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FCA publishes findings of its MiFID II product governance review

  • United Kingdom
  • Financial services and markets regulation
  • Financial services




The FCA’s MiFID II product governance review is based on a sample of 8 asset management firms with assets under management ranging from £2billion to £100billion.  The review found that some asset managers were not undertaking activities in line with MiFID II’s product governance regime (“PROD”), incurring a risk of harm to investors.  The aim of the PROD regime is to minimise the risk of investors being sold products which are not suitable for them.  While the PROD rules apply to asset management firms as guidance only, the FCA expects firms to act in line with PROD and comply with the requirements set out within it.   

What was assessed

From each of the eight firms the FCA selected a UK-authorised collective investment scheme, available to retail customers through platforms or on an execution only basis.  The FCA assessed product governance compliance across the life cycle of the product, looking at how the firms considered PROD when manufacturing and providing products to retail investors.  The FCA’s findings split into four broad areas: product design, product testing, distributors, and governance and oversight.

Product design

The FCA focused on how well firms assessed the negative target market for a financial product and conflicts of interests.  Of the eight firms assessed, only one manufacturer considered the concept of a negative target market.  PROD requires asset managers be able to identify a product’s target market, specifying the type of investors targeted and thus identifying investors for which the product would not be suitable (ie the negative target market).

All of the sampled firms maintained a conflict of interest policy.  However the FCA found having a framework in place was not enough on its own and asset managers should consider whether conflicts create incentives to favour one type of investor over another and how those potential conflicts can be managed to comply with the best interest rules.

Product testing

All of the sampled firms scenario and stress tested their products, but how they conducted those tests varied widely.  For instance, there were discrepancies in the analysis of a product’s specific characteristics and how far back each firm looked when assessing scenario testing against recent developments.

The FCA reviewed costs and charges disclosures and found that the firms fell short of their expectations.  The FCA noted that cost disclosures were and still remain an issue following their  February 2019 “Review on disclosure of costs by asset managers”.  Firms are expected to disclose cost information in a clear, fair and not misleading way, in compliance with regulatory requirements.  However, the sampled firms often omitted information on portfolio transactions costs.


The extent of the due diligence firms undertook on their distributors and those distributors’ use of management information varied.  Due diligence helps firms establish whether a distributor is fit for purpose and whether the distributor’s pool of clients match the target market for the product.

The FCA acknowledges asset managers face challenges obtaining end-client information from distributors, even when they expressly request it and particularly in an execution-only market.  However the onus remains on asset managers to do more to build better relationships with their distributors.   

The management information, systems and procedures the sampled firms had in place internally to monitor data also varied.  The FCA suggests firms review the 2015 FCA publication “Treating customers fairly – a guide to management information”, which will help asset managers identify and monitor key trends which may lead to risks.

Governance and oversight

The sampled firms conducted formal annual product assessments, however, the governance committees were either poorly defined or their record keeping poor, resulting in a dearth of evidence as to the making and challenging of decisions.  Training for product governance committees varied widely.  The lack of record keeping leaves firms and those individuals who sit on product governance committees open to potential breaches of the SYSC 9.1.1R. 

Next steps

The FCA will undertake further work on product governance which will take the form of revisions of the product governance rules and additional guidance for asset managers and distributors.

What is the impact on asset managers

MiFID II was onshored following the UK’s exit from the EU and the rules remain applicable to UK firms.  The report confirms the FCA’s continued focus on product governance at both asset manager and manufacturer level. Firms should consider using the comments in the FCA’s findings as a framework for reviewing their product governance policies and procedures. 

Amongst other things, asset managers should review:

  • their product lifecycle
  • how their target market is assessed
  • procedures for assessing negative target market
  • their conflicts of interest framework
  • the training given to the product governance committee
  • their record keeping and board minutes
  • how they can better engage with distributors

How Eversheds Sutherland can help

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we were at the forefront of MiFID II implementation. We can help review your product governance arrangements, and have assisted clients with responding to other studies and reviews, including the asset management market study.