MiFID II’s potential banana skin

Mark Aldous, head of managed services for Delta Capita, discusses product governance and the need for more cooperation between manufacturers and distributors before the 3rd January 2018.

Buried within the vast array of complex MiFID II legislation is a simple but potentially troublesome requirement to formalise the way in which financial products are developed, designed and their target market is identified based on customer needs. Simple, because most firms already have product development controls in place and will consider suitability and appropriateness as one of their core conduct policies. Potentially troublesome because compared to the heavy lifting in other areas of MiFID II, some have taken the view that this part of the legislation would be relatively easy to implement. And with less than three months to go, the complexities of operating under the prescriptive requirements in the delegated acts have started to come to the surface.

By January 1st, firms will need to have re-organised themselves to ensure that there is an effective management body overseeing product governance arrangements across the firm. While the product governance rules apply to all MiFID II products and services, the management body will need to be comfortable with any area where proportionality has been used to rationalise the impact. Firms will need to be clear as to when they are manufacturing, distributing or even co-manufacturing. In addition, they may need to put agreements in place with others in the supply chain ahead of next year. For firms who rely on others to distribute their products there will be a plethora of new information flowing through the supply chain. This information will need to be ingested and incorporated into the ongoing design and monitoring processes.

While none of these aspects come as a surprise, the impending deadline is causing some concern amongst organisations. We carried out a study of major market participants, which found that sharing information and identifying co-manufacturing activity between the Manufacturer and Distributor were the least well developed area. Given that this is a key theme embedded throughout the regulation, there is clearly more work to do in the remaining months to close out this gap.

A number of industry associations and working groups have been considering these problems and some progress is being made. Further guidance from ESMA on the frequency and scope of the information flow has been helpful and discussions between manufacturers and distributors are finally beginning to progress. A clearer picture of the information flow is emerging and as we enter the final quarter before MiFID II goes live, firms now need to focus on putting their internal processes and governance forums into effect.

Reliance on existing stretched resources to support these additional but critical administrative Product Governance tasks could lead to a risk of failure of the framework. There will be a flow of new information to be processed and retaining evidence of decision making throughout product development and lifecycle is essential. Specialist service providers are emerging as the most effective way to ensure that regulatory requirements are not only met, but do not fall away post-January 1st and Delta Capita’s Product Governance Managed Service, which has been live since 2016, offers an immediate and reliable solution updated to meet MiFID II requirements.