MiFID II: product governance review

Multi-firm reviews Published: 26/02/2021 Last updated: 15/04/2021 See all updates

This review looked at product governance in a sample of 8 asset management firms. It examined how these firms, as product providers (manufacturers), take MiFID II’s product governance rules into account, particularly the interests of the end clients, throughout the product lifecycle. 

What we looked at

The second Markets in Financial Instruments Directive (MiFID II) came into force in January 2018, introducing a new regime for certain firms that design and distribute financial instruments. It aims to better protect investors by regulating each stage of a product’s life cycle. 

This review assessed how asset management firms consider MiFID II’s product governance regime (PROD) when manufacturing and providing products and how far they consider the interests of end clients throughout the product lifecycle.

What we did

We visited 8 asset managers/manufacturers with group assets under management ranging from £2bn to over £100bn. We selected a ‘case study’ product for each firm; either one launched after January 2018 or, if launched before this date, one that had subsequently made significant changes.

All the products we assessed were UK-authorised collective investment schemes, available to retail investors through platforms on both an advised and an ‘execution-only’ (non-advised) basis. The funds included a range of strategies that covered equity, derivative and fixed income assets with a total value of around £7bn.

We evaluated our findings against relevant requirements and guidance in the FCA Handbook, such as those under the ‘Regulatory Context’ section as well as Systems and Controls (SYSC).

What we found

Our review suggests that some asset managers are not undertaking activities in line with MiFID II’s PROD regime. This increases the risk of investor harm, particularly where investors buy products that may not be appropriate. As a result, we believe 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 manufacturers commonly rely on those who distribute their products to give them relevant information on the end consumer. We found that distributors rarely pass this information on to asset managers, hindering firms’ ability to effectively meet best practice on product governance. Asset managers and product distributors need to prioritise effective cooperation and information sharing to address the potential harm to consumers from poor product design and distribution processes. 

We will continue to focus on product governance, which is relevant to both our customer protection and market integrity objectives. Part of our work will be to consider whether we need to make further changes to our product governance rules and guidance, for both asset managers/manufacturers and distributors and whether these changes will better address the key sources of harm throughout the product lifecycle.

Key findings by area

We group our key observations into 4 main areas: product design, product testing, distributors and governance & oversight.

Product design

Our observations here focused on how well firms assess the negative target market and conflicts of interest.

Negative target market

Of the firms in the review, only 1 manufacturer appeared to have considered the ‘negative target market’ concept, but it could not identify the specific group of consumers that would be a 'negative target market’ for its UCITS and NURS products. We also heard of a negative target market that overlapped with an existing investor-base. In this case, the negative target market was defined as investors who wished to hold the investment for longer than 5 years, yet the firm recognised that some investors could remain invested beyond that timeframe.

PROD asks asset managers to identify the potential target market for each financial instrument and specify the type of clients the product is compatible with, or not (a negative target market). Firms should also determine whether the risk/reward profile is consistent with the target market as outlined in PROD 3.2.10R. We would expect asset managers to carry out these activities to enable them to comply with the customer best interest rules (COBS 2.1.1R or COBS 2.1.4R and PRIN 6).

Conflicts of interest

All firms in our sample had a framework for managing conflicts of interest, but not all appeared to be effective.

We expect firms to identify, manage and mitigate potential conflicts while providing a service. They should consider whether there are certain product characteristics, such as charges, objectives or its general operation, that could benefit the firm at the expense of the end investor. They should also consider whether there are conflicts which may create incentives to favour one set of investors over another. It is important to manage any potential conflicts in such cases while considering information involving the target market and distribution strategy. Simply having a framework in place is not enough; the ultimate outcomes are fundamental. Failing to undertake these activities may damage the interests of a client and also risks breaching rules in SYSC 10 and PRIN 8 (conflicts of interest).

Product testing

Our observations here focused on scenario and stress testing, as well as how the firms disclosed costs.

Scenario and stress testing

While all manufacturers could provide evidence of some scenario and stress testing, their approaches varied. Differences included how far their analysis considered product-specific characteristics, such as: underlying assets, investor bases and concentration in times of market volatility and stress, the product’s commercial viability and how far they relied on backward-looking scenarios rather than more recent developments.

To protect investors, PROD asks certain firms to carry out scenario analysis to assess the risk of poor outcomes to consumers and the circumstances in which they may occur. This includes assessing resilience in volatile market conditions and scenarios that may affect how an individual product performs (outlined in PROD 3.2.13R). Stress tests should cover adverse market conditions, including the firm’s own financial strength, asset-specific stresses and any risks from a highly concentrated consumer base. We would expect firms to consider such activities in order to comply with other rules, such as BIPRU 12.4.1R, COLL 6.12 or FUND 3.7.

Costs disclosures

We still see areas where firms need to improve their costs and charges disclosures. Some cost information shown in marketing documents did not match the information shown in regulatory documents such as the UCITS Key Investor Information Document. Our February 2019 publication on costs and charges disclosures found the same problems.

Most of the firms we assessed also appeared to leave out certain charges, particularly portfolio transaction costs, from their cost disclosures. We expect manufacturers to disclose costs and charges in a way that is clear, fair and not misleading and that complies with relevant regulatory requirements. The information firms provide to customers in wider marketing material should reflect the underlying characteristics of a product and give a fair and clear account of charges, including portfolio transaction costs. Failure to do this risks breaching PRIN 7 (communications with clients).


Our observations here focus around firms’ due diligence, the information they sought from distributors and their use of management information (MI).

Due diligence

The quality of due diligence over distributors was variable. Some firms assessed a distributor’s arrangements more robustly than others. We also heard some asset managers claim that due diligence over distributors themselves adds little value.

Due diligence means asset managers can establish whether their chosen distributors are fit for purpose in client onboarding and if a distributor’s intended product recipient matches the product’s target market. Failing to do so increases the risk that products end up in the hands of consumers for whom they are not appropriate, which could cause harm to investors.

Information from distributors

All asset managers faced challenges in getting end-client data from distributors - even when they specifically asked for this information. Some asked for feedback through meetings rather than with detailed questionnaires. A recurrent theme was that asset managers feel unable to influence distributors because of the commercial sensitivity of the data request. The asset manager’s size was also sometimes described as a factor in this. The most problematic area involved pooled nominee accounts for execution-only clients where asset managers rely on distributors for end-investor information.

We acknowledge these challenges. However, it appears that commercial agreements and sensitivities between asset manager/product provider and distributor may be taking precedence as asset managers are reluctant to insist on end-client data trends from their distributors. In our view, asset managers could do more to challenge their distributors for this information - and document that challenge - to work towards a more collaborative relationship that allows asset managers to meet their obligations to act in clients’ best interests. 

Management information

The systems and procedures for monitoring data internally varied, as did how firms use management information (MI).

We published ‘Treating customers fairly – guide to management information’ in 2015. It remains relevant in giving examples of good and poor practice and helping firms develop MI. Given the challenges asset managers face in getting information from their distributors, they should consider this guide and how they can improve their MI to help identify and monitor key trends that may lead to emerging risks.

Governance & oversight

Nearly all firms carried out a formal product assessment or review every year. However, different firms showed varying levels of oversight and challenge across these governance channels.

Key areas we focused on were the second line of defence and product governance committees, the obligations of the authorised fund manager (AFM) board, how firms approached record keeping and training on product governance.

Second line of defence and committees

All asset managers had product governance committees, but some fell short of our expectations. The role of the second line of defence was often poorly defined, meaning the potential for meaningful challenge was limited.

Authorised Fund Manager (AFM) Board

While firms were aware of the AFM Board’s product governance obligations and the need for oversight of the relevant committees’ work or their second-line functions, there was variation in the quality of contribution from the independent Non-Executive Directors. We observed some instances of reasonable challenge, but not in all firms. For example, from our discussions we heard challenge being limited to areas where the independent Non-Executive Director has the greatest expertise, leading to a potential lack of proactive challenge in other areas.

Record keeping

Most asset managers had poor record keeping. This may have been due to a lack of formal process in product design and oversight. Critically, where firms did not document challenge, decisions and checks, they were unable to recall what activities had taken place.

The inability to evidence robust challenge and oversight should raise concern for those individuals accountable for this activity (the focus of the new Senior Management and Certification Regime) as it leaves firms and those accountable unable to evidence challenge and oversight, potentially in breach of SYSC 9.1.1R.


While relevant training is generally in place, the quality and focus areas of this training varied. It does not always include the importance of the needs of and outcomes for the end investor. 

Asset managers should have effective control over their product governance processes to ensure the right investment service reaches the respective target market. To achieve this, it is important that staff are sufficiently experienced on the characteristics of its financial instruments, the investment services provided and the needs, characteristics and objectives of the identified target market.

Demonstrating required knowledge and competence is considered necessary in complying with SYSC 5.1.

Next steps

Following these observations, we are likely to undertake further work on this subject. Part of this may be to consider whether we need to make further changes to our product governance rules and guidance for both asset managers/manufacturers and distributors. We will consider whether these changes will better address the key sources of harm throughout the product lifecycle. 

We expect firms to ensure their activities prioritise good customer outcomes and that they comply with the relevant regulatory rules and requirements. Where we identify potential breaches of our rules, we will consider whether we need to take action, which may include opening investigations or other appropriate measures. 

Regulatory context

Authorised Fund Managers (AFMs) are required to act in the best interests of the funds they manage and those who invest in those funds, under rules in the Conduct of Business Sourcebook (COBS), the Collective Investment Schemes (COLL) Sourcebook and the FCA’s Principles for Businesses (the Principles). While PROD rules apply to AFMs as guidance, we expect firms to carefully consider them when meeting their obligations to ensure they comply with our Principles and other relevant rules. Notably, acting in line with PROD will enable AFMs to comply with some of these other requirements.

Importantly, there are other Directives that set rules and requirements over authorised funds and AFMs as well as alternative funds. These are principally the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD), respectively. Additionally, in September 2019, we introduced new rules requiring AFMs to carry out an assessment of value for relevant UK authorised collective investment schemes (COLL 6.6.20R).

While the UCITS Directive and the AIFMD set high-level standards for asset managers to act in the best interests of fund investors, they do not go into the same level of detail on product governance as MiFID II. Therefore, the framework which PROD provides is important in ensuring that firms act in the best interests of the investors in their funds. As well as the guidance in PROD, AFMs should also consider the guidance in the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD). This sets out our view on what various rules require of providers and distributors in certain circumstances to treat customers fairly. This review identified some examples of what we think acting in the best interests of investors means in practice for AFMs.


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