With a planned review of the Retail Distribution Review (RDR) scheduled for some time this year, fund managers and advisers should not be expecting the regulator to take its eye off the ball when it comes to product governance.
If warnings of a 'crackdown' on product governance are anything to go by, 2019 could turn into a year of enforcement.
Is this the right approach, however, or should the Financial Conduct Authority (FCA) be concentrating on giving product manufacturers and distributors clearer advice and support, which is easier to use?
Following the introduction of MiFID II in January last year, media reports have suggested the FCA is intending to crack down on non-compliance with product governance rules.
While there are other areas of regulation that equally need review, fund managers and advisers should assume the focus on enforcement is motivated by a desire to ensure that investors are not being misled or sold products that are inappropriate to their needs.
The aim of the product governance rules is to ensure that manufacturers and distributors of investment products act in the client's best interests during all stages of the life-cycle of products or services.
While the principle is undoubtedly right, the complexity of the rules and compliance burden is causing issues. If the FCA's estimate that only one in 10 firms is currently compliant with product governance rules is correct, this suggests there is considerable scope for enforcement.
The enforcement regime is likely to impact all levels of the market - from product manufacturers, such as fund managers, to distributors, such as intermediaries and independent financial advisers (IFAs).
For manufacturers, the regulator will be looking for evidence that products are being targeted appropriately to those who wish to invest in them, while being able to sustain any loss that might be incurred.
For example, it is important that the wording used to market such products offers clear advice about the product's characteristics and risk profile and avoids implying capital is not as risk or that returns are guaranteed.
Manufacturers need to ensure their product approval process and governance arrangements are robust and that all appropriate information is made available to distributors - including the identified target market.
For distributors, the regulator will be interested in the channels used and whether the distribution strategy is right for the identified target market.
In addition, IFAs should ensure that they can demonstrate taking a whole market view (which is becoming increasingly difficult with the reduction of research being created - another unintended consequence of MiFID II) and make sure any product they recommend to their clients is appropriate to their individual needs and preferences.
If products are sold to individuals who fall outside of a product's intended target market, distributors will be required to report this back to the manufacturer.