For decades regulators globally have relied on advice and disclosure to protect investors. Through root cause analysis of mis-selling and complaints, regulators are now finding that product governance is an area of the value chain that could more effectively enhance the level of protection for investors.
Disclosure doesn’t lead to better informed investors
Many regulators around the world are, or have, reached the conclusion that product governance obligations rebalance an over reliance on the assumption that disclosure produces informed decision making. As a result, many regulators have already, or are now introducing product governance regimes as part of to protect investors.
Product governance regimes replace reliance on disclosure with an objective assessment of whether the product is likely to be compatible with the objectives, financial situation and needs of a class of customer.
Product governance regimes require regulated firms to take responsibility from the beginning. Products and related services should only be offered in the interest of clients and not be prejudiced by firms’ own commercial interests, funding, or prudential needs.
Benefits of strong product governance
Whether you are creating or distributing new products and services, strong product governance will of course help you comply with regulatory requirements but there are many commercial advantages to doing so.
Strategically a strong product governance will help you ensure that new products are aligned with your overall business strategy and risk appetite.
If you create or manufacture new products, then strong governance around that process will support the development of those products. That will help smooth the implementation of new products and services into your existing operations. This can be an area of real gains, including more efficient use of resources.
A common challenge in introducing new products or services is booking and settlements. Strong product governance will be looking at how booking and settlements can be done in a controlled manner either within your existing capabilities, or by assessing how to implement enhanced capabilities with control.
Strong governance will proactively identify and manage risk. Leading to more effective assessment and mitigation of risk.
Ultimately, businesses that have strong product governance will be getting the best possible alignment of business requirements with the most efficient and effective supporting infrastructure. This alignment will be under regular review to retain that alignment and operational efficiency.
What should product governance cover?
Strong product governance covers the entire lifecycle of the product, from initial idea right through to after sales and termination / maturity of the product.
This usually follows something like the cycle shown below.
Are regulations all the same?
It’s getting complicated as lots of regulators are creating product governance regimes, and those with existing regimes are issuing additional guidance.
For example, in Europe the product governance regulations are derived in MiFID so local transposition varies. Many competent authorities are issuing materials that overlays that local transposition with additional local interpretation and guidance.
It is further complicated in the UK which transposed MiFID into a new FCA Sourcebook snappily titled “PROD”. When FCA introduced PROD, it was expected to replace its existing TCF based guidance, the RPPD. However, it didn’t and the RPPD still exists. So just because you have products that are not in scope of PROD, think again as you have to apply the RPPD.
The upside is that pretty much all the regulators are following broadly similar principles that follow the cycle shown earlier in this blog. So, if you follow those steps, you will be heading in the right direction.
If you want more help then do get in touch as we can help you navigate the various regimes and get something in place that is proportionate to your business.