Product Intervention & Product Governance, or PROD.

Under what can only be described as a headache, MiFID II has a lot of elements to it. Product Intervention & Product Governance was one of the bigger changes and one that kind of got swept under the rug. To take a break from the GDPR, we thought we would have a little catch up about MiFID II.

PROD contains rules and guidance relating to the FCA’s power to make temporary product intervention rules and the obligations of manufacturer and distributors, when manufacturing or distributing financial instruments.

Manufacturer & distributors. What are they?

Manufacturers are firms which create, issue and/or design investments. They must make sure that:

  • The products are manufactured to meet the needs of the identified target market of end clients.
  • The strategy for distribution of the product is compatible with the identified target market; and
  • They take reasonable steps to ensure that the product is distributed to the indented identified marker.
  • Carry out periodic reviews.

Distributors are firms which offer, recommend or sell investment or provides investment services to clients. They must ensure that:

  • They understand the products they offer or recommend.
  • Assess the compatibility of the products with the needs of their clients.
  • Ensure the product is only recommended or offered why it is in the interest of the client.
  • Carry out periodic reviews to ensure this remains the case.

What does it mean by a target market?

The target market is the group of individuals for which the particular financial instrument, structured deport or investment services is aimed at. There are six categories that firms should use when identifying the target market:

  • They type of client to whom the product is targeted.
  • Knowledge and experience.
  • Financial situation with a focus on the ability to bear losses.
  • Risk tolerance and compatibility of the risk/reward profile of the product with the target market.
  • Client’s objectives.
  • Client’s needs.

What does good product governance look like?

Product governance that is carried out correctly should result in products that:

  1. Meet the needs of one or more identifiable target markets;
  2. Are sold to clients in the target markets by appropriate distribution channels; and
  3. Deliver appropriate client outcomes.

This is a very brief summary of one section of the hefty beast that is MiFID II. If you want more information in regards to PRODs then you can pop over to our Knowledge Base, which will give you more detail and guidance. Alternatively, you can head over to Annex 4 of the ESMA Guidelines on Product Governance which includes illustrative example and case studies in relation to the application of the guidance.

Product Intervention & Product Governance, or PROD.
APCC Member

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