Financial Conduct Authority
Product Governance Review – FCA publishes report on its review of product governance in asset management firms – 26 February 2021
The FCA has published a report on its review of product governance in a sample of eight asset management firms.
The review examines how these firms, as product providers, take into account the product governance rules in its Product Intervention and Product Governance sourcebook (PROD) throughout the product lifecycle, in particular in relation to the interests of end clients.
The review assessed asset managers/manufacturers with group assets under management ranging from £2 billion to over £100 billion. All the products assessed were UK-authorised collective investment schemes available to retail investors through platforms on both an advised and an execution-only basis. The funds encompassed a range of strategies that covered equity, derivative and fixed income assets with a total value of around £7 billion.
The FCA indicates that the review’s findings suggest some asset managers are not complying with the PROD regime which is, therefore, increasing the risk of investor harm, and that there is significant scope for asset managers to improve their product governance arrangements. The reliance on intermediated services in the UK investment market also means that manufacturers rely on those who distribute their products to give them relevant information on the end customer but this is rarely received and, therefore, hinders firms’ ability to meet the best practice on product governance.
The key findings of the review in its four main areas include:
- product design: the FCA focused on how well firms assess the negative target market (namely, those potential investors for whom a product is determined not to be suitable) and conflicts of interest. Out of the eight firms reviewed, only one manufacturer considered the negative target market, but could not identify the specific group of investors who would fall under that category. The FCA establishes that PROD requires asset managers to identify the potential target market for each financial instrument and specify the type of investors the product is compatible with, or not (the negative target market).
Further, although all eight firms had a framework for managing conflicts of interest, not all of these appeared to be effective. The FCA reminds firms that they are expected to identify, manage and mitigate potential conflicts while providing a service. They are also expected to consider whether there are certain product characteristics, such as charges, the product’s objectives or its general operation that could benefit the firm at the expense of the end investor. Additionally, they are to also consider whether there are conflicts which may create incentives to favour one set of investors over another;
- product testing: the FCA focused on scenario and stress testing, and how the firms disclosed costs. While all manufacturers provided evidence of some scenario and stress testing, their approaches varied. To protect investors, PROD establishes that certain firms should carry out scenario analysis to assess the risk of poor outcomes to consumers and the circumstances in which they may occur. Stress tests are also required to cover adverse market conditions, including the firm’s own financial strength, asset-specific stresses and any risks from a highly concentrated consumer base. The FCA found that there were areas where firms need to improve their costs and charges disclosures;
- distributors: the FCA focused on firms’ due diligence, the information they sought from distributors and their use of management information (MI). The FCA found that the quality of due diligence was variable, with some firms addressing it more robustly than others. Further, the FCA also found that all asset managers faced challenges in obtaining client data from distributors, even when this information was specifically requested. There was also variation in firms’ systems and procedures for monitoring data internally and how firms used management information; and
- governance and oversight: the FCA found that all asset managers had product governance committee, but some fell short of regulatory expectations. The quality of contribution from the firms’ independent non-executive directors also varied. Most asset managers had poor record keeping, which may have been due to the lack of a formal process in relation to product design and oversight. Finally, the FCA found that, while relevant training is generally in place, the quality and focus areas of the training varied. The FCA reminds firms that that demonstrating required knowledge and competence is necessary to comply with the regulatory requirements under the SYSC part of the Handbook.
The FCA indicates that it is likely to undertake further work on this subject, including whether further revisions are needed to the current product governance rules and guidance. The regulator emphasises that it expects firms to ensure their activities prioritise good customer outcomes and that they comply with the relevant regulatory rules and requirements.
FCA report: product governance review
