FCA Publishes Review of Asset Managers’ Implementation of MiFID II Product Governance Rules


By Nicola Higgs, Anne Mainwaring and Jonathan Ritson-Candler

FCA found instances of non-compliance with the product governance rules which, in its view, increases the risk of investor harm.


On 26 February 2021, the FCA published a webpage setting out eight asset management firms’ implementation of the UK MiFID II product governance requirements. The sample reviewed consisted of asset managers with group assets under management ranging from £2 billion to over £100 billion, and looked at product governance compliance across the life cycle of one case study product at each firm. The products reviewed either launched after January 2018 (when the UK MiFID II product governance rules came into effect) or before this date but had subsequently undergone significant changes (which would also trigger compliance with the rules).

The FCA found that some asset managers were failing to comply with their product governance obligations, which increased the risk of investor harm. As a result, the FCA believes there is “significant scope” for asset managers to improve their product governance arrangements. The FCA will continue to focus on product governance and will undertake further work in this area, which may result in it making further changes to its rules and guidance.

The FCA acknowledges that for certain authorised fund managers the UK MiFID II product governance requirements are guidance rather than binding rules, and that these managers are subject to obligations in the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for the Collective Investment in Transferable Securities (UCITS), as well as elsewhere in the FCA Handbook, to act in their clients’ best interests. However, the FCA also states that it expects firms to “carefully consider” the requirements, and that the framework they provide is “important in ensuring that firms act in the best interests of the investors in their funds”.

Key Findings

The FCA’s observations include:

  • Negative target market: One aspect of the target market assessment by asset managers is to consider whether, in addition to setting a positive target market for the product (i.e., who the product is designed for and why), firms are able (but not required) to also set a negative target market (i.e., anyone for whom the product is not suitable). The FCA observed that only one manager had set a negative target market, and that it conflicted with other aspects of the positive target market assessment. Firms are encouraged to ensure they consider whether the risk/reward profile is consistent with the target market and should be mindful that if they do set a negative target market it properly interacts with the positive target market assessment.
  • Conflicts of interest: The FCA found that whilst all firms had a conflicts management framework, not all were effective. The FCA reiterated that, as product governance rules are outcomes focused, having a framework in place without ultimately ensuring that conflicts either do not arise or are properly managed, does not meet its expectations.
  • Scenario and stress testing: Product governance rules require firms to perform scenario analysis to assess the risk of poor outcomes to clients and the circumstances in which they may occur. Managers may already be required to perform stress testing under, for example, UCITS or Packaged Retail and Insurance-based Investment Products (PRIIPs), and the FCA’s sample found that all managers were performing some scenario analysis and/or stress testing. However, the FCA noted a varied approach and reiterated that a key aspect of product governance scenario analysis is to assess the product in volatile market conditions and scenarios that may affect how the product performs.
  • Costs and charges disclosures: The FCA reminded firms to ensure that costs and charges disclosures are fair, clear, and not misleading, and that firms should match the disclosures contained in, for example, UCITS Key Investor Information Documents (KIIDs).
  • Diligencing distributors: The review found that firms were not consistently performing due diligence on their distributors in order to be able to fully assess whether they were fit for purpose and, in turn, whether the distributors would ensure that products end up in the hands of the correct target market.
  • Distributor feedback: In order for managers to perform proper product reviews and provide appropriate management information to their product governance committees, they must receive appropriate feedback from distributors. The FCA noted that all managers faced challenges in obtaining this feedback but stated that managers could do more to challenge their distributors for this information and that they should record this challenge.
  • Governance and oversight: Whilst all managers had a committee that oversaw product governance compliance, the FCA observed that the committee’s role and terms of reference were often poorly defined, and that there were limited examples of meaningful challenge. Record keeping was also cited as being poor and that critically, if firms did not document challenge, decisions, and checks, they were unable to recall what activities had taken place.


The FCA’s review serves as a helpful framework against which asset managers can review their product governance policies and procedures, particularly given the FCA’s comments that it expects firms for whom the product governance requirements are currently guidance to ensure they take them into consideration in any event.

Notably, the FCA’s review was limited to asset managers offering UK-authorised collective investment schemes that were available to retail investors (i.e., not professional clients or eligible counterparties) through platforms on both an advised and execution only basis. This means that the population of firms reviewed were less able to rely on the principle of proportionality that is built into the product governance rules. This is because, broadly, the proportionality principle requires firms to implement the product governance rules in a way that is proportionate to the complexity and risk of the product and the sophistication of the client (which tracks their client categorization under UK MiFID II). It remains to be seen what the FCA’s views would be in relation to compliance with the product governance rules in a different context where proportionality can be relied on to a greater extent – such as, for example, the sale of vanilla shares to professional clients in a wholesale markets context. Firms should monitor for any updates to the product governance rules (including, whether any such changes apply only to certain products / manufacturers (such as collective investment schemes and managers) or more broadly.