Cordium responds to FCA Dear CEO letter
20 March 2018 London
Image: Shutterstock
Firms must be able to demonstrate they have adequate product governance policies and procedures in place that match the new Product Intervention and Product Governance (PROD) obligations, according to Cordium.
The comments were made by Charlotte Malin, senior consultant and Jon Wilson, project director of Cordium, in relation to the release of the Financial Conduct Authority’s (FCA) Dear CEO letter.
The letter, which was released on 10 January by the Financial Conduct Authority (FCA), targeted providers and distributors of contracts for difference (CFDs).
Cordium said in the midst of the implementation of the second Markets in Financial Instruments Directive (MiFID II) it “may well have passed under most firms’ radars”.
Malin and Wilson added that if firms can demonstrate appropriate policies and procedures are in place for PROD, this will also require careful analysis and adequate internal resources.
They said: “PROD not only codifies existing guidelines but is far greater in scope extending to all types of firms that either create, issue or design, or distribute financial instruments.”
Malin and Wilson advised that firms looking to launch a new investment product or financial instrument need to “clearly define their target market during the manufacturing process”.
“They need to decide who the product is aimed at and why, who it is not aimed at, whether it is priced appropriately, and consider the product’s impact on the broader market.”
Malin and Wilson, added: “Although the Dear CEO letter focused on one product line, it’s view that ‘firms need to improve a number of oversight and control arrangements to reach standards we would consider adequate’ will easily be tested on other products, as well as services, within the scope of PROD.”
They also indicated that many issues identified by the FCA review “draw striking parallels” to the matters the FCA is seeking to address with new MiFID II product governance obligations introduced into the FCA Handbook as part of its PROD rules.
Malin and Wilson said that post-MIFID II implementation, there are wider implications arising that should be taken into account.
They said: “The FCA’s approach to the distribution of CFDs gives an indication of its likely approach to product governance across the investment community—particularly towards any firm targeting investors with products or strategies that are considered higher-risk or complex.”
Though, Malin and Wilson elaborated that the FCA views CFDs as high risk, with “complex products where many investors have already lost money”.
“The Dear CEO letter highlighted that, during the period under review, 76 percent of those who bought CFDs, as part of advisory or discretionary portfolio management services, during the period under review, lost money.”
Malin and Wilson stated that the FCA is waiting for the conclusions stemming from the European Securities and Markets Authority discussions regarding their concerns about CFDs and binary options before confirming its final conduct rules.
They said: “Until then, the FCA’s Dear CEO letter clearly made its views clear as far as manufacture and distribution of these products is concerned.”
“The [FCA’s] investigation found that most CFD firms had not properly defined their target market and could not explain how CFDs fulfilled a specific investor need.”
Malin and Wilson, concluded: “The investigation also highlighted more generic failings, such as the lack of proper communication and oversight between manufacturers and distributors, poor attempts at defining conflicts of interest, lack of or improper use of management information and concerns regarding corporate culture.”
The comments were made by Charlotte Malin, senior consultant and Jon Wilson, project director of Cordium, in relation to the release of the Financial Conduct Authority’s (FCA) Dear CEO letter.
The letter, which was released on 10 January by the Financial Conduct Authority (FCA), targeted providers and distributors of contracts for difference (CFDs).
Cordium said in the midst of the implementation of the second Markets in Financial Instruments Directive (MiFID II) it “may well have passed under most firms’ radars”.
Malin and Wilson added that if firms can demonstrate appropriate policies and procedures are in place for PROD, this will also require careful analysis and adequate internal resources.
They said: “PROD not only codifies existing guidelines but is far greater in scope extending to all types of firms that either create, issue or design, or distribute financial instruments.”
Malin and Wilson advised that firms looking to launch a new investment product or financial instrument need to “clearly define their target market during the manufacturing process”.
“They need to decide who the product is aimed at and why, who it is not aimed at, whether it is priced appropriately, and consider the product’s impact on the broader market.”
Malin and Wilson, added: “Although the Dear CEO letter focused on one product line, it’s view that ‘firms need to improve a number of oversight and control arrangements to reach standards we would consider adequate’ will easily be tested on other products, as well as services, within the scope of PROD.”
They also indicated that many issues identified by the FCA review “draw striking parallels” to the matters the FCA is seeking to address with new MiFID II product governance obligations introduced into the FCA Handbook as part of its PROD rules.
Malin and Wilson said that post-MIFID II implementation, there are wider implications arising that should be taken into account.
They said: “The FCA’s approach to the distribution of CFDs gives an indication of its likely approach to product governance across the investment community—particularly towards any firm targeting investors with products or strategies that are considered higher-risk or complex.”
Though, Malin and Wilson elaborated that the FCA views CFDs as high risk, with “complex products where many investors have already lost money”.
“The Dear CEO letter highlighted that, during the period under review, 76 percent of those who bought CFDs, as part of advisory or discretionary portfolio management services, during the period under review, lost money.”
Malin and Wilson stated that the FCA is waiting for the conclusions stemming from the European Securities and Markets Authority discussions regarding their concerns about CFDs and binary options before confirming its final conduct rules.
They said: “Until then, the FCA’s Dear CEO letter clearly made its views clear as far as manufacture and distribution of these products is concerned.”
“The [FCA’s] investigation found that most CFD firms had not properly defined their target market and could not explain how CFDs fulfilled a specific investor need.”
Malin and Wilson, concluded: “The investigation also highlighted more generic failings, such as the lack of proper communication and oversight between manufacturers and distributors, poor attempts at defining conflicts of interest, lack of or improper use of management information and concerns regarding corporate culture.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
.jpg)