Industry not prepared for MIFID II product governance challenges
MIFID II will bring a significant increase in product governance responsibilities for all parties involved in the selling of an investment product. Under the new proposals both manufacturers of investment products and distributors will be responsible for the products they sell throughout their entire lifecycle and even after they have been sold to the end investor.
This will bring significant challenges for the industry, as manufacturers and distributors alike will need to keep end investors continually updated and informed about any changes to the risk levels of sold products. The likely result is a significant increase in data management, gathering and reporting across the fund value chain.
All parties must think about how they begin reengineering their systems in order to adapt to these new demands and put solutions in place ahead of when MIFID II comes into force in 2017.
In technical terms, these new changes will see a shift in responsibility from a “pre-contractual obligation” to an “oversight obligation” for manufacturers. What this means in real terms, is that once a manufacturer has sold a product to a distributor, it needs to ensure the product is both sold to a suitable investor and the end investor is continually kept up to date with developments in the product’s suitability.
This is a departure from the old regime when manufacturers only had to ensure the product was sold with the correct information to the distributor, at the time of sale.
Under the new MIFID II regulation, both manufacturers and distributors will likely need to disclose any change to a product that may affect the risk levels, regardless if this is at the time of sale or at a later date. For example, if market conditions change and the asset class of the product suffers, manufacturers will need to find a way to keep investors informed of the changes and the resulting increase or decrease in risk.
For market sellers this will require a need to engineer new systems to help them continually flag changing market conditions and changing risk levels, as well as deciding how they measure, allocate and designate varying levels of risk.
Manufacturers will need to be particularly diligent, as, on top of this, they will need to engineer data management systems to not only allow them to keep sight of which distributor they have sold products to, but also where that product has consequentially been sold.
Once a system has been established to gather this data, both manufacturers and distributors will need to set up new reporting and communication lines to ensure they are in constant dialogue regarding where products have been sold and any new information needing to be shared.
Despite these huge data management, collection and communications challenges, it seems that very few industry experts have really begun assessing or preparing for the impact that the new changes will bring.
While the full penalties and consequences of non-compliance is not yet clear, it is safe to say it will not be light. At the very least, end investors will be able to raise a complaint with the regulator or the financial ombudsman if they do not feel they have been correctly informed.
More importantly, from a competition perspective, asset managers and distributors could both suffer loss of business if they are not fulfilling their duties of keeping all their clients informed.
While it is a little too early to look at what the exact solution is, it is very clear to see that data control will be a key component in helping to comply with the new rules and it is never too early to begin preparing.
Thus, asset managers and distributors should begin thinking now about what they need to do to be ready.
In order to ensure effective communication, the data they gather needs to be agile and flexible so it can be extracted quickly and efficiently from relevant sources and documents. Surprisingly, for some firms, a lot of the critical information needed for this is still in paper form, meaning all parties will need to ensure that their systems are updated and ready.
Firms should also be thinking about how they approach the sharing of this data. For example, for some manufacturers it might make more sense to set up one-to-one reporting lines with key distributors to communicate on where products are being sold. For communication with end investors, it might be more suitable to adopt a platform-based approach for information sharing, where multiple relevant investors can be informed simultaneously regarding product updates.
While the finer details of the proposal are still in consultation, it is clear that these potential changes will bring significant challenges for the industry. Regardless, end investors will expect clear, concise and efficient communications. Asset managers and distributors alike will need to think now about how they get ready for this significant change, or face losing valuable business.
Source: FundWeb – Industry not prepared for MIFID II product governance challenges
