There is "widespread confusion" about the steps financial advisers should be taking to address new rules on client segmentation, research has shown.
According to a survey carried out for financial technology business Iress, more than half of the advisers surveyed were not yet aware of the product governance rules introduced by Mifid II.
These rules include requirements that manufacturers and distributors of products get to know their target markets, which means advisers will have to consider which target market a product is likely to be suitable for, have a distribution strategy for their target market and review the products they offer regularly.
But the Iress survey, carried out by the Lang Cat, found 70 per cent of the advisers surveyed were unsure if they were able to evidence the suitability of products and services by client segment.
Only 5 per cent said they were aware of the obligations under the new product governance rules while 58 per cent said they were not aware of this regime.
Mark Loosmore, executive general manager for wealth at Iress, said: "The new rules have caught many people in the industry unaware. There seems to be widespread confusion and concern around the steps advisers should be taking to ensure client suitability processes are evidenced appropriately.
"There are a few things advisers must do. They need to evidence they understand the financial instruments they advise on, assess client compatibility with products and services and ensure client best interests.
"There is no doubt that advisers need to take notice of [these rules]. It’s no longer guidance, it’s rules based now. Advisers should look to their back office technology to help them run client segmentation reports and gather the suitability evidence they’ll need to comply."
Earlier this year FTAdviser reported how the product governance rules give the Financial Conduct Authority greater power to address issues such as value for money and platform use by advisers.
Former FCA technical specialist Rory Percival said these rules would allow the FCA to ask advisers to show it how they had segmented their clients and what products they used for each segment.
The FCA had product governance requirements before the introduction of Mifid II, but they were narrower than the new rules in terms of the financial instruments they covered.
Under the new rules, manufacturers - such as fund managers - must define a target market for each of their products.
Advisers will need to be aware of these and consider this when giving advice.
They must also report any sales outside the target market back to the manufacturer - though there are no rules to say selling a product outside its target market is necessarily wrong.
The Iress research, which surveyed 64 advisers, found 80 per cent of them were not aware of the enforcement actions the FCA could take if they found advisers falling short of the new rules.