On 26 February 2021, the FCA published findings from its MiFID II product governance review. The review looked at product governance in a sample of 8 asset management firms with AUM ranging from £2bn to over £100bn. It examined how these firms, as product manufacturers, take MiFID II’s product governance rules into account, particularly the interests of the end clients, throughout the product lifecycle. The FCA selected a case study product from each asset manager – all products assessed were UK authorised CISs available to retail investors on both an advised and non-advised basis.

The main findings suggest that some asset managers are not undertaking activities in line with MiFID II’s PROD regime. In particular asset managers (i.e. ‘manufacturers’ in this context) are finding it challenging to obtain information about end consumers from distributors. Due to data confidentiality and other commercial sensitivities, distributors rarely pass this information onto asset managers, hindering their ability to meet best practise on product governance. The FCA has stated that asset managers and distributors should prioritise effective co-operation to address potential harm to consumers from poor product design. The FCA also found that most asset managers in the sample had not considered a ‘negative target market’ and that for several firms conflicts of interests frameworks were not effective. It was also found in some cases that costs information shown in marketing documents did not match the information in regulatory documents such as the UCITS KIID. As such the FCA is likely to undertake further work in this area, which may include changes to product governance rules for asset managers/manufacturers and distributors.

PROD rules apply to AFMs as guidance, but the FCA expects firms to consider them carefully to ensure they comply with the FCA Principles and other relevant rules. Acting in line with PROD enables AFMs to comply with other requirements, such as rules found in the Conduct of Business Sourcebook (COBS), the Collective Investment Schemes Sourcebook (COLL), FCA’s Principles for Business (FCA PRIN) and the Senior Management Arrangement, Systems and Controls (SYSC) rules.

Consequentially, ‘product governance’ ends up being an umbrella term for a number of different regulatory requirements, and it can be challenging for firms to manage and maintain records of which regulatory requirements are being satisfied (i.e. COBS/COLL/PRIN etc) and how these tie back to product governance. The challenges are, of course, intensified when this process is extrapolated across various different products and business lines – each of which may also have their own specific regulatory requirements. This may result in firms storing product information across a number of spreadsheets and systems, making it difficult to access the relevant approvals and information, which can adversely affect a firms’ ability to demonstrate effective governance.

In recent times several firms have utilised Deloitte’s OneView technology solution to bring much needed simplicity and automation to this complex matter. One client in particular benefitted from the transparency afforded by the solution across all its products, which made it easier to determine and report on the information and product value provided to customers. Clients also benefitted from Deloitte’s risk and regulatory expertise which is embedded within the solution – particularly as this allows for a risk-based approach in relation to product due diligence, approval and review. 

The remainder of this note sets out more details on the FCA’s findings.

Key Findings by Area 

The FCA’s findings are grouped into 4 main areas: product design, product testing, distributors and governance & oversight.

Product design 

The FCA’s observations focused on negative target market and conflicts of interest.

Negative target market

  • Only 1 manufacturer appeared to have considered the ‘negative target market’, but it could not identify the specific group of consumers that would fall into this category for its UCITS and NURS products.
  • There was also an instance of a negative target market overlapping with an existing investor base.
  • PROD requires asset managers to specify the type of clients the product is not compatible with – firms should also determine whether the risk/reward profile is consistent with the target market (PROD 3.2.10R).
  • These rules should also be followed in order to comply with the customer best interest rules: COBS 2.1.1R, COBS 2.1.4R and PRIN 6.

Conflict of interest

  • All firms in the sample had a framework for managing conflicts of interest, but not all appeared to be effective.
  • Firms should consider whether there are certain product characteristics such as charges, objectives or its general operation that could benefit the firm at the expensive of the end investor.
  • They should also consider whether there are conflicts which may create incentives to favour one set of investors over other.
  • Not managing conflicts could be a breach of SYSC 10 and PRIN 8.

Product testing 

The FCA’s observations here focused on scenario and stress testing and cost disclosures.

Scenario and stress testing

  • All manufacturers provided evidence of scenario and stress testing, however their approaches varied in terms of:
    • how far their analysis considered product-specific characteristics; and
    • how far they relied on backward-looking scenarios rather than recent developments
  • PROD requires certain firms to carry out scenario analysis to assess the risk of poor outcomes, particularly in volatile market conditions (PROD 3.2.13R).
  • Appropriate scenario and stress testing would aid firms with complying with other rules such as BIPRU 12.4.1R, COLL 6.12 and FUND 3.7.

 Costs disclosures

  • Some cost information shown in marketing documents did not match the information shown in regulatory documents such as the UCITS KID.
  • Cost disclosures for most firms also left out certain charges, particularly portfolio transaction costs.
  • Failure to communicate costs in a fair, clear and not misleading manner may result in a breach of PRIN 7.


The FCA’s observations focus around firms’ due diligence, information sought from distributors and use of management information (MI).

Due diligence

  • Quality of due diligence over distributors was variable, with some firms claiming that this practice adds little value.
  • Due diligence allows asset managers to establish whether their distributors’ intended product recipients match the product’s target market.
  • Failure to do so may result in investor harm.

Information from distributors

  • All asset managers faced challenges in obtaining end-investor data from distributors, even when they specifically asked for this information.
  • Asset managers felt unable to influence distributors due to the commercial sensitivity of the data request.
  • The most problematic area was pooled nominee accounts for execution only clients where asset managers rely on distributors for end-investor information.
  • Asset managers could do more to challenge distributors for information, and document that challenge.

Management information

  • Systems and procedures for monitoring data internally were varied, as did firms’ utilisation of MI.
  • The FCA suggested heeding guidance from its previous publication on MI.

Governance & oversight

Key areas of focus were second line of defence and product of governance committees, obligations of the AFM board, record keeping and training.

Second line of defence and committees

  • All asset managers had product governance committees, but some fell short of expectations.
  • The role of the second line of defence was often poorly defined.

AFM Board

  • There was variation in the quality of contribution from independent Non-Executive Directors.
  • There was some instances of reasonable challenge but not in all firms.
  • Challenges were often limited to the iNED’s area of greatest expertise.

Record keeping

  • Most asset managers had poor record keeping – this may be due to lack of formal process in product design and oversight.
  • Critically, where firms did not document challenge, decisions and checks, they were unable to recall what activities had taken place.
  • Inability to evidence robust challenge and oversight should raise concern for senior managers accountable for this activity, as this may potentially lead to a breach of SYSC 9.1.1R.


  • Quality and focus areas of product governance training was varied – it did not always include the importance of the needs of and outcomes for the end investor.
  • Demonstrating required knowledge and competence is considered necessary in complying with SYSC 5.1.