RegulationNov 21 2018

Advisers warned of Mifid II crackdown next year

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Advisers warned of Mifid II crackdown next year

Advisers have been warned they are facing a crackdown on product governance rules in 2019 and have been urged to make sure they comply with the regime.

The product governance element of Mifid II is aimed at making sure advisers are offering their clients suitable solutions by requiring product manufacturers and distributors such as advisers to identify target markets.

But there is widespread concern that advisers are not complying with the regime, with some estimates suggesting only one in 10 advice firms is meeting the rules.

During 2019 the Financial Conduct Authority is scheduled to review how the Retail Distribution Review is working, six years after it came into effect, and it is also expected to reassess its suitability review next year as well.

Rory Percival, a former technical specialist at the FCA, said it would be "daft" of the regulator not to take these two issues together and combine them with a review of whether advisers are complying with product governance rules.

He said he had recently been doing an adviser roadshow with a large provider and when he asked the audience if anyone had heard of the product governance rules he said it was "less than 10 people in a room of 100" most of the time.

He said: "I would simply say that almost nobody has done anything about it. If the FCA was to look into this today it would be extremely disappointed with what it found.

"It is a process you need to go through, but it is not a complex one. The hardest bit of the process is having a good understanding and segmentation of your client bank. The rest of the process falls into place in a reasonably straight forward manner."

Andy Sutherland, managing director of advisory services at compliance consultancy TCC, echoed Mr Percival's concerns about a lack of compliance, saying one in five of the firms he had encountered were meeting the regime's requirements.

He said: "I don't think firms have really understood what they should be doing.

"But it makes good commercial sense to think about this, to think about who you see as the target end client."

Mr Sutherland also anticipated the FCA would look into this area as part of its RDR review next year.

The FCA had product governance requirements before the introduction of Mifid II in January, 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, which is what prompts the need for client segmentation. 

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.

Both Mr Percival and Mr Sutherland predicted smaller directly authorised firms would be the ones which would struggle to meet the demands of Mifid II's product governance rules.

And some of the largest networks in the country said they had attempted to help their advisers comply - though they did not directly respond on whether this had translated into actual compliance.

Stefan Fura, director of Furnley House Wealth Management, said: "I can only speak for my own firm and we are comfortable with the rules. At the heart of product governance is making sure the needs of your clients are being met by the products.

"To be compliant, that is the sort of stuff you need to be doing. It shouldn't be a particularly complex thing provided you understand your clients."

Caroline Bradley, group risk and regulatory director at Tenet, said: "Tenet has assessed the product governance rules against its own internal processes for panel management and are confident that these processes meet the requirements.

"In terms of our appointed representatives, we have provided them with guidance around client segmentation and will pick up on their adherence to these rules via field audit visits."

A spokesman for Intrinsic said: "For Intrinsic’s restricted advisers they choose from a panel of products and providers that are pre-researched by Intrinsic. To ensure the suitability of the panel we follow the rules of [product governance] and consider what products and providers are appropriate for the target market identified.

"Our restricted advisers can choose from a wider solution base if the restricted suite of solutions does not meet a particular customer’s needs. In those instances advisers must clearly document why the advice is appropriate in suitability reports. In annual client reviews, advisers need to evidence the recommendations are still appropriate. 

"Independent advisers within the network will need to consider the suitability, as outlined above, but also follow our whole of market research requirements."

A spokesman for Openwork said: "As a national network, Openwork maintains a central suitability framework that all its advisers use when formulating individual client solutions.

"As part of our Mifid II implementation we reviewed all salient information available from our product provider partners to consider each target market and, for investment products, the alignment between their risk profiles and our own risk assessment tools."

The FCA declined to comment.