MiFID II aims to strengthen investor protection through the creation of a level playing field across the EU and ensuring that firms’ cultures are sufficiently tilted towards acting in the best interests of their clients. MiFID II seeks to codify obligations on both manufacturers and distributors of investment products which had hitherto been contained in FCA guidance, namely Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers (“RPPD”) and apply these to a broader range of client types. These Product Governance rules are applicable to all investment firms established in the EEA, their EEA branches and to branches in the EEA of non-EEA entities, as well as UCITS managers and AIFMs when they offer investment services.
Manufacturers that create, develop, issue and/or design investment products are required to develop procedures and governance arrangements to ensure that conflicts of interest are properly managed, that there is effective control over the manufacturing process and that there is an assessment of the products’ potential target market. Additionally, manufacturers will need to assess the risks of poor investor outcomes, give due consideration to a products’ charging structures, provide adequate information to distributors and regularly review their products. This includes investment firms who advise corporate issuers on the launch of new securities.
The product governance obligations for distributors apply to investment firms when deciding the range of products issued by them, other investment firms or non-MiFID entities and services they intend to offer to clients. These arrangements include processes to ensure that the products and services that investment firms intend to offer are compatible with the characteristics, objectives and needs of an identified target market and the periodic review of product governance arrangements to ensure that they remain robust and fit for purpose.
There are a number of key operational challenges for both manufacturers and distributors, not least of which is defining their product governance responsibilities, arrangements, management information and reporting flows. Firms should assess their current arrangements and ensure that they are suitably prepared for the implementation of the new product governance requirements either as product providers, distributors or both.