An Introduction to Product Governance

In recent discussions with a number of former colleagues and industry professionals across the financial services space, I have been surprised to see just how many are still behind on their implementation and understanding of product governance regulations. Given that these regulations have been in place for some time, this is a concern, and so the following blog provides an introduction to product governance for those that need a refresher or who are considering revisions to their existing framework. While this will be a high-level introduction, I will go into more specific detail in subsequent blogs.

Introduction

In the ever-evolving landscape of financial services, product governance has emerged as a critical component in ensuring fair treatment of customers and mitigating potential risks associated with the development and distribution of financial products. As regulatory bodies around the world place greater emphasis on consumer protection and market integrity, product governance frameworks have become essential for financial institutions to navigate the complexities of product lifecycle management.

In this comprehensive blog post, we'll explore the intricacies of product governance, delving into its definition, purpose, regulatory background, and the profound impact it has on delivering positive customer outcomes.

Defining Product Governance: A Multifaceted Approach

At its core, product governance refers to the systems and controls that financial services firms implement to ensure that products are designed, approved, marketed, and managed throughout their lifecycle in a way that results in fair outcomes for consumers and complies with regulations. It is a multifaceted approach that spans various stages of a product's journey, from initial conception to eventual wind-down.

The primary objective of product governance is to align products with the interests, objectives, and characteristics of their target markets. By doing so, financial institutions can ensure that the products they offer truly meet the needs and expectations of their intended consumers. Additionally, product governance frameworks aim to identify and mitigate potential risks that may arise from product design, distribution, or ongoing management, thereby reducing the likelihood of consumer harm.

Monitoring product performance is another crucial aspect of product governance, as it enables financial institutions to detect issues early and take remedial actions in a timely manner. This proactive approach not only strengthens compliance and consumer protection but also fosters trust and confidence in financial markets.

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Regulatory Backdrop: MiFID II and FCA Requirements

The rise of product governance regulations can be traced back to the principles outlined in the Markets in Financial Instruments Directive II (MiFID II), which was implemented across the European Union in 2018. In the United Kingdom, the Financial Conduct Authority (FCA) has played a pivotal role in shaping product governance requirements for financial services firms.

The FCA's Handbook and the guidance provided in FG21/1 lay out specific product governance rules that firms must adhere to. These rules are designed to be proportional, taking into account the size, scale, and complexity of the firm and the products it offers. The key drivers behind the increased regulatory focus on product governance include:

1. Strengthening investor protection in the aftermath of the financial crisis.

2. Mitigating the risks of mis-selling scandals, such as the notorious Payment Protection Insurance (PPI) mis-selling case.

3. Ensuring positive consumer outcomes as product complexity increases.

4. Advancing transparency and integrity in the financial system.

5. Closing gaps that contributed to past conduct and compliance failings.

6. Keeping pace with market, technological, and demographic changes affecting consumers.

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The FCA's product governance rules apply to firms that manufacture and distribute a wide range of financial products, including investments, insurance policies, pensions, mortgages, and structured products.

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Delivering Positive Customer Outcomes: The Cornerstone of Product Governance

Robust product governance frameworks are essential for delivering fair value, transparency, and positive outcomes for consumers. The benefits of effective product governance are multifaceted and far-reaching, impacting both consumers and financial services providers.

For consumers, product governance helps ensure that products meet their needs and perform as expected. By aligning product design with the target market's characteristics, financial institutions can increase the likelihood of suitability and reduce the risk of consumer detriment. Additionally, the identification and mitigation of inherent product risks or flaws during the design and development stages help prevent potential harm to consumers.

Moreover, product governance frameworks promote higher-quality products and services through ongoing oversight and the motivation to enhance offerings continuously. This, in turn, leads to better information and disclosures for consumers, as distributors gain a deeper understanding of the products they offer.

One of the key advantages of effective product governance is the ability to detect issues sooner, enabling quicker resolution and minimizing the impact on consumers. By implementing robust monitoring processes, financial institutions can establish an early warning system that allows them to take prompt remedial actions.

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Fostering Consumer Confidence and Trust

Beyond the direct benefits to consumers, product governance plays a crucial role in reinforcing the principles of Treating Customers Fairly (TCF). By aligning with TCF fairness outcomes, product governance frameworks help financial institutions demonstrate their commitment to ethical business practices and consumer protection.

Ultimately, effective product governance contributes to increased business sustainability by mitigating the risks of conduct costs and reputational damage associated with product failures or consumer harm. By fostering consumer confidence and trust, financial institutions can build stronger, more enduring relationships with their customers.

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Implementing Product Governance: A Cross-Functional Endeavor

Successful implementation of product governance requires coordination across multiple functions within a financial institution, including compliance, risk management, front office, and information technology (IT). It is a collaborative effort that involves various processes and procedures throughout the product lifecycle.

During the initial design stages, product governance frameworks mandate the identification of a target market for each product. This involves analysing consumer needs, objectives, and characteristics to ensure that the product being developed is aligned with the target market's requirements. Once the target market has been defined, the product design process incorporates risk assessment and scenario analysis to identify and mitigate potential risks that may arise. This proactive approach helps prevent issues before they manifest, reducing the likelihood of consumer harm and potential regulatory penalties.

Selecting appropriate distribution channels is another critical aspect of product governance. Financial institutions must ensure that their distribution strategies align with the target market's characteristics and that distributors receive adequate information and support to understand the products they are offering.

Ongoing monitoring and periodic review of product performance are essential components of product governance frameworks. These processes enable financial institutions to track product performance, detect potential issues early, and take corrective actions as needed. Monitoring may involve analysing sales data, customer feedback, complaints, and other relevant metrics to assess the product's performance and identify areas for improvement.

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Governance and Oversight: A Shared Responsibility

Effective product governance requires a strong governance structure and clear lines of accountability within financial institutions. Senior management plays a crucial role in overseeing product governance frameworks and ensuring their effective implementation across the organisation. A dedicated product governance committee, comprising representatives from various functions, such as compliance, risk management, and business units, is often established to oversee product governance processes. This committee is responsible for reviewing and approving new product proposals, monitoring product performance, and making decisions regarding product enhancements or discontinuation.

Regular reporting and escalation mechanisms are essential to ensure that senior management and the product governance committee receive timely and accurate information about product performance, risks, and potential issues. This information forms the basis for informed decision-making and proactive risk management.

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Embracing Continuous Improvement

Product governance is an ongoing process that requires continuous improvement and adaptation to changing market conditions, regulatory landscapes, and consumer needs. Financial institutions must remain vigilant and proactive in reviewing and enhancing their product governance frameworks to ensure they remain effective and aligned with best practices.

Regularly reviewing and updating policies, procedures, and controls related to product governance is crucial to maintain compliance and address emerging risks or challenges. This may involve incorporating feedback from internal stakeholders, external auditors, and regulatory bodies, as well as leveraging industry benchmarks and best practices. Additionally, fostering a culture of continuous learning and knowledge sharing within financial institutions can contribute to the ongoing improvement of product governance practices. Training programs, knowledge-sharing sessions, and cross-functional collaboration can help ensure that all relevant personnel are well-equipped to understand and implement product governance requirements effectively.

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Looking Ahead: The Future of Product Governance

The significance of product governance is likely to grow as the financial services landscape continues to change as a result of technological advancements, shifting consumer behaviours, and regulatory developments. Financial institutions that embrace robust product governance frameworks will be better positioned to navigate these changes, mitigate risks, and deliver positive outcomes for their customers.

Emerging technologies, such as artificial intelligence, machine learning, and big data analytics, present both opportunities and challenges for product governance. While these technologies can enhance risk assessment, monitoring, and decision-making processes, they also introduce new complexities and potential risks that must be carefully managed.

Regulatory bodies are likely to continue refining and updating product governance requirements to keep pace with these technological advancements and address new areas of concern. Financial institutions must remain adaptable and proactive in aligning their product governance frameworks with evolving regulatory expectations.

Furthermore, the growing emphasis on environmental, social, and governance (ESG) considerations in the financial services industry may influence product governance practices in the future. As consumers and stakeholders become increasingly conscious of sustainability and ethical considerations, product governance frameworks may need to incorporate ESG factors into product design, risk assessment, and monitoring processes.

Conclusion

In the dynamic world of financial services, product governance has emerged as a critical component in ensuring fair treatment of customers, mitigating risks, and promoting market integrity. By implementing robust product governance frameworks, financial institutions can align their products with the needs and objectives of their target markets, identify and mitigate potential risks, and foster consumer confidence and trust.

Effective product governance is a cross-functional endeavour that requires collaboration across various departments, clear governance structures, and a strong commitment from senior leadership. It is an ongoing process that demands continuous improvement, adaptation to changing market conditions, and a willingness to embrace new technologies and industry best practices.

As regulatory bodies continue to refine and update product governance requirements, financial institutions must remain vigilant and proactive in aligning their frameworks with evolving expectations. This will not only ensure compliance but also contribute to the long-term sustainability and success of their businesses.

By prioritising product governance, financial institutions can unlock a multitude of benefits, including higher-quality products, improved customer experiences, and stronger relationships built on transparency and trust. Ultimately, effective product governance is a win-win for both consumers and financial service providers, fostering a more responsible, ethical, and resilient financial system.

As the industry continues to evolve, embracing product governance will be crucial for financial institutions to navigate the complexities of product lifecycle management and deliver positive outcomes for their customers. By committing to this holistic approach, the financial services sector can pave the way for a future where consumer interests are truly at the forefront of product development and distribution.