls” moment? Distribution sales and marketing teams within Asset Management need to prepare for this change of emphasis and consider the due diligence required when vetting new as well as existing distributors. Do they understand the product? Do they know who it’s designed for? What is their plan to ensure that the right clients end up with this product and what controls will they have in place to see this happens?
Let’s hope with all other aspects of MiFID II and SMR to comply with we can enjoy the sport!