The European Commission is probing the effectiveness of the product governance rules introduced to the industry in 2018 in its latest consultation on the Markets in Financial Instruments Directive.
In a 94-page consultation document, published today (February 26), the commission stated there was some debate over the efficiency of the Prod requirements and asked participants how the rules had affected them over the two years they had been in effect.
The Europe-wide Prod rules were introduced in January 2018 — alongside Mifid II — in a bid to improve the industry’s product oversight and governance processes.
Prod tightened the rules around the design and sale of products to ensure they clearly met the needs of their identifiable target markets, were only sold to those target markets and delivered appropriate outcomes.
According to the European Commission, the executive branch of the European Union, stakeholders have raised criticism that the necessary information was not available for all products since Prod’s introduction, while others argued the process added little benefit to the suitability assessment undertaken at an individual level.
Concerns were also raised that the current application of the Prod rules could result in a further reduction in the number of products offered.
The consultation, which is open until April 20, asked industry stakeholders whether the Prod rules had prevented clients from accessing products which would in principle be suitable for them and whether the rules should be simplified.
It also touched on insistent clients, and whether an investment firm or advice firm should be allowed to sell a product to a negative target market if the client insisted.
Advisers were recently urged to “fix the roof while the sun is shining” as experts predicted the FCA would begin a crackdown on Prod rules.
Outside of Prod, the consultation looked at Mifid II’s differentiation between different types of investors. Mifid II currently divides up retail clients, professional clients and eligible counterparties.
But the commission is concerned the Mifid II rules could be “overly protective” of retail clients who had sufficient experience with financial markets and could therefore find themselves constrained by the rules.
Other areas covered by the commission’s consultation included the unbundling of research and execution services. The rules require asset managers to pay for research separately from execution services, either charging clients transparently or paying for research themselves.
The FCA has said the rule changes saved investors at least £70m in the first half of last year, and the commission is only asking participants for their overall assessment of the effects on unbundling.
Mifid II also established strict rules for investment firms regarding inducements from third parties, particularly in regards to fees and commissions, but the FCA had already banned commission on investment products through the Retail Distribution Review in the UK.
imogen.tew@ft.com
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