Product governance: TISA's perspective

Key to your understanding of PROD is the definition of distributors and manufacturers

December 2021

Alistair MacDougall

Technical Manager, ATEB Compliance

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Risk Disclaimer

The information, opinions, estimates or forecasts contained in this article were obtained from ATEB Compliance, are reasonably believed to be reliable and are subject to change at any time. It has been produced for information only.

Views and opinions are those of the author and do not necessarily reflect those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned. No action must be taken or refrained from being taken based on this content alone.

Key takeaways:

  • Understand whether financial instruments are complex or not
  • Consider how you document your target market
  • Understand under what situation does a distributor (adviser) also become a product manufacturer

TISA (Tax Incentivised Savings Association) is a consumer focussed organisation whose aim is to increase the wellbeing of UK consumers. ATEB has been working with TISA in relation to PROD, or to give it it’s full title, Product Intervention and Product Governance. Firms need to know to what extent it affects them and how to implement a proportionate PROD regime.

Key to your understanding of PROD is the definition of distributors and manufacturers. Essentially, a distributor, as the name suggests, ‘distributes’ products (financial instruments) created by a third-party (a manufacturer) and as such are less affected by PROD. What is less understood is that if you create and manage your own risk-based portfolios by selecting funds in line with a defined asset allocation, you are a manufacturer (and quite likely also a distributor). You do not need to be a fund manager or the like therefore to be caught by PROD manufacturer rules and requirements.

Jeffrey Mushens, Technical Policy Director at TISA, has written the article below. It focusses on manufacturers and should help firms to understand the requirements, to check their compliance with the rules and to plan any necessary changes.

Design your own portfolios? Did you know you’re a product manufacturer?

The Product Intervention and Product Governance Sourcebook, or PROD, came into force on 3 January 2018 as part of the new MiFID II requirements.

PROD places new requirements on both ‘distributors’ and ‘manufacturers’ in relation to the systems and controls that firms must have in place for the design, approval, marketing and ongoing management of products throughout their lifecycle to ensure they meet legal and regulatory requirements.

Of interest for this article is the requirement that investment firms that manufacture financial instruments are required to comply with the product governance requirements for product manufacturers.

A firm is considered to manufacture when it “creates, develops, issues and/or designs financial instruments”.

TISA are aware that many financial advice firms ‘create’, ‘design’, ‘develop’ and ‘issue’ their own in-house portfolios, in an advisory capacity, to their clients. Under the PROD rules, such a firm is a manufacturer and therefore needs to comply with both the distributor and manufacturer rules.

The rules set out that product manufacturers must have in place:

  • Joint manufacturing agreements with the fund managers whose financial instruments are included in your in-house portfolios – which sets out roles and responsibilities between the firms;
  • An appropriately skilled and experienced committee which oversees the product governance and approvals process;
  • Product design, approval and ongoing monitoring process;
  • A clearly articulated target market for the portfolios including consideration of the appropriate distribution channels and the oversight of those distribution channels;
  • Identification of any conflicts of interest and a plan for designing out these conflicts or, as a last resort, disclosing them to the client;
  • A process for the identification and management of portfolio risks – including stress testing, scenario analysis, etc;
  • Appropriate management information to ensure that the portfolio(s) remain compatible with the target market;
  • A process for reporting sales and other information to other manufacturers, where required.

 

Jeffrey Mushens,

Technical Policy Director, TISA

Risk Disclaimer

The information, opinions, estimates or forecasts contained in this article were obtained from ATEB Compliance, are reasonably believed to be reliable and are subject to change at any time. It has been produced for information only.

Views and opinions are those of the author and do not necessarily reflect those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned. No action must be taken or refrained from being taken based on this content alone.

Our view

Importantly, there is no one size fits all in relation to product governance and firms should design their processes and practices appropriately and proportionately, taking into account the nature of the financial instrument(s), the investment services and the target market for the product. In practice, this element of proportionality means that the process could be relatively straight forward for certain simple products that match the needs and characteristics of the mass retail market. Whereas for products that are more complex, unusual or likely to be more difficult for investors to understand, a greater degree of effort may be required.

Action required by you

  • Understand whether the financial instruments are complex or not;
  • Consider whether you have enough suitably qualified and experienced resource to oversee the product governance and approvals arrangements;
  • Consider what your product approvals process looks like and document it;
  • Consider and document your target market;
  • Work with the manufacturers whose products are contained within your portfolios to set out roles and responsibilities – in particular in relation to areas such as risk management, stress testing, scenario analysis;
  • Make sure you are getting the right management information, to the right people at the right time so the right decisions can be made from a product governance perspective;
  • Talk to your usual ATEB consultant if you have any concerns

 

TISA has produced a number of good practice guides in the MiFID II space, covering

  • Appropriateness;
  • Product Governance for Manufacturers and Distributors (jointly with IA);
  • Target Market Specification;
  • Costs & Charges;
  • Upstream Distributor Reporting (with PIMFA) (The related template is proposed to be adopted by the EWG as a European Feedback Template (EFT), in the same way as the EMT has been adopted across Europe.

 

All these guides are available, free of charge, from TISA and can be found on the TISA website here.

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